Most new businesses fail: Annie McWalter – avoiding the pitfalls

Most new businesses fail – and that’s just as true in the United States as it is in South Africa. The difference is that in the US, failure is not regarded as something to be ashamed of. That may be slowly changing in South Africa.

What is clear is that some entrepreneurs fail not because their business case is poor or they lack ability, but because they lack support in, for instance, dealing with the bureaucracy that is required to establish a business.

Annie McWalter is CEO of the Hope Factory, a successful entrepreneurship project that falls under the SA Institute of Chartered Accountants. She tells David Williams how the Hope Factory draws on the lessons of the past to guide entrepreneurs in dealing with pitfalls that can be avoided.

I’m David Williams and this special podcast is brought to you by Mercantile Bank. With me is Annie McWalter. She’s the CEO of the Hope Factory. Now, we’ll be talking a little bit more about what the Hope Factory is. It does sound optimistic, Annie. We’ll talk about what that is in a moment. It’s obviously linked to entrepreneurship, but let’s talk about the landscape of entrepreneurship first. What strikes me is there’s a lot of work being done in South Africa on entrepreneurship. There’s a broad agreement. It’s what is needed to save the economy and create jobs, because big businesses don’t create jobs. They in fact shed jobs. There’s a lot of work being done, but it’s still a big issue, isn’t it. Perhaps the first question to ask you is in the general sense. Can entrepreneurship be taught, or is it just five percent of the population who are ever going to become entrepreneurs?

I think it’s one of those questions that’s similar to ‘is a leader born or made’ and I think that the consensus has been that some people are naturally leaders, but you can learn the skills of leadership.

Our philosophy with regards to the Hope Factory and how we approach entrepreneurship is that we look for a certain drive in people. If the skills are not there, they can be taught.

If the knowledge is not there, they can be taught but if that initial drive, that type of personality that is around seeking new work, seeking business, having a flair for finances (is quite important), and having a flair for business; we look for that initial spark.

Everything else, we believe we can teach and it can be learned just as a leader can improve on their leadership skills. There are various courses that you can do. You can receive mentorship. You can learn from other, but if that initial drive is not there, I think that’s very difficult.

I would say that we’re talking the right talk. We’re saying the right things, but I think that an integrated approach to developing entrepreneurs and small businesses…the Government’s certainly saying a lot around it. The Department of Small Business Development and there are various initiatives that Government are doing in terms of that.

What I would say is that I don’t know if there’s always a coordinated effort, and that all the departments are speaking to the same agendas. We seem to be lacking leadership with regard to people coming together and bringing a plan.

The National Development Plan is wanting to look at supporting all these different elements of society in South Africa and really, speaks to job creation as a very high priority but if we don’t have the right environment in terms of the business landscape…

One of the things that I think is really hampering our entrepreneurship is very strict labour laws and also, lots of red tape. It takes an entrepreneur a lot of time to set up a business in South Africa compared to…

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It’s that measure isn’t it, of how many days does it take? Apparently, New Zealand is the best. It takes a day or something.

Yes, that’s right. I think South Africa’s sitting on a month – 32 days or so. We really need to look at incentivising small businesses in terms of helping people to start up a business quicker and also just helping them with regard to the breaks that they need to be able to really, become successful quickly.

I also think that coordinated strategy really carves out a place for small businesses and I think there are certain things, which the Government are doing with regard to that but I’d love to see a more integrated approach. Similar to huge economies like India, where they really, literally have a huge wholesaler that only sells to certain people.

They sell to medium wholesalers. Medium wholesalers then sell on to smaller wholesalers and then it goes to the public, but you as someone in the public can’t go directly to that massive wholesaler.

They won’t deal with you there. It’s legislated, so they’re carving out this economic environment for everyone to have a part. I think that our landscape is too dominated by these really, massive players. The small guys can’t get in. there’s not enough room for them. They are battling to get into that economy.

We’ll talk about what organisations can do to make it easier. It’s not so much the direct entrepreneurship, but the environment they’re in. Another thing that always strikes me is culturally, there must be factors that aid entrepreneurship. In this country, one thinks of the Jewish community and the Indian community with a business contribution/entrepreneurship contribution out of proportion by 10/20 times their proportion of the population, i.e. family business. What are the factors we can learn form there?

In those types of communities, it really is the strength of the family and the role models. Often, they are growing up with business being spoken at the dinner table and that is more prevalent in certain cultures than in others. Certainly, the exposure from a young age… Malcolm Gladwell has that whole, outsider effect. The amount of hours that you need – 10,000 hours.

If you already, as a young child, are being exposed to concepts of business and are speaking about it on a weekly/daily basis, you can imagine how you would have that flair by the time you are an adult and being productive. It’s certainly something that we need to look at as a country (shifting that culture). Cultures evolve. They are not static.

There are always influences that can come in but certainly, I would love to see more mentoring happening of really successful businesses giving of their time to help other entrepreneurs who are starting out.

I’d also love to see more conversations around the dinner table. The curriculums in the schools: I think entrepreneurship is being introduced into the schools curriculums but we need a concerted effort from all areas for that.

The concern for me in our particular context is quite a large breakdown of the family, and so we really do need role models and mentors who will come to the fore.

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I remember the story of the Oriental Plaza where there’s a family. It’s a clothing shop and the father owns the shop, runs it, and orders the goods. The sons work in the shop on a Saturday morning. The mother does the books and she’s around the shop as well. Granddad sits on a chair outside the shop looking at what the opposition is doing, but they’re all involved. They don’t retire from the business and they don’t ever come into the business. They’ve just, always been in it.

Exactly.

That’s the kind of thing, which you’d ultimately want.

We would like to see that. I think we need to build more of an entrepreneurial culture in our country. Let it be a cross-pollination of all cultures. We need to get to that point where sometimes, skills are sitting in a certain category in the population and they need to be willing to share that, and for us to partner together.

Often, one hears in the United States ‘failure in business is a badge of success’ because people say, “Well, you’ve tried it. You’ve learned something. There’s no shame in failing.” I think that in South Africa, we do have a shame about failing.

Yes. I think we’re very strict. If you fall into form of debt, you’re blacklisted. It’s very difficult to get out of that. I think that we do need to change our perceptions of failure because failure is definitely learning. Often (as you’ve said), in America, people learn through the failures.

The story is that an investor won’t even look at you until you have actually failed. It’s the kind of story you hear from America, whereas here, we just really do have that negative perception.

You learn the most through your failures and you learn the most through your hard times. We would like to see that changing in South Africa and what we find with many of our entrepreneurs is filing things like tax and they’re in a bad standing with SARS. We really strive to help them to actually, overcome that to get their books back in order to start paying their taxes.

Compliance is a huge part of that. We are very strict in terms of our regulatory environment and I think that maybe more incentives/more breaks need to be given to the entrepreneur. That does need to be looked at.

Let’s talk about the Hope Factory. It’s under the auspices of SAICA (the Institute of Chartered Accountants). It sounds optimistic, obviously. Tell me where the Hope Factory came from and how it was established.

Absolutely. Well, the Hope Factory is really, a social entrepreneurial venture. We are non-profit company that is part of SAICA, as you’ve mentioned. We have a very big vision and a dream. We dream that one day, every South African will be empowered to be financially sustainable.

We see our landscape and we have one of the highest gaps between the rich and the poor in the country. We have the eighth highest youth unemployment rate in the world.

We’re seeing a country and economy needing leadership in the area of small business development and entrepreneurial developments. SAICA’s oversight is obviously, a key strategic one for us. It was started independently from SAIC, but came under the umbrella of SAICA.

Our mandate was to bring hope. Initially, we started in the job creation space and more in the skills development.

We believe that if we could teach skills, we could help people put bread on the table. We’ve really evolve from those humble beginnings – from a garage (the normal story) – to really, quite a successful enterprise and supply development initiative.

However, our focus is on developing entrepreneurs so our funding is primarily coming from the Enterprise and Supply Development space, but we are really about developing entrepreneurs. We focus on the entrepreneur from start-up all the way up through to R10m in annual turnover.

Our aim is really, to get those initial stages and to attract growth entrepreneurs who can then grow over, and then we’ll hand them over to the people who can take further and mentor them further. We’re essentially around mentoring. We mentor the entrepreneurs.

We have full-time mentors in the employ of the Hope Factory and we really, believe strongly in mentorship. We’ve seen the very high failure rate of businesses – 80 to 90 percent of start-ups fail in the first three years.

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How does that compare internationally?

It’s on par. In America, you have 80 percent as well.

So, we aren’t doing anything wrong. It’s just difficult to start a business.

That’s correct. Yes. We do believe that with the right person who is a sounding board for you… Entrepreneurship is a very lonely journey. In the initial parts, you have to actually do everything that a big corporate is doing, but it’s one person in the beginning.

To set the right foundations, to set the right strategies in place, and to set the right systems in place is quite a tall order in the beginning stages of a business. Bearing in mind that we haven’t had many dinner conversations around business and a lot of exposure to business, we believe that mentoring is quite a good way of helping entrepreneurs, particularly when they’re starting out.

Give me an idea of how many people work for you, what kind of budget you have, and the scale of your operation.

Yes. We have 60 people working for us, so we’re quite a large, non-profit company. We have two branches – one in Johannesburg and one in Port Elizabeth. We’re looking at about R30m to R35m annual budget and we really are hoping to scale. SAICA has a vision of 20/20, that we’re going to have nation-building initiatives, which are going to reach the whole of the country so we want to be on the forefront of that along with SAICA.

SAICA has many entrepreneurship developments. I worked at SA Breweries where they have an enterprise development section. There are different initiatives going on. What is it about SAICA’s initiative? One thinks ‘accountants’ obviously, so is there a particular angle to your entrepreneurship development that reflects that cycling?

Yes. I think we’re very strong on the areas of compliance and helping. A very big weakness in small businesses is the financials and the financial management. That’s where the expertise of CA’s is so crucial. Sometimes, it’s a tricky one because you don’t have everything in place.

Obviously, it’s a small business in terms of all the areas that need to be covered initially, so it’s really, a process of teaching, getting that entrepreneur aware, and getting them focused on that area. Our edge is really, around that area of helping the entrepreneurs to be compliant but at the same time, to put in good strategies. We find that we really draw on that type of expertise with regard to the CA’s.

Do you get the profession helping out in their spare time?

The Hope Factory used to have an initiative where the CA’s were mentoring themselves. We found that they become very busy and so it worked very well for some and not as well for others. Mentoring is a very specific skill.

It’s something that can be learned, but some people are naturally better at mentoring than others are. We moved more for the option of having our full-time mentors, but we have financial mentoring taking place as well and that is headed up by a CA.

Give me an example or two. Tell me about a success story, thanks to your intervention.

We’ve had quite a few really big deals that entrepreneurs have manged to come into as a result of the interventions of the Hope Factory. We had a lovely company that does ergonomics, called Ergo World and they managed to secure a R1.2m contract with Telkom.

Bear in mind that these businesses are from zero to (in the initial stages) R250,000 annual turnover, so it’s such a great opportunity. We had a catering company. They were making a 70 percent loss before they came to us and we completely turned them around. They’ve just gone from strength to strength.

In the time that they’ve been with us, I think they’ve had about 10 to 11 corporate introductions and are now no longer the small entity that was battling to cost things properly and working out whether they were making any profits. They know exactly where they stand now, and have really grown in their figures.

On average, last year 50 percent of our entrepreneurs grew in their profits – up to about 70 to 80 percent in their annual profits.

In number terms, how many that you’ve helped, have succeeded and are still functioning?

We currently have 75 entrepreneurs on the program. That was in the space of three years that we developed the Johannesburg program. In P.E., we have round about 80. On average, about 80 percent of our entrepreneurs are still on the program, and still going well and growing but we do have where we want to graduate people off the program.

That is our aim – that they’ll walk the journey and either fully become a QSE, which is R50m annual turnover or they’re happy at the place they’re at with regard to their income and they’ve learned everything they can in the program.

Those are typically our current exiting points. We’re looking at putting a more phased approach in our program so that we can really look at how many people in the first year moved to this phase and to the second phase. It’s teaching more of a phased approach as opposed to just the actual, annual turnover figures.

We’re looking at how many jobs we’ve created, the profits that were generated, and the annual turnover. Last year, I think 23 jobs were created through the entrepreneurs that were on our program.

People say 23 is not very much but for those 23, it’s crucial. They have dependants and as you say, the culture is spread when more people are doing it. What’s the biggest lesson you’ve learned, or the thing in those three years that you mentioned where you said, “Wow, now we know something. We’ve learned something”?

What we’ve learned is that entrepreneurship is not a cookie cutter type of industry. We’ve learned that you need to have certain systems in place that is standard for everybody. However, the sense of walking a journey with this person is the most powerful journey.

Having a mentor who fully understands you and is able to tap into those softer things, which are sometimes the harder things. Many entrepreneurs give up because it becomes too difficult and not necessarily, because they’re failing, but because of the family pressures.

There are hospital bills and often there’s that element. We’ve learned that we need to have the personal side of growth and growing the entrepreneur in themselves as well as a leader within their business, but we need to have that strict business side as well because they both go hand-in-hand. You actually need to deal with both of them at the same time.

That’s been our biggest learnings from our programs along with what the entrepreneurs have taught us and in addition, for us to create this environment where people feed off each other.

Entrepreneurs do business with each other, creating an economy where you’re also starting to get an entrepreneurial economy where they’re using one another. That’s been an exciting journey for us. Obviously, the partnerships that we have accumulated, coming across likeminded people like Mercantile Bank, who really believe in entrepreneurship.

That’s what they do, isn’t it?

That’s what they do. The journey has been so fascinating. I don’t know if it’s necessary because of us, but they are looking at products that are more suited to the entrepreneurs, which we’ve had on our program. They’ve been sponsoring our program for three years.

They’re really, a fantastic key partner for us. We really love their entrepreneurial flair and mindsets, and they are looking at products that are so tailor-made and suited to entrepreneurs.

We’re thrilled about that because often, the biggest problem for entrepreneurs is simply banking products that are really suited to their needs. Sometimes, a small amount can make a difference.

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Obviously, we want as many black entrepreneurs as possible because black people were deprived of access to the economy for so many years. However, if a young, white person with an idea comes a long, do you have a view/policy on who you help in that way?

We have been playing within the BEE space, but our vision is every South African. We are actually looking for likeminded institutions that will partner with us to help us be able to offer our solutions to everyone. We are looking at online mentoring and options that would be available to everyone as well and so we’re certainly looking for more/broader funding so that we are not restricted in terms of the black entrepreneur.

On a personal note, how did you come to be Chief Executive of the Hope Factory and are you an entrepreneur yourself?

Yes, I did have my own company in development consulting. I’ve come to entrepreneurship more from the developmental side of things and the social entrepreneurship side of things. I studied Industrial Psychology and Herman Mashaba was my Masters topic. I interviewed him in my Masters and it was thrilling, just to see the kind of things he’s doing for the entrepreneurship space.

He is a true entrepreneur and really, in the times when it was very difficult to be a black entrepreneur, he defied all odds. I think I became interested in entrepreneurship when I was looking at it from the Industrial Psychology space.

I also have a brother who was one of the first founders of a very large Internet service provider and so it fascinated me – this area of entrepreneurship. I’ve had times where I’ve worked for myself and then, worked in consulting etcetera but I come more from a space where I’ve been always been working in the developmental space.

The need for the growth in entrepreneurship is just, so evident in this country. I had a year, which I spent in India. It’s such an entrepreneurial nation and I learned so much from that. I saw the power of entrepreneurship there, where it’s in the mindsets. We were talking about cultures earlier, but they have that entrepreneurial culture.

There are no safety nets. There are no social grants or anything like that. They have to get up and heckle, and do, buy, sell, and make money. I saw the power of that and that’s what really drew me into the space of entrepreneurial development. I fully believe in it.

I’ve seen the power of entrepreneurship at play. I’ve been in this space – more the enterprise development space – for about ten years and really, fully enjoying it and loving it, and wanting to make a difference in the country however I can. I feel that a handout is not the solution.

A hand up in terms of looking at the potential people, encouraging them into that potential, and teaching the skills is what really drives me and makes me excited to get up every morning and go to the Hope Factory. The name of the Hope Factory came from the Development of the Hope.

We used to have a factory, but we really love that sentiment ‘entrepreneurs need hope’. They need empowerment. They need to be constantly be encouraged, setting goals, achieving those goals, and creating that hope. We find that we get a lot of high hope from the entrepreneurs themselves.

Well, that’s a good place to stop and it does sound as though you’re making a difference, Annie. Annie McWalter is the CEO of the Hope Factory in this special podcast, brought to you by Mercantile Bank.

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