Sunday, July 19, 2015

The Right to Self-Government

This article first appeared on on 22 September 2014.

So after quitting your job (and your boss) a few years ago, you started a business and after much blood, sweat and tears it is now stable. You are able to draw a modest salary. You live in a modest home. You drive a modest car and your kids go to a modest school. The only problem is you that didn’t work this hard to have a modest lifestyle.

The business is ready for that giant leap, and more importantly, you are tired of the ‘modest’ life and want to sit at the big boys’ table. Of course, your business would need a fresh injection of capital to fund any growth. This means getting an investor. The only problem is that you would need to give up a share of your business to someone else.

After all those long nights and near-bankruptcy moments you are now expected to give up a sizeable part of your ‘little baby’ to some stranger. To make matters worse, you probably have to sell down at a price lower than your version of fair value (because we all think our businesses are worth much more!).

Worst of all, though, you are now getting yourself a new boss. Well, at least that’s what it feels like. Someone else, other than yourself, you now need to consult with and account to.

You start thinking: “Perhaps this is not such a good idea after all. Perhaps I should just stay with my small business. At least it’s all mine. At least I retain my autonomy. At least I remain my own boss.” If this sounds familiar, do not despair. You are not alone.

The Oxford Dictionary defines autonomy as “the right or condition of self-government” and or “the ability of a person to make his or her own decisions”. For nearly every entrepreneur, the thought of bringing in an investor means giving up the ability to make their own decisions. To many this essentially means they now have a boss, which goes against every grain of their entire plan – namely to be their own boss.

The consequence of this outlook is that the entrepreneur then stumps the growth prospects of their business, driven by this fear of losing autonomy. They resist an injection of fresh capital and fresh ideas that have the potential to transform their small business into a sizeable operation.

Most times, entrepreneurs are scared of losing ‘control’. They are scared of losing the ability to decide when, how and with whom they do business. Ask most entrepreneurs if they would want a funder who takes equity in their business or a funder who lends them debt, and they will tell you: “Lend me your money. I pay you back. You get out of my life!”

Of course, many entrepreneurs don’t meet the basic requirements of most lenders of debt. First, most don’t have adequate security. Second, most cannot display healthy and reliable future cash flows to service and eventually settle the debt. Very often then, the only people willing to take the leap of faith in the aspirations of the entrepreneur are investors who bring with them good old expensive, but patient, equity.

But is there any reason to be fearful? Does getting an investor really decrease your autonomy?

As far as I can see, the JSE’s largest businesses founded by entrepreneurs are still controlled by their founders. This is notwithstanding the fact that many of these founders now own minority equity stakes and have boards and shareholders to consult with and account to.

I am told that Brian Joffe (and Mervyn Chipkin) founded Bidvest in 1988 with an R8m cash shell. Today it is worth R85bn. According to my calculations, Joffe owns approximately 2.3% of the business. He has been CEO since inception and is likely to retire as the firm’s CEO. Other than transactions of a certain size and nature that require shareholder approval, Joffe essentially runs the business in consultation with his board.

What autonomy has Joffe lost by listing his business and selling shares to institutional investors? Compare that to what investor capital has allowed him to build over the years – it’s chalk and cheese.

The same can be said of Discovery’s Adrian Gore, Aspen’s Stephen Saad and many others.

So, dear entrepreneur, in the real world, at some stage, you probably have to give up some equity to investors. It’s the basics of risk and return. You are probably a very risky investment right now and anyone who comes in and puts their money at high risk will seek high returns.

So stop being “penny wise, and pound foolish” and work on attracting value enhancing investors into your business. Be realistic about what to expect and what you are willing to give up as a return. To sober your own expectations, approach a boutique advisory firm to do a valuation of your business, on the basis of selling a minority stake. This will help give you a sense of the value a potential investor may place on it.

Selling equity to an investor who will add real value to your business does not necessarily spell the loss of autonomy. It may very well result in astonishing success!

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