Hamilton Ratshefola, MD of Cornastone, talked to CBR about the company he co-founded and buying fish.
CBR: What is Cornastone's history?
Hamilton Ratshefola: My partner Lufuno Nevhutalu and I launched the company in 2000. We had no access to finance so we took out a second mortgage on our homes and dug deep into our pockets.
We started out as an infrastructure provider, selling hardware and software. This enabled us to get the business off the ground quickly, because we were essentially box droppers. Now I run Cornastone Consulting, and Lufuno heads up Cornastone Enterprise Systems. We moved into consulting in 2003 because we wanted to grow the company by generating sustainable, annuity income to complement the sales side of the business. We turned over R200 million last year, with consulting contributing R70 million to that, so it has worked out well.
CBR: What has been the biggest challenge to your business?
Ratshefola: As with all entrepreneurs in this country, it has been access to funding. We still do not have institutions that are able to provide capital to fund entrepreneurial growth. Banks are simply not prepared to take the risks involved with start-ups, and they seem to be particularly wary of IT companies, which is not too surprising given the post-2000 meltdown of several technology initiatives.
Nonetheless, their risk assessment processes leave a lot to be desired. And whether you are looking for bank finance or private equity, the risk analysis models are the same, so entrepreneurs constantly come up against a brick wall. This country needs innovative approaches to finance from both banks and venture capitalists to really get things going.
I believe our economic growth is being stymied by the lack of business insight displayed by the financiers. We need to move beyond textbook approaches to risk management. We also need a bank that is dedicated to funding new business, without demanding years of experience from applicants.
CBR: Entrepreneurship has been highlighted as the best mechanism for people to uplift themselves, and to stimulate long-term, meaningful wealth creation. Do you agree?
Ratshefola: I do. It is a path that has been extremely successful for us. The problem in South Africa, however, is that we have far too many 'me toos'. In Europe and the US, entrepreneurship is seen as a means through which to develop and promote innovative ideas and business models; in this country, we do not invest enough in innovation. For example, if someone opens a mobile phone booth in Soweto, within a week there will be a dozen other booths in the vicinity - the result is cannibalisation, not growth.
Also, there is business and then there is business. I believe that true entrepreneurs create jobs for others, rather than just eking out an existence for themselves from month to month. We were a small business when we started out, but today we employ 260 people. That is true job creation.
CBR: What do you think is the best way to tackle these issues?
Ratshefola: We need to help entrepreneurs to develop business skills - without those, their potential to succeed remains limited. In the minibus industry, for example, there is little knowledge of accounting even though it is a vital management tool. Without that, you cannot balance revenue with costs, and produce a profit. As a result, industries like this, which are run on an ad hoc, hand-to-mouth basis, will always find it difficult to grow and to develop into better businesses.
CBR: How would you go about contributing to the development of skills?
Ratshefola: I would like to see the establishment of an academy that is funded by the business sector, and that focuses only on developing practical business skills. There are few greater contributions that business could make to the ongoing development and upliftment of the country and its citizens.
We also need to develop fresh ideas around financing and providing access to capital for business growth. One of the ways to achieve this is to get entrepreneurs to play a role in finance committees.
CBR: You have mentioned the role of mentorship. Do you really believe it works?
Ratshefola: I am the product of an intensive mentorship programme, so yes, I believe it is key. A recently graduated engineering student, for example, may be an excellent engineer, but not have a shred of knowledge or skills when it comes to managing people. In my experience, the best way to develop management talent is 'on the job'. There is no better way to learn the intricacies of management than spending six months working as a PA to a managing director or general manager. Observation teaches people in a way that textbooks simply cannot come close to doing.
CBR: Why do you think it works?
Ratshefola: There are so many pitfalls involved in setting up and running a small business. There are numerous so-called entrepreneurs in this country who are barely making it. They have no cash reserves, so if they have one slow month, it usually means the end of the business. Mentors can help people by showing them how financial planning works in the real world. These types of interventions are invaluable. I would say that understanding finance accounts for about 50%, if not more, of business success.
CBR: What are your comments on the progress of BEE?
Ratshefola: I do not believe that BEE - as it is being practised today - is encouraging entrepreneurship. Buying 25% of the fish that someone else has already caught is not going to generate sustainable growth and most often does not create jobs. Also, in many instances, the necessary business insight and competencies of the business are not transferred to the new shareholders. This is only about funding and structuring and putting extra money into the pockets of those who are most often already advantaged and privileged.
The government has created tax incentives for people who want to buy into a business, but none for people who actually create a business from scratch. I do not understand that. Cornastone pays a huge amount of VAT, PAYE and other taxes every month, and yet we do not receive any tax breaks. In the case of VAT, for example, small businesses are penalised if they do not pay their VAT on time. To avoid penalties, they borrow money to pay SARS, while government departments or state-owned entities pay only on 90 days. In this instance, small businesses borrow money to finance government for a problem created by government itself. This is ridiculous. The very same government then wants to give tax breaks on BEE deals, when it cannot support small business with workable tax incentives. Please understand, I want to pay tax, but I have a problem when I have to pay irrespective of whether I have collected the money or not.
It does beg the question of why anyone bothers to start a business and go through all the hassles involved, when it would be far easier to just set up an investment house and buy the work done by other people.
CBR: So why have you not done that?
Ratshefola: I enjoy creating new business, and I want to determine my own destiny. There is nothing quite like seeing your own ideas come to fruition. Seven years ago we had nothing; today we have a thriving business that continues to grow and to develop its people in line with that growth.
CBR: Do you see yourself as a philanthropist?
Ratshefola: I think South Africa desperately needs philanthropists. Those of us who make money should be obliged to help others around us. We have to look to the needs of our country as a whole, and seize the opportunities we have to assist people and improve the lives of our communities. Working and retired professionals alike have so much to offer this country, if they would only share their expertise wherever possible.