Traditional models of business funding will require a re-think if South Africa’s small businesses and entrepreneurs are to emerge from the financially crippling “winter of coronavirus” into a spring of growth and rejuvenation, says University of Stellenbosch Business School senior extraordinary lecturer Daniel Strauss.
“Accepting that downturns, recessions and economic crises are inevitable, one needs to shift the focus to building ‘zebra’ companies, which are sustainable businesses with steady growth, strong balance sheets and cash flows, and able to withstand downturns, rather than ‘unicorn’ companies that will die without the next round of funding,” he explains.
Strauss mentions that, in the past, there was an 'or' type of mindset, meaning small businesses were either funded through debt or through equity; however, the time has come for an 'and' mindset.
He adds that the world will be forced to combine the profitability and cash flow of traditional businesses with the growth strategies of startups. This will change the way in which entrepreneurs think, operate and grow forever.
Strauss proposes a future of business finance that is a peer-to-peer network of like-minded entrepreneurs who invest and support one another within the same frame of reference.
He says groups of entrepreneurs who had been buying equity in each other’s businesses for years were the ones to emerge stronger from every financial crisis, and able to pick up additional revenue from weaker competitors once the storm has passed.
“Entrepreneurs think and operate differently. If they invest in your business you will benefit not only from funding but from a mindset that no banker can offer you. Entrepreneurs see opportunities and threats in a different light and once they have invested, they will become your partner to ensure that growth is a given, not a pipe dream.
“If we are willing to change our mindsets around small business funding, we have a chance to withstand future downturns,” Strauss believes.
It is likely that most smaller businesses will emerge from the Covid-19 crisis with severely weakened balance sheets and relief funding in the form of bank loans, which might ease cash flow in the short term but, until it is repaid, they will be more fragile than before.
Entrepreneurs’ ability to approach a local bank manager for a business loan changed significantly after the 2008/9 financial crisis, Strauss points out, when regulations on capital requirements rendered banks virtually handcuffed and incapable to provide the capital necessary to grow small businesses.
While small businesses became too risky for bankers’ mandates, on the other side of the spectrum, venture capital firms could provide equity funding to entrepreneurs with high-growth ambitions for their businesses.
“But what about the SMME owner who wants to build a sustainable business with a steady growth trajectory but has reached the limit of the amount of surety and security that they can provide to the bank for further funding?”
“It has become too risky to start a company with a bank loan and bootstrapping in the hope of building a foundation fast and strong enough to withstand the next downturn. Recessions are going to occur, there is no denying this, and the more debt you have, the less likely you are to recover before the next wave hits,” Strauss notes.
Coming out of the winter of the Covid-19 pandemic, small businesses can experience the “growth, rebirth and rejuvenation of spring” if they are willing to change their thinking on funding, he suggests.