Just three years back, Martin Beyers, 39-year-old co-owner of CERadvance, a specialist industrial ceramics company, would perhaps not have got very far in an entrepreneur of the year competition.
But this year, following a recession caused by cowboy capitalism and the unbridled pursuit of growth, it is not surprising that an appreciation of a restrained and nuanced kind of entrepreneurship is taking hold.
Beyers, who runs a 25-employee factory in the same building near the OR Tambo airport where he started 10 years ago, was last month named the Sanlam and Business Partners 2010 Entrepreneur of the Year. His story is about the painstaking path of niche development and controlled growth from a first-year turnover of R100 000 to the current R12-million.
Beyers spotted the gap in the late 1990s. At the time he worked as a ceramics expert for a multinational company that was pumping millions of tonnes of commodity ceramic products into the mining, minerals processing and power-generating industries.
He loved the creativity and innovation that went with tailormaking ceramics for specific industrial applications, but realised that it sat uncomfortably in a huge corporate focused on mass production. Soon after he went on “sabbatical”, doing some freelance product development and consulting.
He teamed up with Dave Kelly, a marketer with the same feel for the industry, and together they started CERadvance. The name plays on the promotion of ceramics in industrial applications against a preference among industrial designers for often inferior metals and polymers.
Kelly had a good business track record and could provide sureties to finance their machinery, whereas Beyers had to sign personal surety for CERadvance’s debts. What followed were five years of “technically running at a loss” spiced with some hair-raising decisions.
Two years after CERadvance’s inception, the Council for Scientific and Industrial Research (CSIR) was spinning off and privatising small specialist business units. One of these was a ceramics research and development unit manned by two of Beyers’s former classmates in ceramic studies at Technicon Pretoria.
The reasons for buying the unit were compelling. The course had since been scrapped in the technicon’s short-sighted pursuit of large student numbers, says Beyers, and knowledge of ceramics and the technical skills to apply them in industry were fast leaching out of the economy.
If he could grab some of the few remaining top ceramic experts, CERadvance’s occupation of the niche was virtually assured. Beyers was working on an important client which, if it came on board, would give the duo so much work that it would keep them busy for almost a year and they wouldn’t be able to do anything else.
Buying the CSIR unit would mean that he could delegate the contract to his new employees and take a step up from being a ceramics technician to becoming an entrepreneur in the ceramics industry. The problem was that the duo couldn’t afford to buy the unit. Or rather, they could afford to buy it only if they landed the big client.
With no guarantee, they took over the unit and sat waited anxiously for two weeks before the client said yes. They spent the next few years “growing into” their expansion. Right from the start there were temptations to go the route of mass producing commodity products.
Offers came in and opportunities presented themselves that took self-discipline to turn down. “If you want to operate in a niche, you’ve got to do it wholeheartedly. You’ve got to be able to do your own research and development, your own innovations.
The moment you start using generic solutions, you’re no longer operating in a niche market,” says Beyers. When that happens, you expose your business to the kind of uncontrollable forces that the large commodity-based ceramics companies in South Africa suffered in the past few years — a massive recession, an oscillating rand and cheap imports from China.
It made them look at niche markets with renewed interest. But niche building has its disadvantages. One is the relentless need for constant innovation.
“If you say your philosophy is the advancement of ceramics in new applications, you’d better be busy with new work as soon as your previous client has received his value from you. That’s your protection, always being one step ahead, because next year that product [that you’ve developed] could be standardised.”
It’s relentless and risky, says Beyers, but it still beats banking on one or two generic products only to spend everything you have on defending them against copyright violations. Another disadvantage is scalability.
Although he has built up enough skills inside his business to ensure that product innovation takes place without his constant involvement, the team is still small and specialised enough to guarantee the highly personalised service required for tailormade solutions.
His challenge now is to devise a way of expanding without breaking the tight information chains inside the business. But Beyers points to a more serious impediment to growth. He says like most entrepreneurs he finds himself constantly considering alternatives to expansion.
It is more than just the extra red tape that businesses attract when they grow beyond certain staff and turnover thresholds. It is a subtle but pervasive attitude of mistrust and suspicion that the expanding entrepreneur comes up against when he tries to engage with bureaucracies, such as the BEE rating system, the skills development system and the department of labour.
“The entrepreneur constantly has to submit evidence that he is not guilty of something,” says Beyers. A lot of creative energy therefore goes into strategies to grow jobs at a time when SA needs its entrepreneurs to focus on product innovation, developing new niche markets and creating jobs.
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Bootstrapping start-ups
All start-ups require some basic resources such as skills, money, equipment, people and information to capitalise on an identified opportunity and begin operations. Entrepreneurs who must construct a resource base to initiate a new venture face a significant challenge.
Not only must they undertake the complex task of identifying, assembling and acquiring resources, they have no reliable way to estimate what might be required. Very often, this need for a rich set of resources is simplistically interpreted as representing a need for external finance, with potential entrepreneurs and policy-makers alike tending to attribute low rates of start-up and business success solely to a lack of access to finance on the part of entrepreneurs.
In developing countries, in particular, entrepreneurs generally have poor access to funding, partly because of a lack of innovation in capital markets and partly because the cost of accessing start-up credit may exceed the benefits gained from small loan amounts.
Instead, entrepreneurs must find ways to attract resource holders even though both the individual and the enterprise may lack a relevant reputation and track record — very often they will leverage their own human, financial and social capital to gain access to the resources they need.
This practice is known as “bootstrapping”, involving a set of behaviours and methods employed by entrepreneurs to meet the need for resources without relying on long-term external finance.
Research suggests that entrepreneurs use a number of different strategies to bootstrap their businesses: they use their own savings or borrow money from friends and relatives; they make every attempt to minimise accounts receivable and speed up the payment of invoices; they will delay payments to suppliers or lease the equipment they need; they will minimise capital invested in stock through negotiating with suppliers and they may share resources with other businesses.
Early results from a Wits Business School Centre for Entrepreneurship study of the bootstrapping behaviours of South African entrepreneurs suggest that other bootstrapping behaviours may be unique to the developing-world context.
In order to fund future businesses, entrepreneurs might save or invest specifically for that purpose, either to fund working capital or to create collateral against which to borrow, often for years in advance of actually starting the business.
The advantage of bootstrapping a start-up is that it ensures that the entrepreneur focuses on meeting customer needs and that he or she keeps a close eye on cash flow, thereby avoiding expensive mistakes. But, there are disadvantages too.
Growth is often severely constrained in most bootstrapped businesses and usually puts the entrepreneur at a significant disadvantage to competitors.
And although funders are thought to appreciate entrepreneurs who have put their “skin in the game”, the bootstrapping entrepreneur must ensure that he or she has not used up all his her resources before approaching an external funder.