The path of entrepreneurs is fraught with several dangers from which many would ultimately navigate well and recover. However, there are a few roadblocks that are difficult, but not impossible, to recover from. And one of them is running out of cash! The cardinal rule of business is NEVER RUN OUT OF CASH! Pardon me for screaming that out, but I just had to. And there are more ways to run out of cash than to conserve some money but having spoken to several entrepreneurs across Africa, there is one that worries me quite a lot. It bothers me because most entrepreneurs do it with good intentions, but they ultimately realise that the car has run out of fuel.
Sacrificing cash flow for aesthetics!
Many of you might know Vusi Thembekwayo, a young successful entrepreneur and investor from South Africa. He painted a scenario I would repeat and probably embellish to stress my point. Assume that you are an investor; two poultry entrepreneurs approach you for investment. The first entrepreneur has built one of the country’s most sophisticated broilers (bird) processing factories, with all the bells and whistles you can imagine. But he is yet to generate a single $, which is why he needs the investment. He needs to stock birds to process them in another six weeks to sell. The second entrepreneur does not have a broiler processing plant. Still, over the past two years, he has been collecting processed chicken from some processors and selling it, making a decent margin that could have been better if he had processed the birds himself. He is, however, generating cash flow from the ongoing operation. This is also why he needs the investment. He wants to integrate backwards and set up a processing plant to improve his margins. Of the two entrepreneurs, who would you lend to?
If you said the man already collecting and selling processed birds, then we are on the same page. The reasoning is this. For any business, getting customers to part with their hard-earned money in exchange for whatever product or service that you offer is often the most challenging task. It also proves that there is a market for your product or service, and you know how to reach that market. The man selling the birds already understands the dynamics of the broiler market, the cash cycle, the value chain, and the head and tailwinds. Ultimately, when he backwards integrates, he is building out a fit-for-purpose facility that precisely addresses the demand in the market. In addition, the man selling has demonstrated that he can sell and generate cash. In contrast, the former chap has shown that he can implement a project successfully, which does not automatically turn into cash.
Unfortunately, I have seen so many set out to build the infrastructure significantly and run out of cash. From an investor’s perspective, generating and turning cash is one of the most significant indicators of a thriving business, no matter how basic the existing infrastructures are.
Let me share a practical example. I was at an investment pitch session where some companies pitched to raise funds for their business. One business caught the eyes of every single investor and has since closed an investment. The business was selling branded soybean oil in northern Nigeria. The trick, however, was that this company neither purchased soybeans from farmers nor processed soybeans for soy oil. The company was sourcing processed soybean oil from another miller and focused its resources on bottling the oil, branding it, and selling it. The company was doing over a million dollars in sales without investing any CAPEX for crushing, extracting, and refining the oil. His request to investors was to raise capital to build out that capacity. Guess what? He received the funding required.
My submission is this. If you have a vision of what you want to build out, you do not necessarily have to start that way. That is why it is a vision. But start in such a way that you can generate cash as soon as possible. And where possible, always start your business at the point closest to your ultimate consumers. Start by trading eggs if you want to build poultry (even if you have sufficient capital). If you’re going to open a bakery, start by selling bread. First, run a mobile version on a truck if you want to create an escape room. Understand what drives purchasing behaviour – not only through research but through practice.
I am the author of Scaling for Success: Empowering African SMEs. I am a Partner at Sahel Capital, a food and agriculture-focused private investment firm in Sub-Saharan Africa. Sahel Capital manages the Fund for Agriculture Financing in Nigeria (FAFIN) and the Social Enterprise Fund for Agriculture in Africa (SEFAA).
I co-lead SEFAA, an impact-first fund investing in agribusinesses that provide direct or indirect benefits to smallholder farmers across 13 countries in Sub-Saharan Africa. I also lead investments and portfolio management for SEFAA and manage FAFIN portfolios, two of which were recently exited. I am a director on the board of one of the portfolio companies and serve in advisory roles for several startups and SMEs.