In having dealt with thousands of start-ups over the last decade, one of the most contentious and challenges issues to any SME is arguably Access to/the Lack of Access to Funding.
Here are a few truths and opinions regarding the Funding Landscape in South Africa:
- Actual ‘cash on the table’ funding for SMEs is indeed limited, but it depends very much on where the business finds itself in terms of life cycle. Angel and Venture Capital funding is basically non-existent compared to the demand for it (but believe me, the picture isn’t rosier in other countries).
- When we have asked entrepreneurs what they would use funding for, the ‘shopping list’ often includes items that are either not really that necessary (e.g. a powerful new laptop or a new vehicle that could have been leased as opposed to bought outright) or misconception driven (e.g. the need to hire an expensive sales team when current sales efforts are not showing any results to justify that expansion in resources). In instances, what start-up entrepreneurs need funding for is actually available for free or almost for free in the market (e.g. incubation space, mentoring, IP advisory services, coaching, design tools, surveys, etc).
- Banks are often labelled the ‘bad’ guys in the funding spectrum, but the risk profile of SMEs, according to a bank’s risk allocation, often makes it a mismatch. A bank is not there to risk capital (at least shouldn’t) that was allocated for safekeeping by the stakeholders. That’s not to say a bank should be let off easily. Their banking fees and usefulness in the business-to-business space is really antiquated and new entrants such as YOCO, Cash Cloud, Discovery Bank, Bank Zero and offerings based on block-chain technologies (which basically allow for trust to be created between traders) will quickly replace the bigger, slower organisations.
- There is substantial development funding available from corporates and governments. The issue with this funding is that it is often perceived to be spread too thin (e.g for township entrepreneurs) which leads to disappointment when funding is not achieved as well as [criticism that it is ] self-serving for the corporates offering it (e.g. the corporate wants to invest in suppliers who will benefit them while at the same time getting tax credit for it).
- Too many support structures in the SME space are offered ‘just because’, with [support initiatives] often making a good profit by taking a cut from the funds. Examples of these are the numerous incubators which allow entrepreneurs to use their resources for prolonged periods without expecting specific outcomes and targets.
- The South African SME support ecosystem is too focused on funding, mentoring and incubation initiatives and not enough on access to markets. Access to markets has been found to be even more crucial than access to funding many times. Without clients there is no access to funding. If no one wants to buy what you offer, you don’t have a business!
- Mentoring and access to skills is often too generic and high level. There really is no point teaching an entrepreneur about advanced budgeting etc. when they are just starting out. Skills should be taught in conjunction with actual client projects rather than at a high level e.g. don’t teach about social media and marketing, but rather help the SME to set up their social media strategy according to what – at their business stage – actually needs.
- There is no perfect SME support ecosystem and will never be. The perfect SME support ecosystem is too vague and open-ended to be acceptable to governments or corporates. The perfect SME ecosystem is a flat structure that allows SMEs to connect with each other and resources in a democratic way and not based on access to networks. Such a ecosystem requires incredible stakeholder flexibility which is difficult to get buy in from in more institutionalised organisations.
- The future of work is B2B2SME (Business to Business to SME). A substantial proportion of GDP is thanks to SMEs. Close to 70% of all jobs are thanks to SMEs. The myth that government and corporates are driving South African growth is outdated but still exists thanks to coordinated voices and lobbying by larger organisations.
We don’t have to create SMEs. They are already there and actively trading. What we need to do is to get out of the way and make it easier for them to be able to do business with each other and with the world.