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THE HOYOS FILE: The small business, financial system disconnect

Pat Hoyos, [email protected]

THE HOYOS FILE: The small business, financial system disconnect

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The problem entrepreneurs have in the Caribbean is that the pond is too shallow to attract sharks and dragons of the investment variety. By the pond being too shallow, I mean the lack of a mass market to provide the consumption level that would attract them.

If you analyse the shows Shark Tank, The Profit, and Dragons’ Den, you will see that the story is usually about somebody who has come up with a clever idea for automating some tiresome household chore, or providing a new way of doing an already standardised process.

The would-be investors are usually not much interested in them, however, unless they have an upwardly moving sales chart, a patent pending or an intellectual property (IP) copyright, and better still, an opening to a mass retailer.

So what do the sharks, dragons and profits add? Usually money, but equally and sometimes more important, the connections that make the process of “scaling up” the national distribution much more likely. This can involve licensing the IP part of the process or “invention” to a large company which already has the economies of scale and distribution system to roll it out cost effectively by the million, or find a cheaper (Chinese) manufacturer to fulfill orders it acquires from a multi-store contract with JCPenny or Walmart.

In the Caribbean, however, scaling up usually takes place with companies that are already large and firmly established, and usually involves selling the company if it is private, or a takeover battle for the shares if public. The monied investors you see on those shows are small fry compared to the massive companies which do these acquisitions.

A couple of recent cases illustrate: you didn’t hear about AmBev wanting to buy a stake in Ten Saints, a terrific Barbadian beer that is privately owned and made at Banks Holdings Limited (BHL). No, you hear about them taking over BHL itself. And you didn’t hear about Digicel buying up a small local software firm making payment or transaction software with huge potential. No, you hear of Digicel buying Prism Services, a long established Bajan firm best known to consumers for developing and operating the Magna Card for dozens of clients around the region. They started small 20 years ago, when sharks and dragons were still in the sea (except for the legal profession) and fairytale books.

Simultaneously, you hear the said Digicel buying Paymaster, a Jamaican version of the popular service we have here, of which I am “sure” you have heard, and maybe use to “pay” some of your bills. By the way, Digicel’s foray into payment systems is, in my humble opinion, an absolutely brilliant move. Payment fulfillment systems, or whatever they call them, are ripe for reinvention, somewhere in between snail mail and online banking. Anyway, I only bring up all this about the lack of a mass market because I think that as we try to find ways to help start-up businesses with great ideas to go forward, we should recognise that the shark-dragon model works properly only when there is that huge universe of unknown consumers out there who will buy the “offer” originated by a small entrepreneur once they can get launched into their stratosphere. It has nothing to do with the sincerity of such efforts.

What we are trying to overcome is the virtual lockout from the financial system of small entrepreneurs and their business. Today, now that the recession has eased off and banks are lending again, you can get a mortgage, or a vehicle loan fairly quickly, but you will have a much harder time getting capital to buy equipment for your business. Yet we do it, by hard work and sacrifice, until we get our little outfits to a point where they provide us with a living and also pay salaries to a small group of people, but there is a giant disconnect with the rest of the financial system.

These small businesses provide the bulwark of the sales for the larger business and the mega corporations which would all probably die off  without their trade, but they stay the same size for decades, until their owners are too old to bother and their children have moved into other careers, partly because they see there isn’t any real future in the “family business”.

This is not a put-down of small business: it is not that every small business must scale up into the big time to justify their existence. No, most of the time, the whole idea of a small business is to be able to be your own boss and make your own hours (hint: you end up working a lot more hours than you would for others).

That may be why the Canadian government, through Compete Caribbean, and the European Union, through other programmes including Caribbean Export, are focussing on providing training to small entrepreneurs to help them in areas that make them better and more efficient at what they are presently doing, whether they get bigger or not.

But when it comes to financing, I am afraid we are still stuck somewhere between sharks, profits and dragons and family, friends and associates – of whom the latter used to be called, perhaps more fittingly, “fools”.