Business Lessons - Afrikan Heroes

Taking Your Startup To A Foreign Country: What You Need To Know

June 8, 2019

The first few years of your startup are very crucial to its survival. After this stage, an ambitious startup may consider launching operations in a foreign land. Usually, you may have one reason for doing so: you want the business to grow and attract more investments. It is always a case of the bigger the merrier. Expanding to a foreign territory would also present your startup with a big chance to sell your business to a foreign investor, or launch a franchise deal. But the crucial question is usually: when is the right time to set up a foreign office for your startup? We would consider these points in bits, from time to time, about what strategies, when and how to carry on your startup business to oversea countries.

Why Do You Really Need To Move Your Startup To A Foreign Land?

This is a crucial question every startup owner must ask himself/herself. A key reason is usually diversification. In fact, the world is becoming more accessible than ever before. At a click of a button, you would know how the business environments of most countries are. With diversification, you most probably can’t put your eggs in one basket. With a more open world, why would one choose to invest everything they have in one country? Diversification is so important that you should look for investment opportunities beyond your own geographical borders. Take, for instance, doing business in one country with high volatility may affect the value of your stocks in that country. At the same time, some other countries may have a lower rate of volatility. Most investment professionals agree that, even though diversification does not guarantee against loss, it is the most important component of reaching long-range financial goals while reducing risk.

Again, take it or leave it, your location would affect whether your startup would be bought by an investor or not. The picture below shows that some countries get billions of more funding than others. This shows that investors are preferring some countries and even continents over others. Again, investment in emerging market countries carries with it certain “emerging market risks” such as currency fluctuations, expropriation scaremongers, social unrest, crime, among others. Click here to get a view about which countries pay the least corporate tax in the world.

Take a look again at this chart below.

More businesses in South Africa, from the chart above, are expanding to other offshore countries. In fact, a survey released by the Franchise Association of South Africa in 2018 shows that with most independent businesses having a 90% failure rate in the first two years of being in business, the average number of years franchisees are in business has remained consistent at 10 years — with 36% in business for more than 10 years and 67% for more than 5 years.
From the above, it has become obvious about how a future Mark Zuckerberg will suddenly put an end to his coding when he thinks about building the next Facebook in Nigeria or Sudan. However, one thing which makes most businesses successful is that most of the times, they are more willing to take the risk even in an adverse environment, such as in these countries mentioned above. But the risk also has to be a wise and calculated one.

See Post: Foreign Investors Dump More Nigerians

Why Move Out?

Here are a few occasions on which it is extremely important to move out of your current location.

Your Market is Offshore

Most African countries require you to bring back all foreign currency earned from offshore clients within the limit of a particular period. In South Africa, the limit is for 30 days. Nigeria has a liberal “free entry, free exit” approach to the movement of foreign investment funds into and out of its economy, although there are a few hitches here and there. However, if your revenue comes from offshore, do you really need to allow it to get caught in your country’s exchange control web, especially where the exchange controls are highly unpredictable? The best wisdom may be to bill and receive income in your offshore business account, which is more often than not influenced by the exchange control structure in place.

The Startup European Partnership, an open innovation platform organized by the Mind the Bridge Foundation, found that 1 in 7 of all European startups valued at more than $1 million moves their headquarters internationally (with the vast majority of those heading to the United States).

Your Investor Wants You To Move Off-shore:

In this case, your investor may have funds and the experience, connections, and mentorship, but they may desire that you move offshore before they can invest in your startup. Where such is the case, make sure that you do some studies about how much it costs to restructure your business offshore.

You Are Positioning Your Startup for Future Buyers

Most of the time, your startup’s future buyer may just want your startup to be based offshore. Sometimes, the value of your startup may just be the software IP developed by your startup and potential buyers may not want the IP to be based in your home country. Hence, the need to move to offshore locations.

Personal Reasons

You may have started a startup in your home country but you or any member of your family desires to relocate to another country. This may be a chance to extend your startup’s reach to other countries. Where such is the case, having a foreign business in the place in those offshore countries for you or any of your family members may earn you hard currency.
According to a report by the National Venture Capital Association, 1/3 of all venture-backed publicly traded companies between 2006 and 2012 had at least one foreign-born entrepreneur. An immigrant or child of an immigrant has founded more than 40% of the Fortune 500 companies. These are often 100% U.S.-based at inception, but they are more likely both to open an office abroad and to sell abroad than a company without an immigrant founder.

Image result for How startups moved offshore chart — Israel has proved that any country that is serious about its startup ecosystem wins

How Some Startups Handled The Issue of Moving To A Foreign Land

WooCommerce and Getsmarter (which sold to WordPress for something over $30-million and to 2U for well over $100-million respectively) are a perfect example (as a result of that sale to WordPress, WooCommerce today powers over 30% of all online stores with over 1M+ downloads.)

One interesting fact about these two startups before their acquisitions is that never had any plan to expand offshore, yet much of their revenue came from offshore customers. In fact, their offshore customers were the reason why both startups remained in business. Hence, the most important question every startup owner has to ask themselves is how big is your market, and are you well positioned to tap into it?

Even without planning to expand, these two startups succeeded because they focused on developing and selling their product, rather than on an intricate international group structure.

According to Dommisse Attorneys law firm which oversaw the two startups during their early lives:

They knew that at their early stages, they had many demands on limited growth capital. And more importantly, they chose to focus their time and mental energy on value creation. If they had spent either their cash or their time on international structuring, there would have been an inevitable opportunity-cost in terms of slower value creation. Even worse, the opportunity cost could have been terminal to their businesses if they used up capital that could not be replenished, leaving them empty handed when it came to investing in product development.

Bottom Line

Moving your startups to offshore jurisdictions depends on your immediate need for growth. If your immediate need for growth is absolutely pressing and you have the capital, why don’t you go for it? After all, the more markets you go into, the better the chances of exposing your business to more potential consumers. In the next series, we would be looking at the cost of setting up an offshore company across Africa and beyond and key issues of using the right tax strategies to boost your offshore business as well as issues surrounding procuring one trademark for your startup which you can use in almost over 20 countries across Africa.

In all these, you may wish to access more legal other advisory services before proceeding with expanding your business.

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.

Facebook: https://web.facebook.com/Afrikanheroes/

How Mentors Help Startups To Succeed: A Comprehensive Analysis

Mentors form a critically important part of building a successful business.

According to the United States’ Small Business Administration’s Office of Advocacy survey, only half of all small businesses survive more than five years and about 10–12 percent of all employee-based firms close each year. The research also shows those small businesses that receive three or more hours of mentoring achieve higher revenues and increased business growth. This has been further confirmed by a 2014 survey by The UPS Store, that about 70 percent of small businesses that receive mentoring survive more than five years — double the survival rate of non-mentored businesses.

Aside from the United States, research conducted by the UK’s Federation of Small Businesses has shown that small businesses that have received mentorship have superior survivability rates when compared to non-mentored businesses.

Below are some of the great proven ways mentorship helps startups to scale.

Mentors Have Deep Knowledge About Their Industries:

A mentor who is in your industry and who has been in the same line of a startup as you do would help you to understand the depth of your business and the complex nature of your market. However, having a mentor who focuses on a particular niche is better than having a mentor who provides general advice which your startup may need.

Dr. Arthur Krebber shares some thoughts about why niche mentors are better than general ones.

Being a marketing magician does not make you a supply chain supremo. When placed on the throne of Mentor, you run the risk of acting like the oracle of all things startup-esque.
A dose of self-reflection is critical in this regard. What is your advisory niche — i.e. in what two to three areas can you really add value? And are those in line with what your mentee is after? Depth of advice always beats breadth of advice.

Startups Can Avoid Many Costly Mistakes With The Help Of A Mentor

With an experienced mentor, your startup can scale through several mistakes. Mentors usually do not have vested interests in your business. They, therefore, seem to say the truth the way it is. They will tell you things no one else will, even if it hurts.

Founder of IrokoTv, Jason Njoku says mentoring helped him to a great extent while growing iROKOtv.

I think it’s super important, irrespective of whatever industry you’re in, to try and be on friendly terms with other significant players. The VOD players above are all slightly different, across different Geo’s, yet much further ahead in terms of market development than iROKOtv. So I have A LOT to learn. Speaking with Suk [Park, Co-Founder of DramaFever.com] a few Fridays ago in NYC really made me realise how little iROKOtv had actually achieved. In the 4 hours I spent at DramaFever’s madison avenue office, I learned more than I could ever know otherwise, even if I read hundreds of books or blog articles. Their successes and challenges helped narrow my entire company’s focus and thus make necessary changes earlier rather than later. I will be circling in with Suk on a regular basis just to trade ideas, borrow some wisdom and genuinely try and re-create the greatness DramaFever has created. Ego aside. Where possible. Get a mentor. Or a friend.

Mentors Can Lend You Their Network

Having a mentor with strong connections in the industry and the ecosystem you are operating in will help you in no small ways. The mentor can help to open multiple doors. Most investors feel more comfortable and would most probably make an investment if the startup was referred to them by their network. This applies also in the most business to business engagements. For instance, it is more effective to get referred by a vendor that supplies to a large corporation than cold calling.

Michelle Shroeder, an entrepreneur, and blogger who runs the personal finance and lifestyle blog Making Sense of Cents, that turns in over $70,000 in revenue per month says that as a mentor:

“The most painful mistake I see first-time (or inexperienced) entrepreneurs make is that they see others in their industry or niche as competition. This can significantly hold you back, as you may never learn industry secrets and tips, make genuine friends, and more.”

“Don’t view others in your niche as competition. Network and build relationships.” @senseofcents

“Instead, I think you should see others in your industry or niche as colleagues and friends. You should network with others, attend conferences, reach out to people, and more.”

Shola Akinlade, Co-founder of Paystack is one of the startup owners that benefited from this network:

“I applied to YCombinator in 2007 for my first company, Precurio. We did not get in, but we kept working on the business. In 2014, I realised that so many businesses were struggling to accept payments from their customers online and so I started working on Paystack to solve the problem and make payments easy for businesses. While working on Paystack, someone told YC about me and one of the YC partners encouraged me to apply. I applied and after some back and forth, we got invited for an interview in Silicon Valley in November 2014, ” he said.

Most Mentors Are Entrepreneurs Too So They Share In The Struggle

Mentors themselves understand what it means to run a business and succeed. Entrepreneurship is hard and someone who has gone through that path can understand the various issues and guide you in the best ways. Mentors are already familiar with their areas of specialization. Learning from them can help startups wade through unclear waters. Mentors can bring in a sense of direction and balance for startups when things go awful. They can help startups spot new opportunities. A mentor who has built a company from idea to exit is an ideal being. It always helps if you are mentored by someone who has gone through the process of entrepreneurship and has been successful at it. Although having mentors from big corporates who manage large businesses is good, it is a different game when you need to validate your idea, raise money and steer the company through difficult times. This when you would require an entrepreneur who has had that experience.

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Mentors Are Flexible With Their Wealth of Experience

Unlike starters who are yet to have a feel of what the business terrain looks like, most visionary mentors are already looking ahead towards finding a lot of creative solutions to current problems. A great startup mentor can help you to look beyond the daily operational and tactical issues faced by your startup and help you build a bigger vision for it. In this regard, you should hope that the mentor should help you look at the evolving technology trends and changing market dynamics. The mentor should also help you build alternative revenue sources, and scale and solidify your position in the market.

Key Points About Finding The Right Mentors

A startup owner has to be careful about choosing a mentor. Usually, a single mentor may not possess all the elements listed above. In this case, it is extremely necessary that you may need two or three mentors with different levels of engagements guiding you.

Nav Athwal, founder, and CEO of RealtyShares sees mentors as a very important part of the journey for startups

As a founder, there’s a tendency to assume that your grit and hard work are sufficient to drive the success of your startup. While these things can take you far, they’re not a substitute for the experiential knowledge that comes from heading up an established company.

That’s what makes mentors and advisors such a crucial part of the equation for startups. Surrounding yourself with the right people — at the right time — can be instrumental as you grow and begin to move toward long-term sustainability.

The type of mentors and advisors that founders should associate themselves with is linked to what stage their business is in. In the early days, you might have one set of advisors that helps you find your footing, and as you move onto the next phase of growth, the people you look to for advice and insight will in turn evolve, he says.

Avoid Celebrity Mentors

Many first-time founders make the mistake of chasing celebrity mentors. While they do bring a lot to the table, it’s not necessary they are the right fit for your needs. Founders must do extensive research before signing on a mentor, because the relationship is more than temporary.

The first step in finding the right mentor is to ask what is it that you want a mentor to help with. “I help structuring my ESOP plan”, “I need to create employee policies that will help me attract and retain the right talent”, “I need to find out the best technology investments for my business”. A concrete question that the mentor can answer for you will help narrow down the list considerably, notes Inc42 BrandLabs.

Bottom Line:

Mentors are good for the growth and the eventual success of startups. However, in looking out for one, follow certain sound standards. For instance:

Don’t go for celebrity mentors. Find a tested, trusted and experienced entrepreneur or expert.
Plan specific problems you would want the mentor to help you solve and focus on them with the mentors until they are solved.
You can rely on more than one mentors based on their expertise in specific areas at a time
Don’t force yourself into the relationship; let it grow on itself.
Most times, sticking to the paid consulting type of mentorship may not be a good choice. They may lack the capacity to be open and objective for fear of losing their earnings.
Charles Rapulu Udoh

Facebook: https://web.facebook.com/Afrikanheroes/

Lessons Startup Businesses Can Learn From Nigerian Diamond Bank Merger

May 11, 2019

Hard as it may be, Moody’s has just come up with a report on how and why one of Nigeria’s strongest banks, Diamond Bank failed. The global advisory services firm, in an in-depth report analysed factors that brought about the downfall of the bank (a bank that went from making profits of N28.5 billion in 2013 to making losses of around N9 billion in 2017) and its eventual palliative merger with Access Bank.

Here are key insights that led to a bad day for Diamond Bank, according to the report, and what lessons surviving businesses can learn from it.

“Diamond Bank Aimed to Become The Leading Retail Bank in Nigeria, and Took on Excessive Risk as it Pursued This Objective”

Indeed, this is a case of borrowing Peter to pay Paul in bid to become more attractive to Paul while satisfying Peter also. The report said, although Diamond Bank set out to become Nigeria’s leading bank, it banked its hope on achieving that by letting all its taps open, without properly gauging the risk implication of it. It was like a case of everybody come take a loan, we would take care of that. The result: all business owners scampered in that direction, wielding buckets, ready to pluck out some loans to finance their businesses.

Why that idea may not be entirely bad, for a bank that was trying to make businesses in Nigeria love it, most of the businesses were not ready for the loans, had no plan of paying back soon. The bank did not appear, however, from the report, to be strategic enough: while endearing itself to retail businesses in Nigeria by allowing them to cut so much flesh off it in the name of loans. It didn’t turn its eyes to a balancer?

The report said that the bank did not attract enough corporate borrowers who are a major moneymaker for banks and that, well, it loaned out more money to the oil and gas sector than the Central Bank of Nigeria thought was prudent (52% versus 20%). So when oil prices fell in 2015 and 2016, the bank came crashing with it.The result is best captured by this point from Moody’s:

“The bank’s Non-Performing Loans (that is, all loans overdue by more than 90 days) reached 42% of gross loans in 2017 (Diamond has not yet reported its 2018 results). The bank’s provisions against these Non-Performing Loans were low at only 19%, weakening the quality of its capital, while high credit losses eroded its profits, ” Moody wrote

There is still hope for the bank, though, as Moody’s noted that Access Bank with which it has merged, is strong enough to reduce the risk of default for former Diamond Bank creditors.

‘‘Diamond Bank’s Weak Governance Structure Compromised The Board’s Ability to Determine The Bank’s Risk Appetite’’

This point was going to come anyway. Moody’s merely captured what was already in the public domain. In 2018, this letter came from Nigeria’s market research and analysis news site Proshare. The content of the letter simply was that a former chairman of Diamond Bank, Seyi Bickerstheth gave some hints why Diamond Bank’s CEO, Mr. Pascal Dozie, should be replaced. It re-echoed the same demand from Carlyle Group’s Carlyle Sub-Saharan Africa Fund (CSSAF) DBN Holdings who also wanted Mr. Dozie shown the exit door.

“A key shareholder CSSAF DBN Holdings demanded an immediate removal of management principally the CEO but the Board favoured a less drastic approach to minimise disruption and also enable the Board secure new leadership,” Bickerstheth wrote in the letter.
“After several discussions, the CEO of the Bank, who is also a representative of the second largest shareholder Kunoch Ltd agreed to resign effective January 3, 2019, but would not tender his letter to confirm his verbal notification.”

The Implication:

You can’t expect a lesser consequence. Moody’s therefore noted that this Diamond Bank’s weak governance structure meant:

A highly compromised board

A board with little ability to assess the bank’s risk exposure and;

And a board that failed to rigorously interrogate management over strategy.

Now watch the follow-up consequence:

The weak governance structure meant the bank’s management would plunge the bank into an unrecoverable loss. There was a sudden decline of profits. After making profits of less than N5 billion in 2016, the bank fell far to losses of N9 billion the following year.

‘‘The CEO’s Family Was The Second Biggest Shareholder In The Bank, Directly Controlling 14% Shareholding’’

It looked like nobody was going to tell the bank the hard truth anyway, and when you don’t have such hard truth tellers in organisations, all boats would be oared to one direction. Moody’s said Diamond failed because it did not have enough independent directors (the objective truth tellers)on its board and this resulted in a lack of effective board oversight.

“By the end of 2017, only one of Diamond’s 13 board members met the Nigerian SEC’s definition of independent (another had retired in August),” Moody’s noted

“We believe Diamond’s board failed to provide an effective check against the bank’s management team. Board independence is important because it makes it more likely that management strategies are subject to rigorous questioning, reducing the risk of directors ‘rubber stamping’ management decisions.”

The implication of this is not far-fetched, Mr. Dozie, whose family was the second biggest shareholder in the bank, directly controlling 5% and another 9% indirectly through its investment firm, Kunoch Ltd (14% in total) was only 4% off the Bank’s biggest shareholder, Carlyle Fund, which controlled 18%. This meant, of course, a huge overbearing influence of one family over how the business of the bank was run. A striking example was the fact that a member of the founding family held the CEO role between November 2014 and March 2019 when it merged with Access Bank. During this period, profits fell by 78% in 2015 and bank deposits shrank by 22% between year-end 2014 and 2017.

“The Board’s High Membership Turnover Hindered Its Oversight Role.”

Indeed, between 2009 and 2019 when it merged with Access Bank, Diamond Bank had three different CEOs and three different board chairmen. This only meant two things:

A continuous erosion of the independence of the Board and;

A badly destabilised board membership

“While new board members can make a positive contribution to a bank’s governance by bringing in fresh insights and experience, the new appointees at Diamond tended to lack sufficient knowledge of the bank. The board’s high membership turnover, therefore, hindered its oversight role.”

As it stands now, it appears Diamond Bank’s fate has been sealed. The merger is merely an official language. Access Bank expects to help Diamond Bank rewrite a different history. But whether the Phoenix rises again is merely a matter of time. The deed has been done and other businesses have to learn their lessons.

Charles Rapulu Udoh

Charles Rapulu Udoh, a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organisations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution and data analytics both in Nigeria and across the world.