Green entrepreneurs: sustainable start-ups in the real economy
The measure of business success is changing. ‘Innovation darlings’ Uber and Airbnb prove this – a taxi company that owns no vehicles and an accommodation giant that owns no property. Innovation is not always reinventing the wheel. It calls for experience and expertise, and sometimes the biggest disruptions come from fixing a problem or improving something well-established at the right time. Where do we stand in South Africa, and what is the reality for green entrepreneurs in terms of challenges and opportunities?
Keeping it real
African Centre for a Green Economy (Africege) director Mao Amis says the green economy should not be viewed as a new sector, but rather “all sectors of the economy need to transition to a green economy. The entire economic model needs to be shaken.”
Renowned business coach and Aurik Business Accelerator CEO Pavlo Phitides argues that “in tough times the green economy fades away to nothingness. It needs legislation, and that legislation needs policing”. He adds that in South Africa, with a 1.4% growth rate, there are more pertinent issues, such as social and labour unrest and new BEE codes, plaguing business.
Phitides admits to seeing more green start-ups fail than ‘traditional’ start-ups, and attributes this to the fact that there is no stable environmental policy, and it’s not monitored. “Unless the Green Scorpions are given teeth and enforce stringent green legislation, it won’t fly.”
Tanner Methvin, partner at Impact Amplifier, which runs the Eco-Innovators accelerator programme and others focused on investment readiness of enterprises, says the context and role of legislation in terms of its value for ensuring that entrepreneurs thrive, is neither straightforward nor simple. “Legislation has relevance to the green economy in certain places – building materials, large-scale renewables and decentralised ablution facilities for example, but there are so many other territories where legislation is not the issue, nor should it be. Being green isn’t a competitive advantage unless quality and price are equal to mainstream goods and services. Only then does green become an advantage,” he notes.
Phitides suggests the future of green industries rests on how Volkswagen is dealt with in light of the emissions scandal, which erupted in September. This will show how seriously companies are dealt with for environmental transgressions. Will executives and engineers face criminal charges, and huge fines? Or will companies plead that regulations are too stringent and punted by environmental agitators? If green fraud is not viewed seriously, this could set green industries back.
Amis says the VW example will indeed be a clear demonstration to industry that there are huge risks for not toeing the line. In addition to the massive reputational damage and share price decline, Amis points out that VW set aside .3 billion (about R97 billion) to fix the problem. “That is not small change,” he adds.
“Everybody seems to be talking about green commitments, but I feel people are still dragging their feet,” says entrepreneur Frans Swanepoel of Thee Card Network, which runs a micro-urban organic aquaponic mobile farming project.
Phitides’ top advice to green entrepreneurs is to find a problem and develop a product or service that could solve that problem by being green. “Don’t rely on legislation. You should outperform an existing product or service. Start-ups are under-resourced, you can’t sit around waiting for government to implement the policy that will make your product or service worthwhile.
“Where a problem exists, there is a value proposition. The trouble with green industries in South Africa is that there is no legislation pushing customers that way.”
Gutsy green entrepreneurs
While many are certain the ‘green economy’ is an idea whose time has come, others maintain starting a business in this sector is tougher than usual because it is a niche market and people still need convincing that ‘green’ is worthwhile.
“If you have a green product or service, and it’s at a significant premium to another product, that’s not good enough. If green comes with a price tag, forget it,” reiterates Phitides.
Another green entrepreneur, Mxolisi Mulauzi from Bontle ke Tlhago co-operative, which operates a recyclables buy-back centre, says most people don’t have enough information on greening concepts, making it a tougher arena to work in. “You have to create a market, rather than penetrating an already existing market. Most people are sceptical of products and services not familiar to them,” says Mulauzi.
Starting any business is tough, and green entrepreneurs need to be prepared for that reality. PWC’s 2015 Emerging Companies Insights report states that South Africa has one of the highest business failure rates in the world at 75% – a depressing statistic.
“Venture capitalists want to make money quickly. They aren’t motivated by philanthropic desires. That’s why tech and apps are appealing. Anything that requires capex, manufacture and a long-term view is not as appealing,” says Adam Seymour, who developed a biomimicry-inspired structurally integrated panel called e-lite build. “There are so many barriers to accreditation. Because it was a new product it couldn’t be compared to anything and it proved almost impossible to get certification as a recognised building material that meets the required standards,” says Seymour, recounting the challenges of getting a green product into the market. Seymour took his foot off the pedal and says he will “wait for the world to catch up” because the time and energy spent on e-lite led to his other, well-established business suffering.
Timing is everything
Methvin says perhaps many start-ups fail because they are chasing the wrong things at the wrong stage of the business. “Maybe what you need is not actually funding, but thorough product or market testing. Or perhaps entrepreneurs have to face the hard truth that their business is not a good investment prospect and strategies need to be refined.”
The universe of entrepreneurs is not particularly well formed. Loosely, there are three stages, first the ideation phase (is there a demand to be filled?), second, testing the market (the incubation phase and the testing and trial phase), and third, with proven success, the need to scale up and attract investment for growth.
And this is what every green entrepreneur canvassed by earthworks cited as the major challenge – funding and investment. However, there are an increasing number of incubators, accelerators, and competitions in South Africa to give entrepreneurs who start green companies a boost.
“There is the potential that people who continually participate in programmes will crowd out other potential companies in need of assistance. You must get out there, actually hustling to get business and selling, not just incubating. You risk being a start-up forever if you keep applying for incubator programmes,” says Amis.
Amis points to lessons learned from the failure of a start-up by Arthur Attwell, who, in his online article entitled “Why I wont run another start-up” cautions that start-ups have become a commodity in an industry of start-up conferences, websites, courses and competitions. There are many distractions out there, and one should distinguish from the glitz and glamour, and seek genuine guidance.
“For a young business running out of runway, sales are all that really matter. For a while, the acclaim is great for motivating staff, and to help inspire an investor’s confidence, but the effect wanes after a few awards. Don’t chase coverage in the start-up industry. Find your own industry’s media outlets (they’re harder to find and less sexy than the start-up press) and focus only on them,” Atwell advises.
While on the Eco-innovators programme, entrepreneurs work on their businesses and the course needs to be short and focused, fast and useful, says Methvin. “There is a danger that an entrepreneur could be in a perpetual state of assistance. The early stages definitely need more support. Different stages need different support from people with the skills best suited for their needs.”
“The biggest opportunity in developing countries is the government or public sector procurement systems. This would cut emissions significantly and promote the social dimension of the green economy,” says Amis.
However, Phitides maintains that “if government were to procure green, that would make it more expensive. And in a 1.4% growth rate economy, they can’t afford that. It’s a luxury.”
Methvin, however, agrees opportunities lie in greening the supply chain. “Government and corporations should be purchasing with ecological incentives,” he says, advocating the search for more holistic ways of solving current problems.
“We need a greater marrying of core human needs and environmental needs. Access to energy is often better done through renewables. Different approaches to waste management facilitates, new recycling and green projects, and ecologically sensitive building materials are better for people’s health, as is organic farming. There are so many ways to solve existing problems using green solutions. To realise these opportunities, however, we must develop an entrepreneurial approach to dealing with these issues. And the Eco-innovators investment readiness programme supports these enterprises to secure the capital they need to scale up,” Methvin adds.
Amis notes the South African government has done a lot with the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) by establishing a sector that is secure and mature enough to attract private investors. “It’s a good example of how government can drive change,” he says.
Another opportunity for green entrepreneurs is the emerging market of impact investors looking for viable businesses to invest in – and this is a key motivator for programmes such as the Eco-Innovators programme and the New Economy Accelerator.
Methvin explains impact investing is not very well developed in South Africa, and about 80% of impact investors are in the US or EU, channelling funds to projects in Africa. The Global Impact Investment Network determined the impact investments made in 2011 was about billion, and by 2014 this amount had risen to .6 billion in deployment. These investors represent an entire spectrum: from philanthropists to private equity funds that want to buy 25% of a business.
In South Africa the need is to secure deals of a certain size. Local investors can facilitate smaller deals, but overseas investors want bigger deals (in the R15-R20 million and up range). This is because there is almost the same amount of administration and due diligence that goes into a small deal as there is going into a bigger deal.
“There are huge opportunities in the sector and anyone coming in at this stage is a pioneer. It might sound hard, but now is the time to put yourself ahead. Take the risk,” says Amis.
When asked why so many start-ups fail, Phitides says it’s because people build a business on the back of an idea (which is ego-centric), rather than solving problems. “The business must be the domain of the customer. It’s not yours. A business is built on customers – you must address their problems.”
“There is no easy industry to start a business in, they all have similar ‘teething’ issues. A business is a business, the sector has nothing to do with it. The smarter, harder working person takes it to the top in any sector,” says Bryan Majola from Energy Doctors, which implements renewable energy and energy efficiency projects.
There are harsh, profit-driven realities of business, but the cutthroat, competitive, socially fractious and environmentally destructive nature of business-as-usual has inspired the forging of a different path – one more focused on sustainability, collaboration and purpose. While many may view green business as a luxury, the reality is the earth has limits, which are fast being tested. Well-structured businesses taking this into account will surely be the success stories of the future.
By Christy van der Merwe
For the full article, including a list of resources available for start-up companies in the green economy, see earthworks magazine Issue 29, December 2015/January 2016.