Why young businesses fail

Chege ExpertExpert:  Crescent-side Management Services Founder and Director Bernard Chege (pictured)

The statistics on survival of start-ups are discouraging: three out of five (60 per cent) enterprises in Kenya do not see their second birthday; only 10 per cent survive to the fifth year; 95 per cent of those that make it to five years survive. In other words from 100 new businesses, 60 collapse before one year is over. The 10 that make it to five years survive.

There are many reasons why start-ups fail. One of the main reasons is Lack of focus. A lot of businesses start up in an ad-hoc manner with no clear core business. In fact, a number of businesses establish their core business after a few months in business. By then they have tried supplying foodstuffs, stationery, engaging in minor construction works and refurbishments, passenger transport etc. Along the way, the businessman creates more rewarding networks in one line and settles on it as a core business. Unfortunately, for one successful business, hundreds of others perish after burning their fingers in different business lines.

What most business people need to understand is that each line of business is a school in itself. In normal schools, it requires time and persistent study for one to graduate. And each year a student moves from one class to another, if the pass marks are met. It is the same in business.

A new business must go through each stage of challenge successfully to ‘qualify’ for the next stage. Most of the SMEs start as a one owner and only employee. When you are alone there are no human resources issues to deal with. Hiring other workers is an ‘exam’. Dealing with human resources issues is ‘continuous assessment tests’. Leave (emergency, paternity and maternity, annual e.t.c.) come to test the business owner. Staff coming in late or leaving early are petty issues that put the owner to test. To achieve focus, the business must draw a strategic plan.

This plan will outline what will be the core business, the marketing, the organization and the financial plans amongst others. The plan focuses the business to achieve its goals. To support the strategic plan, the business needs to come up with policies that will guide its operations. A human resources policy, for example, will spell out how the business will recruit, motivate, develop and exit employees. A three years’ strategic plan would be ideal for a startup. Five years might look to far when one is just starting.

The strategic plan will then be reviewed mid-term and at the end of the three years and another one drawn for the next three or five years. As much as a strategic plan is important to a business, implementing it is critical. Business owners must apply themselves to ruthlessly execute the plan if the desired results are to be realized.

 

Mr. Chege is also an expert in Business Management including Strategic and Business Planning, Financial Management, Project Management and Banking.

Why SMEs need bid bonds when tendering

BID BONDS_INVESTEQ CAPITAL CEO SUSANInvesteq Capital is a public company that has empowered over 4,000 SMEs in Kenya and beyond by providing them with bid bonds and other business and financial solutions that promote the stability and growth of their enterprises. The company boasts of offering affordable performance bonds to help small businesses satisfy contractual requirements. SME Digest caught up with Investeq Capital CEO Susan Asige to explain why SMEs need bid bonds.

SME Digest: What should SMEs know about bid bonds?

Susan Asige: This is a guarantee document and the reason why tendering entities emphasize on bidders to have bid bonds is to eliminate jokers; people who are not serious, who think they can bid for any tender without proper qualifications. Any bidder with a bid bond is a serious bidder.

Everything Kenyan entrepreneurs ought to know about bid bonds.

A bid bond costs money so there is no way a client will get a bid bond if they are not serious about winning a tender. That is why most tendering entities will always ask for a bid bond and most of the times they are very specific, whether it’s a bid bond from the bank or from the insurance company.

SME Digest: Why do most SMEs shy away from applying for bid bonds?

Susan Asige: Any financing institution that gives bid bonds subject applicants to due diligence. Most of the banks for instance, will require clients applying for huge bid bonds to place a security, which most SMEs do not have.

At Investeq Capital, we create flexibility and reduce the turnaround time to one hour. New clients come back because when they go to the bank, the procedures is long and tedious with some banks even requiring you to first open a bank account with them. Some clients get frustrated along the way and they end up not qualifying. If you don’t have the patience, the financial resource, you’ll not get a bid bond from banks.

A bid bond is not a high risk guarantee and clients should not be subjected to long and tedious procedures when applying.

I think allowing the women, the youth and Persons with Disabilities to bid for government jobs with bid bonds was informed by the long and tedious procedures the banks subject their clients to when applying for bid bonds.

The old school way of doing bid bonds where you were required to put a cash collateral is another reason that discourages most small businesses from utilizing bid bonds. SMEs do not have a lot of money and such requirements tie their working capital. This is money they need to inject back into the business.

SME Digest: What do I need to apply for a bid bond?

Susan Asige: When applying for a bid bond, you need to have all the necessary documents, including tender advertisement (newspaper cutting for instance) and the tender document that has your company details, the directors and the Bill of Quantities (BOQs) among other documents.

The tendering process is very strict and a small mistake can lock you out. We spend time with these clients, go through the tender document to check if the applicant has complied. The client then fills in an application form and we proceed with the application. The credit team also looks at the applicants financial statements.

At some point we had opened a shared services function where we can help clients to put up the tender document.  Where we think our client has not done it right, we advise them as a way of adding value to our products and services.

Right now Investeq is corresponding with several local banks, including the Kenya Commercial Bank (KCB), who have also opened their branches in international markets. All the processing is, however, done at Investeq offices.

We have clients in Ethiopia, Tanzania, Nigeria and Rwanda. We already have a branch in Uganda and we are rolling out to Rwanda in the first quarter of 2016 and by the third quarter we hope to have a branch in Nigeria. These expansions have been informed by the clients we are working with.

What percentage of my company should I give to investors?

Chege ExpertExpert:  Crescent-side Management Services Founder and Director Bernard Chege (pictured) The percentage of shares partners own in a company depends on a number of factors:

 

  1. What they are bringing on board;
  2. The value of your company;
  3. What you are willing to cede to them;
  4. How desperate you are for what they are bringing on board;
  5. Your negotiation skills.

If your company is valued at Kshs.1 million and the investors are bringing in Kshs.200,000, then it is reasonable to cede 20 per cent of the shares to them. However, most entrepreneurs put more premium to their business than what can actually be substantiated. The years of sweat, the sleepless nights, the expected future earnings, even the entrepreneur’s ego, all come to play. An entrepreneur also fears losing control of the business. Oftentimes entrepreneurs pass over great investor opportunities due to this fear. The enterprise then continues struggling for years and when the energy levels of the owner wane, the business finds it difficult to survive in the continuously dynamic market dispensation. At times it is good to ask whether one is better off as a 100 per cent owner of a struggling business or a 20 per cent owner of a thriving business that outlives the owner.

Mr. Chege is also an expert in Business Management including Strategic and Business Planning, Financial Management, Project Management and Banking.

What are the biggest challenges to starting a business?

Chege ExpertExpert:  Crescent-side Management Services Founder and Director Bernard Chege (pictured) There are many challenges that beset a start-up. The following five are some of the most common ones:

 

  1. Insufficient Capital

Due to challenges in estimating how much money the business needs coupled with an unrealistic expectation of incoming revenues from sales the start-up finds itself in a cash crunch situation even before it takes off. Goods purchased in cash are sold but are not paid for at the expected time. If this situation persists, the start-up is unable to meet new supply orders due to the delay in payment. In the meantime, bills are accumulating; workers need to be paid, rent is due, utilities bills need to be met.

2. Lack of a viable market Quite a number of start-ups are driven by owner’s enthusiasm with the product or service without regard to what the customers want and are willing to pay for. It is always advisable to research on what customers’ value and the price they are willing to pay for the product or service.

3. Lack of competitive advantages Some start-ups are replicas of existing businesses. They have no differentiation in the product or service or in the way they offer the product or service. You can start the same type of business but you must have a competitive advantage to be relevant in the market. All matatus plying the Ongata Rongai route offer public transport services. But those with tv screens, wifi, phone/laptop charging facilities latest music, interior disco lights, clean with new number plates e.t.c. have a competitive advantage.

4. Picking a niche market that is too small At times, a start-up’s business idea is great but the buyers are too few. A pork butchery in Garissa may be a monopoly but where are the buyers? This goes back to the three points above, get the customers first and then provide the solution.

5. Breakup of the founding team Startups are high-stress environments and disagreements and rifts usually crop up when the business takes long to bring in the expected returns to the owners. Enthusiasm wane in on some of the owners and they start to commit less and less of their time and energy to the start-up. A sudden departure of a key partner can be disastrous. 

Mr. Chege is also an expert in Business Management including Strategic and Business Planning, Financial Management, Project Management and Banking:

How can small businesses leverage the Internet to grow?
PHOTO BY CALEB MUTUA

PHOTO: CALEB IMAGES

Expert: Prof. Bitange Ndemo

Small and Medium Enterprises leveraging the technology to create enterprises is not a new concept to Kenyans. Affordability and access remains major hurdles and the government must focus on these areas because it has been proven that once there is access and affordability, SMEs know what to do with the technology.

When taking your business online as an SME, a website is a good place to start. You can then leverage on social media to market your products and services and to drive traffic to your website; Social Media is a very powerful tool to leverage on digital marketing. Startups are now using WhatsApp to market their products and services.

Every SME needs broadband in order to succeed. Studies have shown that access to internet alone, brings up the country’s economy by 0.75 per cent. As a country, therefore, we need to spread broadband widely to enable more SMEs access the internet at affordable rates.

Prof. Bitange Ndemo is an associate professor at the University of Nairobi’s Business School and a former permanent secretary in the Ministry of Information and Communication

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