Earlier on Monday morning on Twitter and Facebook, entrepreneur Allon Raiz from Raizcorp made the statement: “Your role as #entrepreneur is to anticipate, plan and take action.”
While I agree with the sentiment, I am not 100% sure I agree.
Rather I would argue that the role of an entrepreneur is to generate a positive return on invested capital.
Last week I noted in my column that entrepreneurs need to be able to answer five key questions, the most important of them has to be: “Do you understand the concept of return on capital employed (ROCE)?”
I often hear that the role of an entrepreneur is to “disrupt” or “create jobs” but I strongly disagree with these sentiments. These may be spinoffs of what an entrepreneur does, but I don’t believe that it is their “role”.
In the US for instance, the ability to raise funding for a business has become as much a measure of success as running a profitable business. The same mentality is floating around in the South African start-up scene and frankly, it is quite annoying.
You are a business success when a stakeholder invests a certain amount of money into your business and that investment generates a positive return on the capital employed.
Obviously there will be ups and downs in the business cycles and very few small businesses churn out profits annually. The true entrepreneur, working to Allon’s comments, works out if they employ a certain amount of capital at a certain point in time, they will see a real investment return.
You have to be brutal about this process – pie in the sky estimations are cheating not only your stakeholders – but yourself. If you make informed decisions, you will know when it is time to invest more or throw in the towel.
However, when I was debating this with another entrepreneur, he reminded me that I couldn’t throw stones in glass houses. I can’t argue that Moneyweb is an entrepreneurial business based on its current financials. I can argue that it is a disruptor in the South African media space and that it employs people, but our numbers are public information so its quite clear that we are not generating a return on capital employed.
In the previous fiscal, we spent R34 million to make R34 million in revenue. That is not entrepreneurial. That is called running on a hamster wheel and that is why small business owners cannot get caught up in this idea of being “entrepreneurs” until they are generating a real return on the capital that they or their shareholders inject into the business.
You may be in business but you are not a business until you are delivering a return on capital.