South Africa needs to turbocharge small business development, says Bridgit Evans, executive director of the SAB Foundation, one of the most successful private sector champions of entrepreneurship in the country.
“There’s been a slow maturing of the entrepreneurial environment, but South Africa can’t afford to wait for the SMME sector to slowly mature. We need to turbocharge small business development, we really do,” she says.
The foundation, which Evans took over in 2015, one year after the department of small business development was created, has shown how it can be done. It has invested R668m supporting 4,000 small businesses, 90% of which are flourishing, in stark contrast to a 7% survival rate for small businesses supported by the department and a plethora of related entities that dole out R6bn a year.
“When we first work with entrepreneurs they’re generally very small. Our intention is to catalyse growth as quickly as possible,” says Evans.
In the first phases the foundation only offer grants, which accelerate early growth.
“We make those grants very deliberately, in conjunction with mentors and investment teams, to make sure that funding catalyses as much opportunity for the entrepreneur as possible.”
Later the foundation offers interest-free loans, and two years ago it began offering concessionary loans at below market interest rates. As the businesses grow they migrate to loans.
One of the biggest factors holding back entrepreneurial growth in South Africa is lack of financial literacy and financial record-keeping, Evans says.
“We’ve found that even entrepreneurs who are educated just drive sales and neglect the financial side of the business. Because of that they’re not able to access any form of finance and so their growth is limited.”
There are thousands of small businesses in the country, but they stay small because they can’t access finance to grow. “Often this is because they don’t keep proper records, and without proper financial records no commercial-type investor can invest in them. This is a [widespread] issue.”
You’ve got a whole sector that is constrained in terms of its growth. That’s where as a country we have not been effective enough
The businesses outsource this to bookkeepers who do their annual financial statements but provide no financial insight into the business.
Without that insight, “you’ve got a whole sector that is constrained in terms of growth. That’s where as a country we have not been effective enough,” Evans says.
Entrepreneurs go to short-term lenders that charge more than 30% interest, and get into a debt spiral they cannot escape.
The SAB Foundation runs a “straight entrepreneur programme” for entrepreneurs outside the major metro areas who provide goods and services in neglected communities. It gets about 7,000 applicants for that programme every year, but accepts only 60.
They’re rigorously selected on merit and other factors including the potential of their business. “We come in after they’ve been operating for a year. Not necessarily very well, but at least operating.”
The foundation also runs a programme that invests in innovation. The innovation coming out of universities is “just extraordinary”, Evans says, but there’s little support for even very high potential businesses in the early stages.
“We get them through those first years. Some are picked up by venture capitalists when they believe some of the early risk has been mitigated. They’re not going to look at start-ups, so there’s a huge financing gap in this area.”
She would like to see commercial banks offering more access, but concedes it’s a big risk issue. “Many of them have had their fingers burnt.”
The government’s Small Enterprise Finance Agency, which funds SMMEs that cannot get credit from the commercial banks, had a loan default rate of 40% in 2022; the foundation hasn’t had any after two years.
Evans ascribes this to the meticulous monitoring, mentoring and training of the entrepreneurs her foundation funds.
In spite of the achievements of such private sector initiatives, she says the answer to the small business development crisis is not to simply dump the clearly underachieving department of small business development.
“My issue is strategy. What’s the strategy, what are the challenges around growing entrepreneurs? Let’s develop a strategy around that, let’s stick to that and all move in the same direction. That’s what I don’t see.”
The potential for entrepreneurs and small business development in South Africa is enormous, she says, “but you can’t just throw money at a business and think it’s going to grow”.
“It’s a kind of a ‘spray-and-pray’ approach with everyone just doing their own thing. It is moving the needle, but it’s not moving it nearly enough.”
The challenge is to use the hard lessons that have been learnt to design a strategy that will unlock potential and growth, “and then let’s all move in that direction”.
“There’s constant shifting and changing. There’s no strategic drive in the same direction.”
There’s a lot of activity from a plethora of different players but little to show for it because no-one is asking the hard questions, Evans says.
The department gives billions to Seda offices around the country so they can help entrepreneurs with marketing, branding and access to markets.
“The question is how skilled are the people in rural Seda offices to be able to grow a business? Even in our space it’s really hard to find solid mentors who can help to grow businesses.
“There’s been a slow maturing of the entrepreneurial environment overall, but the reality is we are not creating those jobs. We have to do something about connecting the dots around the financial literacy and record-keeping issue to try and lower the risk for investors.”
Does Evans think the Department of Small Business Development is doing enough to justify its existence given its exorbitant cost to the taxpayer?
“My view is if we have a department like that it should be the thinking hub in what’s happening in entrepreneurship, and it should drive the overall strategy for how you’re going to change that picture. That’s the role I see for a ministry like that.”
She won’t be drawn on whether she feels it is playing that role, but says she is not seeing an appropriate sense of urgency from the department.
“None of us has the appropriate sense of urgency, given how high our unemployment rate is.”
