Young entrepreneurs are often tempted to seal the deal with the first available investor. | Simone Kley
Young entrepreneurs are often tempted to seal the deal with the first available investor. | Simone Kley

Don’t jump in head first, experts warn

By Tshepiso Tshabalala Time of article published Oct 21, 2021

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TO ESCAPE the disheartening challenges of youth unemployment and shackles of poverty, many young South Africans are putting on their entrepreneurial hats hoping to create a better future for themselves by kick-starting their own small businesses.

But securing funds to jump start these businesses continues to be a daunting task for many.

Young entrepreneurs are often tempted to seal the deal with the first available investor. | Simone Kley

Despite there being various initiatives by both the public and private sectors to fund small, medium and micro enterprises (SMME), the programmes are seemingly flawed and do not always cater for the needs of the people they are meant to benefit.

Zanele Matome, the founder of Welo Health – a company that provides innovative health solutions – said that the application process for SMME funding was a contributing factor towards the challenges that entrepreneurs encounter and its threshold should be lowered to make these programmes more accessible to those in need.

“Government agencies also offer funding but they are very much risk averse, their long lead times and cumbersome application process make you lose out on deals. Government funding agencies are more suitable for growth companies, not start-ups or new entrepreneurs. (Although) information (on funding programmes) is easily accessible, the caveat is actually getting those funds in the hands of entrepreneurs, particularly previously disadvantaged ones,” said Matome.

Lack of access to funding programmes may explain why young entrepreneurs more often than not find themselves in legal troubles after contractually binding themselves to the first investor that comes along, without thoroughly reading and understanding the terms and conditions of the contract, because their main objective is to get their businesses off the ground.

“Most of the time they (entrepreneurs) are at a point of desperation and lack funds for lawyers or accountants and are willing to do anything to get money for that first consignment or deal. This stems from having credible and legitimate doors being shut on you and leaves you at the mercy of unscrupulous lenders or investors,” Matome explained.

The businesswoman said that mistakes that young entrepreneurs make in their quest for funding included giving away too much equity for next to nothing in the early days as well as looking for investors before gaining traction and having proof of concept.

She advised young entrepreneurs to hang tight for as long as they can until they find traction as this gives them leverage with investors.

Attorney Tarcia Makgolane said young entrepreneurs should prioritise consulting a legal expert before entering into any legal agreement with a potential investor.

Makgolane further highlighted that this process is not financially crippling as young entrepreneurs think and that it was always beneficial for both parties to have a legal practitioner present when dealing with contracts to help them to understand the terms and conditions.

He said that once contracts are signed, it becomes difficult to renegotiate deals.

“Spending money on legal fees is seen as an expense rather than an investment by many young entrepreneurs, (by) not seeking legal advice they (entrepreneurs) place themselves at a commercial and legal risk,” she said.

Makgolane also warned against breaching contracts.

“If a contract does not give the right to terminate, it won’t be easy to get out of that contract unless you have negotiated termination. If one is an entrepreneur and they cancel any fixed contract, they could be liable to pay a reasonable penalty set out by the other party they are contracted with. These penalties depend primarily on the type of contract that was entered into.”

To avoid making more mistakes, Matome urged entrepreneurs to establish networks and seek advice on how to go about building their businesses.

Moreover, they must acknowledge that they can't build alone. Getting a credible team that will play a vital role in taking the business to the next level is key, said Matome.

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