Having carved out a bit of a niche in the small business sector over the last few years, I am often invited by entrepreneurs to come to coffee to ‘brainstorm’ ideas for their small businesses. Over time, I’ve realised there are plenty of similarities between these discussions and a few of the themes I’ve found repeating themselves on a regular basis.
For the purposes of this article, I will lay out the typical ‘entrepreneur’ who comes to one of these coffee meetings. Typically they are one- or two-person businesses that are horribly under-capitalised, there is very little that is unique in their business and, they are working incredibly hard to get ahead but just can’t find this mythical ‘break’ which would change their business into an asset of value.
I will unpack this in follow-up pieces but here is the mental checklist I tend to go through:
Do they understand the concept of return on capital employed (ROCE)?
This is a really harsh one for the entrepreneur who pours every spare cent and every waking hour into their business, but at some point they need an external set of eyes to remind them of Einstein’s definition of insanity: doing the same thing over and over again and expecting a different result.
I thought Moneyweb editor Ryk Van Niekerk highlighted the issues perfectly in his recent column entitled: “Nobody wants to touch SMEs.”
Do they REALLY have paying customers?
This is one of the most useful questions to ask. Many will quickly respond that so-and-so is “interested” or they have a ton of proposals out in the market, but is somebody actually buying what they are selling?
US billionaire Mark Cuban has an excellent quote: “Customers want to see that you have other customers”. If they are not obsessed with providing a product or service that somebody wants and needs, then they are on a hiding to nothing.
What is it you actually do?
As an entrepreneur this is a great question to ask yourself every single day because it focuses you in a way that no other question will. When the entrepreneur is rattling off everything they ‘could’ do, you know that they don’t know what it is that they ‘do’.
I didn’t realise it at the time but when I joined my dad’s software company shortly after leaving school, I learnt a really good lesson. We used to spend a lot of time building bespoke software for a variety of projects and the ultimate return wasn’t great. In time we crystalised that our area of expertise was “building recipe handling software that interfaced to manual scales”. We could roll the same solution out to the food, pharmaceutical and even panelbeating industries.
We could define what we did in 58 characters – can you?
Will marketing money help?
As an entrepreneur who makes a profit encouraging people to take out advertising, it is probably a bit self-defeating to say a red flag goes up when I hear people saying that they need to raise money to “market their brand”.
A couple of us recently spoke at an entrepreneurs forum and there were two great stories told. One was by an entrepreneur from Limpopo who kick-started his business simply by hanging around Transnet tender briefings and bizarrely got his first deal supplying screws and bolts (which he knew nothing about) simply because he was the only person to rock up to the briefing.
The second was from Moneyweb contributor and finance sector entrepreneur Craig Gradidge who told the audience that his business was launched in an Old Mutual auditorium when he started fielding questions about Sasol’s BEE deal.
If the entrepreneur themselves is not the best marketing tool then no amount of marketing money in the world is likely to be the answer.
Can they add skills without spending much more?
This is always an interesting one because the debate tends to circle around why their business needs capital to employ more people in the hope of drumming up additional business.
In all the years I have chatted to entrepreneurs, I can only recall one business where they really needed an additional body and they ticked both the ROCE and paying customers boxes. Interestingly the young lady who ran that business could quite easily have solved a lot of her problems by offering unpaid internships. Ergo no capital outlay.
Remember these brilliant words from Amazon founder Jeff Bezos: “If you can’t feed a team with two pizzas, it’s too large.”
The reality is that success in a small business often comes down to luck and timing. It could be argued that these questions are too much along the lines of ‘play it safe’ but I genuinely believe that if you can ask and answer these questions every few months, you will be a happier entrepreneur.