Venture capitalism needed for new ideas

There is a great deal of pressure these days for people, especially younger skilled people, to develop innovative ideas and create new businesses.

This, in fact, is the best way for the economy to develop as a large number of new start-ups will mean that the market can sort out which ones are in the right place at the right time and which will never really take off.

Generally the failure rate for start-ups can be quite high in most economies, but this is rarely a serious problem.

The businesses that succeed and those that fail are normally all on the small side, so there is no massive dislocation when some business folds, and the ones that succeed are normally the ones that grow and eventually become large businesses.

If you want some Zimbabwean examples from the top 10 companies, Econet started with Strive Masiyiwa and a receptionist in a small office suite in Fidelity Life Towers on the Kopje and Innscor started with a single takeaway in Augustinho Neto Avenue in the lower rent part of Harare city centre.

Many thousands of people now earn their living working for these companies and their offshoots, and they provide a noticeable slice of the tax revenue.

Going back even further another business empire started with three brothers arriving with a couple of ox wagons of trading goods, including the first whisky to reach Harare in many months, and unable to rent a shop tipped up one of the wagons as a “tuck shop”. The Meikle brothers built their empire from there.

Others started similar businesses at the same time, and some succeeded, although less spectacularly, while others went bust. But the net result was economic and employment growth, so good ideas need to be encouraged and turned into businesses.

One major problem is that many of those with good ideas do not have deep pockets. There are the banks, including the Government’s pair of the Empowerment and Women’s Banks, but bank managers are not always the best judges of what will work and what will not.

The present tight liquidity means that they are more likely at the moment to make the right call, but that many more businesses could start if there was more finance available.

We also have the second financial need when the small business has been successful, has grown beyond the savings of the founder or the salary of a close relative, and now needs more serious money.

Borrowing at 20 percent, the present bank rate and that was the result of a sharp drop in bank rates after the introduction of the ZiG, is a burden on any business, especially one just starting to grow.

Here is where the venture capital outfits and the “penny exchanges” start becoming useful, connecting the people with good ideas but no money with those with money, but not many good ideas.

A venture capitalist will invest in a promising business, taking a chunk of the shares, but leaving enough to those creating and building the business to personally benefit substantially from their success.

When the business is up and running and ready to list on a stock exchange or move into some other form of multiple shareholding, the venture capitalist will sell out, taking the profit, and with a successful venture that can be a large profit, and start looking for another likely start-up.

Often the venture capitalist will have been able to provide the necessary business environment for the successful entrepreneur, the financial discipline, the help in meeting likely customers, the marketing links and the raw material links.

A good venture capitalist is a lot more than a speculator and will provide very good service for the eventual profits earned.

The Government itself has been involved in venture capitalism under the Second Republic, the medical oxygen plant near Mutare and the marula processing plant at Rutenga being a couple of examples.

A more consistent venture capital thrust could be maintained if the Industrial Development Corporation returned to its routes. It was set up as a venture capital concern, to develop an industry and then sell it off using the capital and the profits to develop the next industries and keep growing.

But almost immediately after its founding Ian Smith declared UDI and the IDC became a different sort of company, a holding company for those industries that had been effectively nationalised after their foreign owners dumped them, such as the Ford assembly plant becoming Willowvale Motor Industries, or which were going under but which the regime thought needed to be maintained.

Early post-independence Governments wanted to keep the nationalised industries, even when they had little strategic value, rather than sell them off, perhaps even in management buyouts, and recycle the capital into new ventures.

But the IDC could be returned to being a venture capital entity for the medium business sector, turning likely medium businesses into larger businesses, floating them and then using the share sale money to take up the next round.

A large company that should be, or could be, under partial or full State ownership would be properly positioned in the Mutapa Investment Fund, as to qualify it would need to be a cash cow and therefore a good choice for a sovereign wealth fund.

The IDC has been brought under Mutapa, and that makes it easier for it to be the venture capital arm, while Mutapa is the holding company and wealth fund for more permanent holdings.

But there are opportunities for the private sector to create venture capital concerns, possibly connected to banks but otherwise within some of the large private conglomerates, or even a new company that could be floated on one of the stock exchanges.

The important part of venture capital is to have a number of irons in the fire, and not be relying on just one or two investments, and where a single failure could spell serious trouble. A proper venture capital entity will have enough investments in play that if one or two turn turtle that is regretted, but was statistically expected.

More use needs to be made of the Companies Act and especially the private limited company. Many small companies are set up by people just wanting the limited liability that a sole trader cannot have, and they hold all or almost all the shares and talk about “my company” with a parent, sibling or spouse as the other director.

But the format is well-designed for a group of people with a good business idea to formalise their operation and by assigning shares to avoid a lot of dispute in future years as success builds up. It also offers the opportunity to bring in a family member or two as an investor shareholder.

The setting up of the company would make it clear that joint decisions are required, and that the minimum standard of accounting is maintained.

If everything goes well that company can, in time, even go public so that those original investors who want to take their profit and run can then realise the value of what they have created.

Which brings in the need for a lower level exchange to the Zimbabwe and Victoria Falls Stock Exchanges. These have listing requirements that basically mean you have to already have a successful business before your initial public offering, and the business cannot be small and in the Zimbabwean context even “medium” is probably a bit small.

But other countries have what are scathingly called the “penny exchanges”, where small companies with cheap shares can get some outside capital and provide a real investment opportunity for a particular type of investor, one wanting to take risks but have these spread.

The low price of the shares means that an outside investor can buy into several companies, and be able to make their money off those that succeed.

In a sense it is a hands-off version of venture capitalism, where the outsider does not have much say in the day-to-day affairs but still needs the opportunity to have several irons in the fire so that the inevitable collapse of one business can be shrugged off.

When the little company on the small-unit exchange reaches a market capitalisation that allows a movement to the “big board” the company can then move up market.

What needs more debate and more action in Zimbabwe is to work out how the modest amount of available capital can be connected to the growing number of smaller businesses run by competent people with some very good and innovative ideas.

We do not have to reinvent the wheel to do this, but we do need to establish the necessary links and the necessary ways of making the investments.-ebsunessweekly