28 years after the end of apartheid, the South African economy is starkly divided between so-called ‘first’ and ‘second’ economies. This common South African phraseology is a euphemism for ‘the rich’ (who do business in a certain way) and ‘the rest’ (who do business in a different way).
Worryingly, much of the country’s Small to Medium Enterprises (SME’s) activity is locked into a subsistence paradigm, where the business supports only the financial needs of its owner and fails to contribute to economic growth meaningfully.
One of the primary issues within the country’s SME sector is a simple lack of experience.
Government policy makers, government SME development agencies, local large corporations and much of the Enterprise and Supplier Development Service Providers they hire, have little on-the-ground experience of the daily reality of life as a South African SME entrepreneur. This is particularly true of the so-called second economy.
As a result, SME development programmes are often hopelessly out of context, and hinder, rather than help support the development of SME’s.
Getting The Basics Right Is The Battle
Only 13% of SMEs Employ More Than 5 People (Source: SME South Africa)
It is a simple matter to:
- Tell the youth and unemployed to start a business and teach them to pitch.
- To register a business, open a business bank account and get a tax clearance certificate for your first tender application.
However, it is a far more complicated mission to stay cash flow positive and compliant 5 years, or even three years down the line.
Much of the well-intended small business incubators and accelerators are bottom-heavy, too focused at helping people start businesses. And due to the inexperience and incompetence of the hired help, they lack the ability to support the same SME’s scale and create jobs; resulting in failed dreams and even further demoralisation of the very people the system is intended to support.
Job creation is undoubtably the key to economic growth and the sustainability of our country. This relies on the success of small to medium businesses. Yet more than 80% of them fail.
The bottom line of entrepreneurial life is simple: when basic business literacy and experience is lacking, emerging entrepreneurs make mistakes that are fatal to the business.
Without the necessary high-impact support, even those entrepreneurs and small businesses that show great potential, will also succumb to the 80%+ failure rate within 3 years and 96% failure rate within 10 years.
And to make matters worse; since the pandemic and the beginning of the digital age, these SME failure rates have seen an unprecedented increase.
The last local study by Catalyst 4 Growth states that:
- High-cost BDS (Business Development Support) had the worst performing SMEs. This indicates that the high cost of a BDS programme does not necessarily translate to high-quality performance outcomes.
- Also, the most frequent reason for business discontinuance was the entrepreneurs finding other employment for themselves. It is therefore not surprising why most entrepreneurs fail; because they start businesses due to a lack of employment.
It can then be concluded that, expensive incubation programmes that support new and start-up businesses, are not an effective way to develop SME’s nor to create jobs. And that, if this trend continues, fewer SMEs will continue to access these expensive BDS programmes.
This not only reduces the number of SMEs that can be positively impacted by quality BDS programmes, but the number of transforming supply chains and jobs being created will continue to remain low and possibly reduce over time.
Help establish the next generation of genuine Scaleup SME’s and job creators
To aid a substantial boost in the growth of SME’s and our economy, a set of high-impact programmes containing relevant and local context need to be developed and driven with the intention to help establish the next generation of Scaleup SME’s and job creators.
These programmes should be in the form of SME Scaleup Accelerators. These accelerators are set to be cost-effective and to provide high-impact growth for growing SME’s who seek high-quality business growth and development support, as well as to provide Enterprise and Supplier Development (ESD) corporate clients who are looking for a working alternative that delivers tangible and sustainable results.
A key part of the strategy is to focus on a specific and narrow segment of SMEs. An example is to focus on scaling businesses that have a combination of the following 3 traits:
- A demonstrated history of generating between R 10 – R 25 million in annual revenue.
- Has a minimum of 5 full-time employed staff excluding the founding entrepreneurs, and
- The business has been running for at least 5 years.
There is a series of misconceptions around this profile of SME – that they are generating enough money and are doing well enough, and so they do not require assistance. However, these businesses are at the cusp of scaling and therefore the most ideal segment to create the much-needed jobs while also at their most vulnerable. They therefore should be assisted with that in mind.
This SME segment typically has a proven compelling value proposition in the market but needs to be refined, the founders are invested through skin in the game and is possibly prime for outside investment. Therefore the business is better positioned to be fast-tracked for growth and significant job creation – making it ideal for scaleup support.
Why we should prioritise supporting scale-up SME’s
- These businesses are stifled by the knowledge ceiling the founders now face as a result of the complexity that comes with scaleup growth. And complexity is the silent killer of growing small businesses. ‘This paradox explains why only about one company in nine has sustained more than a minimum level of profitable growth ’during the past decade, and why 85% of executives blame internal factors for their shortfall, not external ones beyond their control.
- These growing but struggling businesses have created permanent jobs that can easily be lost. The loss of jobs in such an already tight economy leads to disastrous results for the breadwinners and their families. And so, even more needs to be done to save existing jobs.
- The South African SME development ecosystem that is bottom heavy and focused on new businesses lacks a localised body of knowledge, competencies and infrastructure to support these growing but struggling businesses.
- The next level up of business support normally associated with boutique, international, and top consulting firms is expensive and out of reach for most R 10 – R 25 million annual turnover businesses. It also needs be noted that these consulting firms provide very little foundational next-level entrepreneurial knowledge and education for scaling small business owners; which is a critical and key ingredient in skills transfer that empowers the business from within to re-chart its path to scaleup growth.
- Business schools have the knowledge but not the capacity to provide technical skills, digital technology, tools nor hands on guidance to support the implementation of digital transformation, processes and systems within these growing businesses.
And so, until now, South African SME’s generally do not have access to all-round comprehensive business support throughout their scaleup journey towards next-level growth.
Where to from here? How do we help secure the future of this country’s Scaleup SME’s and help create the millions of jobs required to sustain the economy?
A thorough analysis of existing programmes needs to be conducted to provide further insight on where the successes, shortcomings and failures of existing SME and entrepreneurship development programmes are, as well as how these can be improved upon or completely avoided.
- Department of Small Business Development-led initiatives like SEDA (Small Enterprise Development agency).
- Private sector-led initiatives that include:Incubators and accelerators
- Business Chambers
- Incubators and accelerators
- ESD (Enterprise and Supplier Development) programmes
- Access to finance programmes
- Business Advisory Institutions (IBASA, et al.)
- Job creation initiatives such as YES (Youth Employment Services) – an initiative that calls on business to help the government create critical work experience for young people across the country.
- Foreign Direct Investment (FDI). FDI, if channelled with great care, can result in longer-lasting growth and sustainable job creation efforts as part of the SME Scaleup Accelerator Programme. Two key areas FDI can be channelled includes high-potential tech start-ups and the building of small to mid-scale manufacturing factories within or in close proximity of local communities.
- SME-manager skills development programmes. Management in small to medium is unique and should be catered for accordingly.
- Manufacturing and export-focused businesses.
- Large-scale creative industries that have high-employment potential.
- Resuscitating agribusiness for food security and expansive job creation.
- Import, export and tax reform.
Lest we not forget that close to 80% of new entrepreneurs and new businesses fail. A Majority of start-ups destroy value more than they create. There is no logic in continuing to pour the same energy and resources into what we know is a failing cause.
SME development should not be driven by the sentiments of merely wanting to help youth, just so we feel good about ourselves in supporting others.
Jobs are not going to come from rotating copycat survivalist micro businesses nor by supporting subsistence entrepreneurs who at the drop of a hat, will choose employment over the gruelling task of running and growing their business.
We now need to choose a side that works, is practical and measurable. We have to focus on supporting SME’s we know have a greater chance of succeeding and can create jobs.
South Africa needs to produce goods and services that compete on a global scale and can earn foreign currency to create wealth domestically. That means building companies that are globally competitive.
This also requires an educated workforce that can meet the demands of running a post-pandemic entrepreneurial venture.
As South Africans, we need to build, implement, measure and improve our very own localised SME and related-skills development body of knowledge in supporting SME’s; the engine for economic growth and job creation.
Transforming the ‘second economy’ into a legitimate first and primary economy will take extensive planning and considerable effort. The key focus MUST be on enabling the hyper-scaleup of SME’s for job creation. This means investment in SME’s and all of the associated infrastructure and supporting ecosystems, and avoiding all we know to be inefficient, incompetent and a waste.
Please share your thoughts by commenting below.
Happy Global Entrepreneurship Week!
KK Diaz is a Business and Brand Strategist, Digital Marketer, Business Coach and 6-times Author. He helps companies of all size to get more customers and to execute high-growth strategies. To book a free consultation with him, use this link: https://meetings.hubspot.com/kkdiaz1