Anyone can start a Business! Really!

Wednesday, February 17th, 2010

 Have you ever noticed those little street vendors that seem to pop up along busy roads? 

You see it wherever the taxis gather, and even on the pavements outside shops that attract lots of people.  Driving back from the Cape just before New Year, I noticed this just outside a little town called Paul Roux in the Free State.  The N5 between Bloemfontein and Bethlehem is undergoing some major revamps (still!) and there are sections where drivers may have to wait for up to twenty minutes because of construction work.  Right there, at the waiting point, a number of people were weaving between the stopped cars, offering cold drinks, snacks and fruit to weary drivers.  I thought it was great and what’s more, it occurred to me that we’re probably never really going to see an African communist – they’re far too enterprising a people to be tied down like that!

Enterprising people from all works of life see an opportunity and take it – sometimes without ever thinking about whether they’ve structured the business right, whether they have enough capital, or even whether the business is going to succeed.  They’re driven by the need of the moment, and when that moment is over, they move on to the next one.   In South Africa, there is a vast, unregulated, informal economy – just like in most other parts of Africa – which turns over billions of Rand every year in business.  Sadly for the taxman, not much of it reaches his coffers – either by way of VAT, income tax or employees’ tax.  But it sustains millions of people – every day. 

And there are amazing business ideas in that informal economy.  I remember reading one of Clem Sunter’s books about fifteen years ago, – when the cell phone industry was in its infancy, and recall the story of one innovative gent from Soweto who had chained (somehow) a number of cell phones up, and then charged people for making calls on them.  Nowadays, everyone pretty much has a cell phone, so his business would have had to adapt, or it would have died.  No doubt, he’s moved on to better things since then!

The key difference between the success of some of these tiny ventures and the failure of other larger ones is in the view of the entrepreneur involved.  On the one hand, you get the person who is only interested in making his daily bread – he has no thought for tomorrow, other than when tomorrow comes, he will assess the situation and adapt.  Today he may be selling cell phone time – tomorrow he may be selling cell phones.  But, in between times, he works hard at it. 

On the other hand, you get the person who has the view that his business is going to make him rich – quickly!  He needs to borrow lots of money to get started, and wants all the bells and whistles that go with it.  He, quite often, also works hard but often not very smart!  He makes more money in a shorter time, but history also proves that invariably he tends to lose it all – and other people’s money too – in a short time. (Within the first two years in fact).

How then can we harness the innovation and initiative in our informal economy, and stimulate it to greater heights?  How can we make a simple street vendor into a wealthy entrepreneur, an employer of people and a contributor to the state coffers?  There are two aspects to this:  firstly, there is the attitude of government towards business; and secondly, there are the actions of the entrepreneur himself.

R.Glenn Hubbard and William Duggan, in their article for “Strategy & Business” entitled “Roots of Prosperity” have this to say about the role of government:

“In the history of economic success, no two countries have ever followed identical paths. But there is a universal pattern nonetheless: Nations rise out of poverty when elements of a thriving business sector replace the previous economic system.

The factors necessary for this transition are known. Since 2004, the World Bank has tracked them each year in countries around the world for its “Doing Business” report. The report specifies 10 forms of government regulation that affect the various phases of a company’s life cycle: starting a business, obtaining licenses (such as construction permits), employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. The fewer impediments that government places before entrepreneurs in any of these areas, and the less time it takes (for example, to stand in line) and the less money is required (for fees or bribes), the more business-friendly the country is — and the more prosperous. …Although the 10 criteria listed by “Doing Business” provide a road map for governments, governments alone cannot be effective in creating a healthy climate for business.”

It needs the efforts of entrepreneurs.  And, as for them – I think the success of their ventures requires two things – leverage and management.  Simply summarised – this could include leveraging one’s time through others, and leveraging one’s physical resources through the perceived value of goods and services; and then managing those resources in such a way as to allow not only for enough income to live on, but to allow for enough income to be ploughed back into future growth.  Manage your time, and manage your money! (not just how much you spend, but what you spend it on).

To make this simpler to understand, let’s use the cell phone entrepreneur as an example.

To start with he buys himself one cell phone, chains it to a block of granite near a taxi rank, and then sits there himself to manage the process.  He deals only in cash.  The phone records the amount of time the caller used, and at the end of each call, he multiplies the time by a fixed rate per minute.  He has secured a specific rate from the service supplier, and he now adds a markup on to the rate for his profit.  The only leverage he has at this stage is the difference between what the service provider charges him and the rates he charges his customers.  Given the fact that there are only so many minutes in a day, and the fact that he has to take time off to go to the toilet, eat, drink and rest, the amount of business he can do is limited.  There are constraints to growth – at first!

However, at the end of each day, he adds up his takings, separates an amount which he knows must be used to pay the service provider, takes an amount for himself to meet his daily needs, and saves the rest. (managing his money!)  After a time, he has saved enough money to purchase another cell phone, which he duly chains to the same block of granite.  He still manages the process himself each day.  But, he has now managed to leverage his time – he can now sell twice as much time per hour as he used to.  His service-provider cost has doubled to cater for the extra cell phone, but he still has the same personal financial needs each day.  This means he can now save more money each day.  It’s not long before he is able to buy two extra cell phones – giving him a total of four – all of which he alone continues to manage on his own.  His savings amount each day starts to go exponential.  He then decides to employ his younger brother at another taxi rank, kits him out with four cell phones – and his business really starts to grow.

After a couple years, he is employing ten people, all with four cell phones – and his business attracts the attention of his service provider.  They like what they see and they offer him a cell phone franchise.  He goes for it, and it’s not long before he ends up owning twenty similar cell phone franchises around the country.  It may have taken him anything between ten and twenty years to get there, but when he does – he notices that he no longer needs to do much work himself.  His time is now leveraged through over one hundred employees, and his management skills are leveraged through a well-designed system that is replicated from one shop to another.  His personal income has grown significantly, but he manages to ensure that he never takes out too much that it will put his business under pressure.

And it all started with one cell phone chained to a stone!

This may be a fairy story, but I have no doubt that it’s close to the truth for many – only the details may be different.  All it needs is commitment, hard work and patience.  The bottom line is – you don’t need a lot of money to start a business.  Just don’t be too proud to do the basics right, and don’t be in a hurry!