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Most startups fail in 5 years - but we can change that

Apr 27 2019 08:00
LJ Grobler

More than 90% of all new companies do not survive the first five years. Since nobody in a successful company wants be one of these statistics, the tendency is to build in checks and balances to prevent this from happening, especially in larger companies.

Companies do realise the importance of research and innovation to stay ahead. Internal research and innovation units or divisions are therefore often set up.

These are also seen as key aspects of revitalising the South African economy and to create jobs. Unfortunately, most of the time they are not very successful, despite the fact that numerous programmes and initiatives developed by government also support them.

Developing world-class companies

The THRIP programme currently administered by the dti has been one of the most successful grant programmes that funded research and innovation. Alongside, the North-West University has been fairly successful in commercialising research and innovation supported by THRIP.

Two examples include the establishment of Jonker Sailplanes and CFAM Technologies – two companies that started as Masters degree studies and developed into enterprises that are competing with the best in the world.

Jonker Sailplanes is based in Potchefstroom, South Africa. THRIP supported the research and development of the sailplanes. The sailplanes are able to compete with the best sailplanes in the world. More than 25 sailplanes are being produced annually from the production facility.

Owners of Jonker Sailplanes have won several world championships in recent years. Since buyers of these high-performance sailplanes are only interested in the best technology available, Jonker Sailplanes need to continue with their research programmes to remain competitive. Failure to do so would be disastrous – nobody is interested in a sailplane that is not capable of winning the world championship!

The twin-screw extruders that were also developed with the support of THRIP led to the establishment of CFAM Technologies. CFAM developed the capabilities to set up complete turnkey food and feed processing plants that compete with the best companies from Europe and the USA.

The main processing companies in South Africa are now using CFAM extruders, where previously they used extruders from Europe or the USA. More than 70% of all instant maize porridges that are produced in South Africa are now processed on CFAM extruders.

Accessing dti grant funding

Companies, especially SMMEs, can apply for dti THRIP funding though an annual call for proposal windows. The information is available on the dti website. It is a prerequisite that one or more universities are involved in the project.

Grant funding of up to 90% can be obtained if historically disadvantaged universities are also involved. It is recommended that companies approach universities and work together in developing the applications for THRIP funding.

Other examples re the dti incentive grant schemes, which include the Agro processing support scheme, Black industrialists scheme, Aquaculture development and enhancement programme, Cluster development programme and tax incentive programmes such as 12i, 12L and 12J.

Many companies make use of the grant funding and tax incentive programmes. Government is also making significant financial contributions in this regard to stimulate businesses and create more jobs.

Apart from a few success stories, however, most companies find it difficult to fast-track research and innovation initiatives.

Why is it hard to fast-track R&I?

It is my opinion that especially larger companies over-institutionalise their research and innovation.

This is especially true for technical or engineering projects that pose technical failure risks. Reputational brand damage, possible law suits and damage claims make companies risk aversive, thus reiterating the need for institutionalisation. Companies are therefore forced to introduce more checks and balances that slow down the process.

To better understand the situation, you need to look at the way research and innovation is usually being approached at small, medium and even some large-scale commercial companies.

A typical scenario is the following. A new internal research and innovation business unit is established to identify and commercialise research and innovation within the company. It is usually a small group of less than ten people, with an allocated staff budget and a small expenses budget. The aim of the group is to identify opportunities and develop business plans to open up these opportunities.

The process is then institutionalised within the normal company structures developed to operate the business on commercial basis. The innovation business plans are presented to the same investment committee that approves all other business as usual business plans.

The same investment criteria are being applied for both. Since innovation projects tend to be riskier with higher levels of uncertainty on the assumptions used, compared to business as usual projects, the innovation projects are often not approved.

A different set of criteria is therefore needed for evaluation of research and innovation-related business plans, since these projects pose a higher risk for failure. The reward, if successful, should be much higher.

The situation described above often leads companies to rather buy smaller companies that developed new innovations, after the initial risk of accidents or equipment failure have been mitigated. Smaller companies and start-ups are therefore better positioned for research and innovation-type projects. They are more agile and can easily adapt to changes without being hampered with institutionalisation.

I believe the research and innovation programmes and initiatives of commercial companies will become more successful if they position their research and innovation in a smaller and more agile special purpose entity.

This will limit the financial and especially legal risks associated with research and innovation, and ensure much more agility and flexibility to adapt to market needs. This can be strengthening by partnering and the establishment of collaboration agreements with universities and other research institutions.

Universities can help companies

Universities have access to postgraduate students that can become part of these programmes. Students can be used to work on specific research and innovation projects identified by the company.

A system can be set up whereby students are being mentored by mentors from industry as well as the university, thus ensuring that the academic and commercial objectives of the projects are being met.

CFAM saw the light in 2007 as a spin-off company from the North-West University's drive towards research and innovation. The establishment of a special purpose vehicle to commercialise the research and innovation associated with extrusion was critical in establishing a launching platform.

CFAM now has the expertise to design and supply fully automated turnkey food and feed processing plants. The strategic intent and focus of its research is to develop affordable nutritional foods and feed products from locally produced agricultural products.

This not only led to new products, but also assisted in tackling topical issues such as food security, job creation, empowerment and poverty alleviation. This can be integrated to create complete new extrusion value chains to assist in revitalising the agricultural sectors.

The national impact of CFAM has been significant. Its impact on South Africa’s GDP, through the revenue generated by the extrusion plants, is more than R1bn per year. More than 1 000 permanent direct and indirect jobs have been created in the upstream and downstream extrusion value chains.

We would not have seen the massive successes in CFAM that we see today, if not for a sound foundation of research and innovation, accompanied by proper entrepreneurial business understanding.

Prof LJ Grobler is Research professor at the North-West University’s Faculty of Engineering and Director of CFAM Technologies. Views expressed are his own.

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