Welcome to the era of bankruptcy where profitable companies and corporations whom today stand tall and are the envy of the industry, raking in one award after another but come tomorrow go bust and fill for bankruptcy.
In recent years the biggest casualties of bankruptcies have come from the retail sector with retailers closing thousands of stores following years of declines in sales and customer traffic.
More than 6,403 stores from Charming Charlie to Payless have announced closure and filed for bankruptcy so far in 2017.
Business Insider SSA recently had a chat with Jason Spindler, CEO & Managing Director at I-DEV International to understand the root cause of why otherwise successful corporations go bust faster than you can say Timbuktu.
Jason, Co-Founder of I-DEV, has over 15 years of experience advising large and small corporations on growth, management and financial strategy.
“The core of what we do is help businesses in emerging markets to scale. Our clients are generally businesses that range between $500,000 and $30 million in revenue and that are in early to high growth stage,”
“We provide support in two ways. One, strategic support, where we help a business grow its top line and improve its bottom line, and Two, we help businesses to secure the capital needed to scale and thrive,”
I-DEV has been around for nine years and has worked with more than 300 investors, companies, iNGOs, and DFIs in 45 countries to build leading, high impact businesses and a stronger private sector in emerging markets.
Locally the company has worked with some of the biggest firms to help them source funds and to advise on growth strategy as they seek to expand their businesses nationally, regionally and even globally.
The firm recently helped Kenya’s mobile-based produce delivery firm Twiga Foods secure funding of ~2 million in seed capital and helped put in place their growth plan for the first 24 months.
“The raise was the largest seed round in East Africa to date at that time, and it was a pretty groundbreaking deal for East Africa. It really changed the East African tech scene, and put it on the global map,” says Jason. This company has attracted 1st time Africa investors from Silicon Valley, DC to the Middle East, and continues to raise.
I-DEV also recently closed another transaction for Big Square, a leading and fast-growing casual dining restaurant chain, helping secure $ 6.5 million to scale from 8 locations to 33 locations and begin to move toward East Africa regional expansion.
In addition, I-DEV is working with Sir Henry’s, a benchmark store that offers an exclusive collection of men's clothes and accessories, to help the business grow from 4 locations to 20 locations in Kenya.
“We are doing some other very interesting transactions that I can’t talk about just yet but it will be in the public eye in the next few months if all goes as planned!” said Jason.
Jason is an old hand in investment and has seen corporations go under before his very eyes.
“I started off in investment banking on Wall Street at Salomon Smith Barney/Citigroup in New York during the dot.com boom and then the dot.com bust, and the companies we were working with were some of the largest telecoms in the world. These are companies that had raised billions of dollars in capital and they still went bankrupt. One company we had done a billion dollar bond for and then a year later, we ended up selling the company in bankruptcy for $100 million. That was just a billion dollar bond! Let’s not talk about the bank debt that they had and then the equity and the IPO that they had right before. So $5 billion was probably lost from just that one company,”
Jason says there are multiple reasons why corporations fail but key among them, which is perhaps the biggest Achilles heel is a business’ internal structure.
“One of the things we noticed looking at companies and startups in East Africa, is that a kind of a pivot point in the market occurred more recently- where, for example, Kenyan businesses launched in the past five years were slated for growth from the very start. They were designed from day one to grow as rapidly as possible, and that can absorb and leverage external investment whether it is from international or family money. They were built from Day one with proper accounting systems and no double books. They were built from Day one to sacrifice cash flow and profitability for growth, so it’s very much a new economy Silicon Valley approach to building businesses.
On the other hand, there are businesses which have hit the 10 year mark that have profitability so investors especially PEs can look at them and figure out how to value them but they have double books because most of the time they are family businesses, their accounts is a mess, the board and the shareholders’ positions are often very contentious, they don’t want external investors coming in, they are very hesitant to take equity and even debt BUT they are cash flow positive.”
Faced with the two situations, investors normally overlook newer business models with proper systems but with negative cash flow and wrongly invest in businesses which on the surface look very profitable yet are actually built on sandy soil.
“The challenge that we see with a lot of investors is that they are confused by these new economy businesses that purposely choose to sacrifice profitability and cash flow for early and rapid growth. Traditional PE funds (private equity) typically don’t understand how to value businesses like this and deem them not profitable. They say ‘we can only invest in profitable businesses or invest in you but your valuations are going to be low.’”
“So you got have these two types of businesses and the private equity funds are stuck in the middle of the two, struggling to understand how to go about it. Historically, they have worked with the second type of business, yet really, the first time of business lines up better for them! But they need to get comfortable investing in cash flow negative deals especially in the first years!”
Ultimately at the end of the day, Jason says the biggest reason corporations big or small come tumbling down always boils down to one thing- cash flow problems.
“So whether you are a big or small company, cash flow management is critical.” It also requires picking and planning for the right clients, and building an investment strategy that supports this.