This start up company case have me reflect back to 2007. That is when one of my final year students showed me his plans to start his macadamia nut farm and asked if this is a way to start it without money. I was amazed with his creativity on this idea.
Having no access to capital
In the interest of privacy, lets call him, Sandile. It is important to understand the background of Sandile. Sandile comes from a previously disadvantaged group in South Africa. This means access to capital and wealth networks was limited. He is not politically connected and thus such networks was not accessible either. His father at the time kindly indicated to him that he had to fend for himself.
From that background a young Sandile entered my office and requested a brief consultation to present his plans for input and advice. I remember the day clearly. This was the first time Sandile came to me for consultation.
He opened his file and showed me images, plans and diagrams. Not a business plan, but a lot of data and research on how his macadamia nut farm will work. I am not a farmer, but from a business perspective, it showed significant insight in how it will work, and that he clearly did his homework in understanding macadamia nut farming.
Access to land
If you want to farm in South Africa, you generally have to buy a piece of land, develop the land for agriculture, get all the equipment and technology, by either renting or buying it. Then you need to get a significant amount of operating capital to see you through the time to your first harvest. Now Sandile presented to me that for seven years he will have no income from this farm but will need to sustain this farm. That is because macadamia nut trees will only bear nuts in seven years time.
So I asked him, where are you going to get land?
Sandile told me that he had made a profit share deal with the tribal leader in northern Limpopo (the former Venda) who owns all the land in that area. In this instance he was able to access land at no cost and at no risk. So his problem was not land, but was to sustain the operations of the farm for seven to ten years and would like to get my advice on it.
Start up company operations funding model
I had looked at all his plans, and realized that it was impossible for him to obtain results in one year for that business. That was therefore a longer term, bigger project. In the shorter term, he had to demonstrate his ability to start and run a business without capital. However, I also wanted to help him with his longer term project.
It was then that I have discovered the solution to use interim projects to fund a larger scale project. With this insight, I had asked Sandile: “What other businesses did you think of starting that you are able to start in the next week and show a profit?”
Sandile responded in stating that he will sell Laptops on campus to students. Now what I am certainly aware of was how can he sell laptops to students who cannot afford laptops in the first place. But perhaps he already had the answer. So I asked him to tell me more about his plans for that business.
Sandile then indicated that he had found a reliable supplier with access to demo laptops. He was able to supply laptops at a fraction of the price to Sandile and then Sandile can resell those laptops on campus.
I was skeptical that students who could barely afford textbooks will be able to afford laptops, even at a reduced price. However I told my student to give this idea a chance and see what happens.
The struggle to sell to a market who cannot afford your product
A few weeks later, Sandile was back in my office for consultation. This time he told me that he managed to get some laptop sales, but sales are going slowly. He indicated that the reason was as I suspected: The market could not afford the laptops.
However, what I loved about this student is that he came to my office already with a solution to his problems. He just wanted to soundboard his solution with me.
So I asked Sandile what his plans was to overcome this problem, to which Sandile responded:
“You see sir, the bookshops on campus has access to the electronic student loan facilities.”
At the time most students studied using the government student loan scheme called NSFAS. Students had a card, almost like a credit card, and could purchase educational related products using their cards and approved merchants, who often operate from campus. So Sandile continued by saying:
“I have negotiated with one of the bookshop owners on campus to sell my laptops there”
I said this was great, and but I asked him whether he will stock his product there, to which his answer was:
“Absolutely not sir! That would be too risky for me, and besides I do not have access to that much operating capital. What I have negotiated was that the bookshop owner would collect orders from students, and then I will supply the laptops based on those orders. Students then have already financially committed and I had nearly zero risk to supply them their laptops”.
I remember that this little business had brought in enough revenue to help Sandile buy and plant the first macadamia nut trees that year.
The framework: Lean to Zero Zagger Framework
This framework that Sandile applied is what I call my Lean to Zero Zagger Framework. What this means is that as you know when everyone zigs, then the appropriate success response could be to zag. When everyone either find excuses how not to start a company, you simply find a different perspective. After reducing the resource requirements, such as negotiating or entering in partnerships – in this case with the Venda tribal leader for the land, then to zero the resource requirements for that venture, you simply start a venture that can be done without capital. You then re-invest the funding of the interim venture into the bigger venture. The steps of this framework is as follows:
- Find out what resources or network you have access to
- Find new ways to reduce resource requirements that you do not have access to
- Develop profit sharing partnership agreements for any remaining, but core and critical resource requirements
- For resources that purely requires capital, where partnerships are not possible or undesirable, then develop a zero capital smaller project (seeding project)
- Start the seeding project without funding, and re-invest the proceeds into bigger project
- Liquidate/exit by selling the seeding project when the primary project is self sustainable and when the seeding project is consuming valuable time and attention that would be more beneficial to develop bigger project.
Pros and Cons of the Lean to Zero Zagger Framework to a start up company
This zero start up company process that are based on the Lean to Zero Zagger Framework have certain drawbacks as well as benefits. Firstly the drawbacks are as follows:
- it takes time, and also carries some risk
- if the barrier to entry is low, then the potential profits might be low
- it can defocus you from your primary focus or passion
The benefits of this approach to start up a company is as follows:
- You can run it at the same time and reinvest the profits into the new venture
- It can generate equity value, this if you sell you get a large payout to reinvest
- You can decide when to exit – when the new venture is sustainable
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No matter what the obstacles to start up a company, there would be a way to get it done. However the less access you have to available resources, the more time and creativity you need to invest to make it work. This in itself is not a bad thing, because what this process does is temper the entrepreneur into become a better leader, and help him become self-sustainable and accountable towards his future decisions.