Don’t Invest in Businesses. Invest in People.

This is a photo taken at a Pennies for People partner’s lunch with Clem Sunter at the Anglo American chairman’s dining room, Johannesburg, 2002. I’m second from left.

My failure with Pennies for People

I’m not very sentimental and I’m not a hoarder, but when my business Pennies for People or “Pennies” failed in 2003 I decided to frame this photo and keep it for two reasons: 1) It’s a reminder of when as a 29 year old lawyer I left the world of employment and my life changed forever and 2) It’s a reminder of my greatest, most glorious failure.

I hate failure. It haunts me. It’s personal. The wound never heals. With Pennies, after two years of sacrifice and exhaustive effort, it was that much more painful. The business should have never failed, yet it did. I still think about Pennies almost every day. It motivates me to this day.

Twelve years on and people still ask me ‘what happened to Pennies’ and say what a great idea it was! But it failed. When I have to endure such conversations, I make a mental note to use this as motivation, because there’s unfinished business here. I still have a dream of raising new, alternative sources of funding and support for entrepreneurs and social enterprises in Africa, using innovative funding and investment models.

The idea behind Pennies was to secure the support of retailers in South Africa to adjust their cash register systems to facilitate the round-up of purchases, where for example a customer could elect to have their groceries of R298.50 rounded up to R300 with the R1.50 ‘small change’ or ‘pennies’ donated to support charities and start-ups. 100% of the funds raised from millions of transactions each year would go to approved projects in 6 month cycles, with the interest earned used to cover Pennies’ operating costs.

We came close but in the end we were unable to secure the buy in of any retailers. We ran out of money to support the business and ourselves at the same time, whilst trying to raise start-up capital as a parallel process. They were some of the best yet hardest days of my life. They continue to define me to this day.

Now twelve years later with ecommerce and digital payment platforms becoming mainstream even in Africa, Amazon now allows customers to add a donation to their chosen charity at check out. Perhaps Pennies was just before its time?

I wish Y Combinator existed in 2001 when we founded Pennies. I wonder what they would have thought about us?

The Success of Y Combinator

Randall Stross’s book The Launch Pad gives an excellent insight into the inner workings of Y Combinator, arguably Silicon Valley’s most successful and exclusive school for tech start-ups. With the legendary venture capital fund Sequoia Capital as its primary backer, whose list of rock star early stage investments includes Apple, Yahoo and Google, Y Combinator has discovered the likes of Dropbox (class of 2007) and Airbnb (class of 2009).

In the world of Silicon Valley start-ups everyone wants to discover the next big thing which can scale into a successful IPO.

But I have often wondered what happens to Y Combinator’s hundreds of start-ups who fail or the thousands who don’t even get selected. How will their story end?

9 out of 10 Businesses Should Not Fail

We are all aware of the often quoted statistic that 9 out of 10 businesses fail, and that most of them fail in their first year. This has always troubled me. Should we simply accept this abysmal statistic? Is this inevitable, some law of business?

I’m sure you’re aware of the well known quotes about failure: that you haven’t failed unless you fail to pick yourself up and try again, that failure gives us valuable lessons and that failure is just part of our journey to success. I’m sure you’ve also got your favourite inspirational stories of inventors and entrepreneurs’ perseverance through failure - people like Thomas Edison and Walt Disney.

I agree with these views and love such stories. But in reality, on a human and economic level, there is nothing romantic about business failure. When you’ve given it your all to something you passionately believe in, it’s just plain hard and not that easy to pick yourself up and try again.

In South Africa where I live, the stark reality is that many young entrepreneurs don’t have the luxury like many Silicon Valley start-ups, to be able to pick themselves up and try again. There are significant financial and social consequences to failure. Sadly a support system and ecosystem often doesn’t exist for them.

In the new, alternative economy which we so desperately need in our troubled and volatile times, it is the entrepreneurs who will create the new jobs and thus grow our economies in both developed and emerging markets. We simply cannot afford for 90% of businesses to fail any longer. But how can this be improved?

Firstly, we should embrace the approach of primarily investing in and supporting entrepreneurs and their teams, and not their businesses. This may sound simple enough and many people will say that this is in fact what they do. But the true test is when things don’t go as expected, when businesses fail. How do we then respond?

We need to be prepared to support people through their business failures.

This is easier said than done. I’m talking about hard working, intelligent and passionate entrepreneurs, who are now suffering great pain and disappointment and are low on the key ingredient of confidence.

We may now be required to see a person’s potential and talent, even some genius, during their dark, struggling and disillusioned days. We may feel tired, impatient, frustrated and disinterested. We may now be required to commit more funds or to give more of ourselves and our capacity, when we least want to or can afford to. We may be required to go the distance when our motivation is low.

It’s at times of failure and despair when people need someone to truly believe in them and give them perspective.

Secondly, the traditional VC and private equity investment models are old economy. They need to be disrupted. Most examples of crowd funding are still based on the same underlying VC model. They need to go much further.

We need more patient and wise capital. We need to broaden and deepen the definition and horizon of investment returns.

Just like people are unique, so too are their businesses. We need to become more like farmers and less like manufacturers, creating the unique, conducive environment for more entrepreneurs to flourish in their seasons.

We shouldn’t be fixated about just finding the mega successes or businesses which can scale quickly, but also appreciate that ‘smaller’ businesses (often owner managed partnerships and family businesses) can offer good, sustainable returns which in aggregate can offer greater value than the one or two ‘big’ wins.

The backbone of our economies and which in aggregate employ more people, are these ‘smaller’ businesses. They often also provide much needed social stability in our communities.

Some of these ‘smaller’ or less significant ventures, founded by entrepreneurs who would be considered to be the runts of the litter, rough diamonds or uninspiring, may in fact surprise investors over longer horizons and develop into highly profitable companies, which initially didn’t show much promise. This is the wonder and beauty of investing in people. But many investors or mentors wouldn’t have backed them in the first place or would have written them off too early.

The new economy which we need to emerge requires far more successful start-ups and entrepreneurs to come through, on all levels and scales.

What are your ideas to improve the success rate of start-ups?