The world is changing fast and to keep up you need local knowledge with global context.
Are entrepreneurs born or made? How do you recognise a true entrepreneur? What is the best strategy for those wanting to start their own business? Who should they approach for money? What is a bank looking for before lending to them? Mercantile Bank CEO Karl Kumbier has invested his career pondering these questions – and then betting his bank’s capital on the answers. Here are the unique insights from South Africa’s only bank that focuses exclusively on doing business with entrepreneurs. – Alec Hogg
This special podcast is brought to you by Mercantile Bank whose chief executive Karl Kumbier is with us in the studio. Karl, you guys focus on entrepreneurs, so you deal with them all the time. We’re in a situation in South Africa where we need entrepreneurs to perhaps pull us out of the funk that we’re in right now. Is anybody potentially an entrepreneur?
That’s a good question. I don’t think so. I think you’re born an entrepreneur. Often, people think they can become entrepreneurs and you often see quite sad cases where people leave the corporate world and take their pension, invest it in some or other business, and they lose everything because they think they can suddenly become an entrepreneur. I honestly believe that you’re born one and if you look at entrepreneurs, they’re quite big risk-takers. They’re willing to take a risk and many people aren’t willing to take that risk. I always use this good example. I come from a family of entrepreneurs. My father’s an entrepreneur, as is my mother, my sister, and my brother.
What do they do? What does your mom and dad do?
They were in textiles all their lives. My father is German and he came out with all the immigrants in the sixties. He was 19. He had a suitcase. He arrived in South Africa and if you look at that, there were a lot of Greeks, Portuguese, English, and Germans in those days and they came out. Just think. From a risk point of view, they would have left a country, gone to a country they don’t know and suddenly, they have to make things work. I suppose they saw the opportunity to leave their country and try to make a life somewhere else. Other attributes of entrepreneurs is that they work very hard as well. When someone starts their business, they’re working 18 hours per day. When you start on the first of the month, there’s no salary cheque. You have to make things work. Often, the whole family is in the business.
You say ‘have to make things work’, so is it necessary to be in severe need before you in fact, will be properly motivated as an entrepreneur?
I don’t think so but I think that when you have to put bread on the table, you are obviously going to make sure you work a bit harder and you’re giving 100 percent to make sure this thing works. Some entrepreneurs come from a wealthy background with wealthy parents and the parents were able to give them the start-up capital, so there wasn’t that type of pressure but often, entrepreneurs have to make it work because as I say, there’s no money in the background.
I was reading Ashlee Vance’s biography on Elon Musk. He epitomises everything you said. He had these three businesses that he was running simultaneously, after selling his first few businesses. He’s taken all the money ($300m) and invested it in those three businesses. He got to a point where he lost it all and he had to go to friends to borrow. Fortunately, SpaceX (the fourth rocket) actually worked. The first three had been a disaster. Tesla, the car factory, did manage to overcome some of the issues that it had and then Solar City, the solar energy business that he has with his cousins from Pretoria, also clicked into place. You think about Elon Musk. If that fourth rocket had actually, also failed like the first three; as an entrepreneur, do you think he would have found a way to somehow keep it going or do even entrepreneurs give up?
It also depends on where you’re operating. Let’s use an example. In the States, I think you would see every successful businessman or businesswoman has failed once or twice. Even Donald Trump went bankrupt years ago and suddenly, he’s bounced back and is worth billions. In the States, if you’ve failed, it’s not seen as a huge negative. People like the idea and from the fact that you failed, they would have seen that you’d learned from your failure in the past, you‘d change your ways and hopefully, make a success in the future.
It’s called ‘school fees’, isn’t it?
Sometimes, private school fees, I think. In South Africa, if you fail at a business, there’s actually quite a stigma attached to it and it’s very difficult to get finance after you’ve failed in the business, which I suppose, is a tough one but it’s not the same as the States. If we look at Elon Musk, I think he’s a typical entrepreneur (high risk-taker). You or I, being conservative…imagine you’d suddenly made $300m. You’d park it all in the bank and earn interest for the rest of your life. He’s saying ‘no’. He takes the full $300m and invests the full $300m in three businesses.
It’s inspirational, though.
It’s unbelievable. Suddenly, all of them are really struggling and he’s down to his last Dollar but yet, he bounces back and now he’s worth billions again.
He wasn’t even down to his last Dollar. He had to sell his car. He had to borrow from his pals who of course, today…This morning I saw Tesla went up eight percent yesterday because the new car got a rating of 103/100. How does that happen? That Tesla, alone, is now worth more than Glencore and twice as much as Anglo American – just the one company.
That’s unbelievable. You also have to think about his friends now. I suppose it’s a high risk to back him, but he’s obviously has something. He’s obviously passionate about his business. The people trust him. They buy into his concept and they were willing to give him that extra little bit of cash to try to get him through that cycle.
Is he unusual or do we have good entrepreneurs like him, in South Africa? What I mean is he’s certainly outperformed in a very tough market, if you look at the South African boy who went off to the United States. Is he an outlier or might there be others in this country that you come into touch with?
We have wonderful entrepreneurs in this country. If you think about it, the businesses in this country have grown. Let’s take SABMiller as an example. They’re sitting at number 2 in the world from a brewing point of view and you think the tip of Southern Africa suddenly produces a company like that. You have Old Mutual, etcetera and so they all started somewhere. Just take the banking industry as an example. That’s quite a good one. You say ‘right, the banking industry’s been dominated by the big four banks for over 100 years’ and then, someone like Jannie Mouton comes along. A couple of guys come to him and say ‘listen, we want to start this bank, called Capitec. Would you back us?’ It’s high risk. He puts a whole lot of money into this business and suddenly, he’s worth billions now because of a great idea. Someone enters the market and you think it’s saturated; you can’t make money, and these guys are doing so well. I think there are still huge opportunities to do well in this country and we have great entrepreneurs.
What makes them great? Where does it come from? Is it in the DNA?
Yes, I think it’s in your DNA. That’s exactly right. You have entrepreneurs out in business, but we even have wonderful entrepreneurs within the corporates so it’s not to say that if you work for a corporate, you’re not an entrepreneur. I think the corporates have done really well. They have people in those organisations who have an entrepreneurial flair – willing to take risks, able to see the bigger picture, and are able to enter new markets/segments. I think that we, as South Africans, are quite resilient. We make things work. We’re hardworking. We’re innovative. We think differently. Using Elon Musk is an example; it’s so nice to see South Africans going offshore and making an absolute killing offshore. I think there are many more Elon Musk’s in this country than one would think.
How do you find them? You are positioned. You are the entrepreneurs’ bank. You must be looking at things differently from say, the big four.
For sure. We’re a business and commercial bank. We only look at entrepreneurs. We’ve been banking entrepreneurs for 50 years now. This year, we’re celebrating our 50th and I think our sole purpose in life is to grow entrepreneurs. We’re passionate. We think we’re entrepreneurial in our thinking. We look up to entrepreneurs. We’re inspired by them and when we go out there and someone comes to us with a business case or an existing business, what we do is we look for established entrepreneurs that are looking for an extra steroid injection (if you want to call it that) in financial solutions to help take their business to the next level. That’s what we’re really good at. We’re really good at partnering with established SME’s to say ‘what type of financial solution do you require in order to help take your business to the next level’.
Give me an example.
We have quite a few examples. One that we spoke about this week was a guy brought up in a family that owned two groceries stores. He then decided he wants to go out there and start his own Spar franchise, so then he went and bought it. Then he bought another one and he bought fuel stations and right now, he probably has five fuel stations and three or four Spar franchises. That’s someone who came from one franchise. They started banking with us and we managed to…we’re now lending probably ten times what we used to when we first started with that individual.
Does Warren Buffett have it right when he says that accounting is the language of business? In other words, if you want to be in business, you have to understand the numbers.
Yes. I think so, but accounting nowadays is so complicated with all the new accounting standards. You don’t have to understand that piece. From an accounting piece, I think where Warren Buffett is right (he says people shouldn’t be looking at EBITDA) but because of the big capital investment-making upfront, you have to take depreciation off and you have to make sure of your recovery or depreciation, and then a return after that. If you look at the true entrepreneur, often many entrepreneurs don’t have a degree or a degree in finance, so they’ve had to teach themselves over the years, how an income statement works.
They’re numerate, though.
Yes, they’re numerate. Exactly. However, they can literally… There’s an old saying. On the back of a cigarette box, you can work out the math. They know that if you buy this thing for R1.00, you need to sell it for R2.00. You’re making a decent margin. That’s the way the guys operate.
I’m showing my age and perhaps you’ll show yours. There was a fellow called Tony Factor whom (years ago) was a fantastic entrepreneur, who told us he never finished school because he was dyslexic but clearly, he was very numerate. As long as you understand how numbers work, formal education is not going to make the difference.
In addition, the most important thing you need to understand is cash flow. Many businesses fail, not because they’re not making profits but because they’ve run out of cash flow.
What’s the difference?
I suppose the difference is that with a profit, you’re buying something for R2.00 and you’re selling it for R1.50, so you’re making a loss. From a profitability point of view, this business is not sustainable because you’re not going to generate profits. From a cash flow point of view, the problem is that you when start a business and you grow quite quickly, you need working capital. What working capital means is you need to be able to finance stock and debtors. Often, people don’t buy goods from you with cash. You’re giving them terms, so the debtors are only paying you 30 days later but you have to pay your suppliers on day one for the goods that you’re selling to the debtor. Suddenly, you have to finance that cycle and what happens is, it’s all very well in the beginning because you borrowed money from family friends or you have a bank that’s given you facilities.
However, if you grow very quickly, you run out of cash flow, so a bank’s not willing to put more money into it and your family and friends aren’t willing to put more money into it. Suddenly, your business closes. Not because you’re not making profits, but it closes because you’ve actually physically run out of liquidity (out of cash flow).
So you need to have the reserves somewhere. Either a friendly bank that’s given you facilities, family and friends who are prepared to kick in, or your own facilities.
That’s exactly right. Our belief at Mercantile is that we build really good relationships with our customers. We believe in a stakeholder management model. The stronger your relationship with the customer, the better it is because when times are tough, we can sit around the table with that customer and say ‘what are your needs right now’, and they can explain the situation. We can sit around the table and we’ll come up with a solution that hopefully, makes it work for both parties. If you identify an issue, you have to notify your stakeholders quickly so that you can come up with a solution to try to help fix it.
Karl, what about South Africa at the moment? We saw the economy contracted by one-point-three percent in the second quarter. There’s a lot of disquiet about the political leadership in this country. Your clients, who are entrepreneurs and actually going to be the people who make the difference, because they’re the ones who are going to ensure that there is more employment (obviously, in the future); are they also suffering from this pessimism?
Yes. Look, I think times are tough at the moment and confidence levels are dropping. If you look at the indexes, they’re all coming down but once again, entrepreneurs are resilient. They’re not going anywhere. They’ll say ‘geez, times are tough at the moment. The economy’s contracting or it’s growing at less than one-and-a-half percent’ and I think people come to the realisation that it’s not going to change in the next year. This tough economy is there for a couple of years to come. I think the question they ask is how to make money in a tough environment. What do you need to do? You need to find new markets and new products, and maybe diversify. Many of our customers are actually looking it. Once you’re in South Africa, it’s a great springboard to go into the rest of Africa so the guys are looking into countries like Mozambique, that’s still growing, quite nicely.
Angola was growing nicely until the oil price tanked, but the people are looking at those types of markets and saying ‘right, how do we set up shop in those countries and try to make a difference there’. The economy is tough and if you think about it, we have all the ingredients to make this country really successful and take it to the next level. I was looking at an example now. We all moan about the electricity for example, which is a real issue and it needs to be resolved. I don’t know if you know, but Eskom generates close to 50 percent of Africa’s power in total. In other words, we have a 42mw capacity. Nigeria, for example, only has four and Nigeria’s supposedly a larger economy than we are, but it’s a one-product economy, if you want to look at it like that. We have all this infrastructure.
We have great businesspeople and we have great entrepreneurs in this country, so if we can somehow get together with government – and I think government and business has to work closely together – to say ‘what do we need to do’. Government enabled it to be really easy to do business in this country and the businesspeople…it’s left up to them to try to help grow this economy and create jobs.
I guess there is a Ministry of Small Businesses, although the person whose running it hasn’t had a whole lot of experience in running a small business, which is a little bit of a concern. Maybe we can learn from countries elsewhere, where they take experts in the field and inject them into government to serve at that point in time.
It doesn’t even have to be to serve. It’s just to get together, sit around the table, and say ‘how do we make things work’. We can use an example. This new visa regulation. You can understand why someone is thinking about doing it. Obviously, child trafficking is an important issue but wow, we certainly can’t just change a legislation and suddenly, it impacts on tourism across the country. I think tourism brings in about R100bn per year in foreign revenue, into the country and it’s the one of the few industries in this country that’s growing. We were rated the most beautiful country in the world. We had a wonderful World Cup here in 2010, so we did all the right marketing and now suddenly, we make it very difficult to come and visit us. Other countries in the world know that the global economy is quite tough, so they’re doing everything they can to take the friction out of the visa process and make it easier for people to go and visit those countries. We should be thinking about the same thing.
Maybe we should learn from history and find a common enemy. The common enemy in this case, would be those who benefitted from the visa regulations in South Africa, i.e. Australia. If you’re Chinese, you can go to Oz now. You’re not coming to South Africa anymore.
In Australia, they can get a visa on arrival. That’s how easy they’ve made it now because they know that the Chinese market is the largest market in the world, from a tourism point of view and our Chinese market…the stats the other day showed that its dropped 40 percent compared to last year. It’s crazy. We have to look at this thing and say ‘what do we need to do in order to make it easier to bring these tourists to come into this country’.
Entrepreneurs don’t really care about politics, though. Obviously, if the politics affects their business, then they need to pay attention and the rules have changed. I remember going to one of the World Entrepreneur events and being impressed by a consistent message that came through, where they said ‘these are the parameters within which we work. We don’t waste energy trying to change those parameters. That’s for academics and politicians. We work within those parameters and if they become too confined, we’ll go and find another place to play’. Is that consistent with the entrepreneurs you know, or are they more emotional and more politically involved?
We bank entrepreneurs, so your SME market…anyone turning over from your hairdresser to Richard Branson. They back us. They can’t influence the politics, so that’s why I think they don’t really worry about it. Obviously, it impacts their business and they’ll moan about it. It’s more the large corporates…corporate South Africa has to get together with government, sit around the table and say, ‘what policies need to change in order for us to get the most out of this country? How do we grow corporate South Africa?’
Corporates are not small-business friendly, though. They say they are but you know from practical experience that you have to go through so many hoops to be able to do business with a corporate nowadays. Many small businesses say, ‘what the heck. Let me look elsewhere’.
I suppose it depends on the corporate. You have examples of ones that look after the SME’s and others that don’t.
They like to say they look after SME’s, but do they? Do they, actually?
Some corporates will. An SME might start from very small, like someone I was at school with. They actually had a bakery in Cape Town and suddenly, he got involved with one of the large retailers and that business has grown from making 1000 rolls per day to hundreds of thousands, so they’ve grown a massive business now on the back of one corporate. That corporate actually make them. On the same page, as quickly as a corporate can make an SME, they can also break an SME by paying them too late. Maybe they hold back on payment or they’re sending orders back because their buyers have made the wrong decision. I think you’re right. I think it’s a mix, but I think there are lots of corporates out here that actually do treat the SME’s well and provide them with growth opportunities for their business.
I guess it depends on the leadership at that corporate. Had Brian Joffe built it himself from scratch, Bidvest would have had (in its DNA) an understanding that you need to help the little guy, whereas other corporates that have been around for a lot longer and are run by professional managers, might be looking more at the bottom-line.
Exactly. If you don’t have that entrepreneurial instinct I spoke about earlier, in that corporate, they won’t understand how the entrepreneur thinks, what makes the entrepreneur tick, and what the big negatives are for entrepreneurs. As I said, cash flows: suddenly, you change your policy to pay your suppliers 60 days instead of 30 days. It makes a huge negative impact on the entrepreneur. Now they have to run around to the banks and try to find more facilities to fund that extra 30 days. I think it goes both ways.
Unintended consequences of decisions taken on high (like the visas). Karl, from your customer base, who is doing well? What sectors at the moment, are you seeing that are having a good time of it?
Funnily enough, we have quite an even spread among all the sectors. From manufacturing, to retail, to wholesale, to construction, to financial services like insurance brokers, and estate agents. We always look at it and say it doesn’t matter… Often I’d want to say ‘wow, you have to stay out of that industry’, but we always believe there’s a gem in any bad industry, anyway. Somebody’s still making money and as long as we try to identify the right customer and partner with them…. Across the board, it’s tough out there but we don’t see any particular industry struggling. Obviously, the steel industry is going through turmoil. Last year, there were quite a few liquidations and business rescues in the steel areas. Evraz is in business rescue. Looks like the IDC has now approved a loan to help bail them out, so I think that industry’s really struggling.
We don’t get involved in agriculture, but I think that industry is struggling because of the drought. Retailers are not doing as well as they were two years ago. For example, African Bank were writing close to R2bn worth of loans per month when they were going two years ago. Now, the new African Bank is writing one quarter of that and no one else has taken up that slack. It just means that R1.5bn liquidity has been taken out of the market, so people aren’t buying. The retail sector won’t do as well as it has.
We saw that in the Shoprite results, didn’t we?
Exactly. All the retails. Then you look at some of our customers. We bank one of the largest distributors of fruit and veg in the Western Cape and this guy’s business is doing really well? Why? When times are tough, people buy more fruit and veg than they do meat, so his business is doing well. I think it all depends on the individual/company/entrepreneur. The general environment’s quite tough, but the guys are still making money.
Warren Buffett also (to return to him) says that when the reputation of a good business meets a bad management, the business wins anyway, but when the reputation of a bad business meets a good management, the business also wins. Do you see that as well – that it’s actually, all about the people?
Definitely. We saw one recently actually, in the printing industry. We had a wonderful management team: passionate and honest. I think that’s the important word – honesty. You need honest people. Times are just tough and eventually, the business is closing. When we look at financing a business or partnering a business, we always look at the entrepreneur first. About 60 percent of your decision is to say ‘right, can you do business with this person? Are they honest? Are they passionate? Do they have the experience?’
How do you know if they’re honest? How do you do your due diligence on someone to make sure they’re honest?
We have a good network out there as well, and so we’ll just make a couple of calls. We’ll find out one way or another and nowadays, there’s Google. Just do a Google search and immediately pick up if there’ve been issues from a reputational point of view. That’s quite important as well because you want to deal… I think Warren Buffett also said ‘you only want to do business with people you actually like and people you can trust’ and if you can’t…if the trust piece is slightly missing, you shouldn’t do business. You should actually just walk away. We live by that philosophy quite strongly. We want to do business with the people we trust and work with because when times are tough, the people you were sceptical about are the ones (when their backs are against the wall) that are going to suddenly do things they shouldn’t do and as a bank, you lose out.
I met a very wealthy South African billionaire who invests in people. He does it here and around the world. He invested in my first business nearly 20 years ago. At that stage, he said his biggest risk was how people change when they get money. Do you find that as well, that when someone will come to you maybe on bended knee and say ‘please, Mr Mercantile Bank. I need a loan of R5m. That’s going to help me through the problems I’m in’, but the minute you grant that loan, their behaviour changes?
No, we haven’t really. From initial discussions at our due diligence and our meetings, that where we all go and eyeball a person. We won’t just go and lend money. We’ll sit around the table and work out, and tour their factory. We’re good judges of character here at Mercantile and we’ve been in the industry a long time, so if you sit down with a person you can quickly work whether or not… As soon as someone is arrogant, for example, you actually don’t want to do business with them. We have so many entrepreneurs on our books that have made a hell of a lot of money and they’re still the same person they were when they started their business. It hasn’t gone to their head. They’re modest. Maybe they’re driving a fancier car now and have a holiday house etcetera, but they really are such down-to-earth people that you can sit around the table still, and they’re exactly the same as the first day you met them, which is great.
Do you have any on the other side?
We’ve had the odd one and we’ve also made changes on our side, asking if we still want to partner the person. Sometimes you have to make a tough decision and say ‘no’.
So that ‘gut feel’ still comes into it, even in the most scientific of businesses.
Big time. It’s very important.
Karl, just to close off with, I’m sure there are people listening to this and saying ‘I really believe I am an entrepreneur, but I’m working in this organisation and I’m a bit scared to make the leap. (a) I don’t really have the self-belief to do that and (b) I don’t know where I’m going to get the money from that I need to achieve my dreams’. How do you tackle those two?
It’s quite difficult. Personally (or the bank), I wouldn’t be able to determine that but as an individual, I think you’ll know if you’re an entrepreneur. You can say it’s very risky. Do I want to move now? I’m earning a salary. The answer is ‘yes’. No, you’re not sure. Then the answer is probably ‘no, stay where you are’. The entrepreneur will know ‘I’m just working right now to build up enough capital so I can start this business and the day I have enough capital, I’m out of here and I’m going to start this business’. I think that’s the entrepreneur. They’re willing to take that risk to move out of a cushy lifestyle and suddenly go into starting their own business and putting their own money into it.
So the bright idea is not going to hit them ‘out of the blue’. You know where your path is.
Exactly. I don’t know if you’ve heard of the 3F policy, but you borrow money from friends, family, and fools. I think that’s the first step. Most people who start their business would have borrowed what they can from… I don’t know if you saw the documentary on Sol Kerzner the other night on TV. I thought it was wonderful. He borrowed money from his family. They started the one hotel and then they bought another one. Then the audit partner he used to work for…he put money into it. He bought into his vision. He could see that Sol was a real entrepreneur and I think that’s exactly right. That’s how you start these businesses. You borrow money from family and friends and then once it’s going, then they’ll come to a bank like ourselves and we’d say ‘we’re happy to partner with you’.
One of our example…a customer had a small business in the security industry and when they started partnering with us, they had a couple of thousand guards and now they’re sitting with over ten thousand security guards just because we bought into the vision and we helped finance the growth in that business. That’s a perfect example of the type of business we’d like to get in the early stage, once they’re established and have a proven track record, and then we provide them with the necessary solutions to take their business to the next level.
Charlie Munger who is Warren Buffet’s right-hand, says that if you want to find the answer to a difficult question, invert – always invert. I’m going to ask you to invert. What is not an entrepreneur? What are the lessons that you’ve learned from lending to people that have actually gone wrong? Every bank has bad debts.
What is not an entrepreneur is someone who isn’t passionate about their business. Every entrepreneur you know… To me, the nicest thing about going and visiting one of our entrepreneurs (and I love going to see the factories) is they’re so passionate about their business, they want to show you the factory and how things are made. You can see the people just love their business. Someone who isn’t passionate about their own business is not going to succeed and I think the most important thing is the risk-taking. An entrepreneur is willing to take that risk, whereas a non-entrepreneur (a person not willing to take the risk) is either not going to become an entrepreneur or he could fail because the business never ever grows. It just stays very small and he’ll go back into the corporate world.
We have some rules for entrepreneurship. If you think you’re one and you qualify on all of those various scales, Karl Kumbier would certainly be able to identify it very quickly. He’s the chief executive of Mercantile Bank and this special podcast was brought to you by Mercantile Bank.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.