The key ingredients of start-up success

What factors are the most important in getting small businesses off the ground? A competition for entrepreneurs in the health-care sector is exploring the importance of route to market in making South Africa’s start-ups work

“Most firms in developing countries have no paid workers, and hardly any reach the size of 10 workers.” That is the opening line in a 2015 blog post by World Bank economist David McKenzie about start-ups in the developing world.

In South Africa, this presents tremendous scope for growth. It’s also the premise of a recent endeavour by the Gibs Centre for African Management & Markets (CAMM) and Aspen Pharmacare.

It was sparked during a discussion with Aspen group senior executive Stavros Nicolaou. “Trophies are good,” he said. “[But] we want to build genuine, justified confidence for the smallest entrepreneurs. How do we really help them?”

I went back to McKenzie’s work. He analysed a competition in Nigeria called YouWin! It was launched by then president Goodluck Jonathan in 2011 to help start new businesses or expand small ones. It attracted 24,000 applicants in the first year. The top 6,000 entries were selected for a four-day business plan training course. Then 1,200 winners were chosen to receive awards averaging $50,000 each.

That’s a lot of money — but it delivered results. McKenzie’s analysis: “I calculate the cost per job created at around $8,500, or $3,606 per job-year over the first three years. By way of comparison, fiscal stimulus in the US costs around $100,000 per job-year.”

And, he found, there was a 23 percentage point (pp) chance the winning start-ups would grow to 10 or more workers over three years. For existing firms, that figure was 21pp. Over the same period, profits increased by 23%-25%.

Solving Africa’s health-care problems

So, we had a model to work from. But we didn’t have tranches of $50,000 sitting around. There was, however, something we could offer instead. We typically consider capital, skills and a great idea as the necessary ingredients for entrepreneurial success. And they are important. But there’s another element that is too often overlooked: a route to market.

CAMM economist Francois Fouche and Allon Raiz from business development company Raizcorp joined the conversation, and we put together what quickly became the Aspen Gibs Route-to-Market Challenge.

We invited small businesses in the health-care industry to apply. They needed to be based in Africa and have the potential to solve African health problems.

Our top five contenders ranged from Portia Modise’s pre-revenue PRD Logical Solutions, which produces mechanical devices that make everyday life easier for people in wheelchairs, to Gokul Nair and Giancarlo Beukes’s Impulse Biomedical, which makes an auto-injector to treat severe anaphylactic shock, to Ashley Uys’s Medical Diagnostech, which manufactures rapid diagnosis test kits of the sort we all got to know during Covid.

The business founders then came to the Gibs campus to interact with business and academic stalwarts. There, the top three pitched their businesses to a senior judging panel that included the likes of TransUnion Africa CEO Lee Naik and Nomsa Nteleko, founder and CEO of software solutions company OS Holdings.

“This was key,” says Nicolaou. “Most of these entrepreneurs [had] never presented to investors before. This showed up in the spectrum of quality. Some were pretty good. Some, despite being very smart and having interesting businesses, were just not good enough to win business. We told it as we saw it. We were encouraging. But it would have been no good to ignore significant flaws. The goal is to make these businesses better next time they pitch.”

‘Proof of concept’

The route to market was addressed when the finalists were given a chance to pitch to Aspen executives and supply chain leaders. If successful, there was the chance they could gain access to the pharmaceutical company’s distribution channels.

“There was no guarantee of an offtake agreement,” says Nicolaou. “But you can’t buy this sort of access.” And, he adds, the company is “seriously considering” possible opportunities with several of the finalists, including the winner, Uys’s Medical Diagnostech.

Looking at the venture, Nicolaou has clear ideas on how to make the project bigger and more effective.

“First, I think we should expand this into more industries. Imagine 10 of these challenges in 10 of our biggest industries. Now that we have the proof of concept, we can get buy-in,” he says.

“Second, I think we should up our game on testing the contestants in the boardroom. I’d like more of our nonexecutive directors in the room to really challenge these young people in a constructive way. I think they will emerge from the experience immeasurably better able to get their products and services moving and making an impact in the economy.”

Onward to the 2024 challenge.

* Saville is the founding director of the Centre for African Management & Markets at the Gordon Institute of Business Science. The centre conducts academic and practitioner research and provides strategic insight on African markets

By Adrian Saville
This article first appeared in the Financial Mail.