During his February 2018 budget speech, former finance minister Malusi Gigaba announced the development of a fund to benefit small, medium and micro-sized enterprises during the early start-up phase. The fund has been allocated R2.1 billion.
It is my view that, because of the 96% failure rate for small businesses, the government should be very careful about how they allocate this funding, and should be looking at the best return on their investment in terms of employment and future revenue.
They should also take into account the vast differences in issues facing a micro-business and those facing a medium-sized business. By lumping micro and medium businesses under the same definition of SMME, one does a great disservice to both. Micro businesses struggle with registrations, finding staff and cash flow, while medium-sized businesses battle with BEE certification, staff retention, building systems, audits and so on. A national fund or strategy that indiscriminately deals with micro- and medium-sized entities is bound to encounter issues.
I believe the allocated funds would be better spent on the ten-man (or person) band because, implicitly, this size of business possesses the entrepreneurial constructs that provide a higher statistical chance of success. To develop a business into a ten-person band requires time, and time provides a good source of information about the business and its leadership.
First, it offers perspective on the character of the entrepreneur; he or she must possess a level of tenacity and must have persisted through a number of challenges in order to reach this point. Second, the business has shown that it has a market. Great ideas do not necessarily have real markets but, by the time your business has grown to ten people, it has proved to some extent that there is a market that can sustain – or at least partly sustain – those people.
Third, it demonstrates a level of sophistication within the business. A one-person band can run his or her business without any real systems to speak of, while a ten-person band requires a minimum level of systems in order to operate – be it payroll, accounting software, a website and so on. It shows that the entrepreneur has evidenced the ability to create systems on his or her own. Fourth, the shift from a one to a ten-person band over time also implies that the business has adapted from its original idea to a more commercial response to the opportunity. The entrepreneur has proved he or she has the ability to iterate, which is a critical entrepreneurial quality.
Fifth, in most instances, the ten-person band has financial records which offer a good source for predicting whether or not the business will continue to be a success into the future. Early start-ups have a lower likelihood of financial records and history. Finally, there is a higher probability that a ten-person band will be operating from formal premises and not from home, thus incurring real costs. Many early start-ups that work from home and employ family and friends forget to include rent and market-related salaries in their financial modelling and, when they are forced to rent commercial space and hire professional staff, their business models collapse as the overheads often cannot be sustained by their margins.
I also urge the government to consider that money may not always be the correct solution when it comes to developing and growing small businesses. In fact, in some instances, it could be the death knell. I offer the real example of Joe Mkhize (not his real name), who ran an operation in Johannesburg that did vinyl sign applications on to containers and had contracts with a number of cell phone companies. He employed nine people on a full-time basis, generated around R400 000 net profit per year, and earned a salary of R60 000 per month. He then received the option of a grant for R1 million which he erroneously used to purchase a state-of-the-art, wide-format printer in order to print his own vinyl signage.
Unfortunately, his current premises could not house his new printer so he had to find larger, more expensive premises. Also, he did not have the ability to operate the printer so he required additional technical staff. He realised if his technician were to fall ill or take leave he would be unable to operate the printer and therefore needed a second technical person for redundancy. The new printer also had to be insured and so on.
The sum of all these additional costs instantly turned a profitable business into an unprofitable business. The additional funding, without the correct advice, derailed a business with huge hope for growth, and it closed down within the year. Money applied in a business in the wrong way can destroy it.
I believe that investing in ten-person bands and supporting them with the right business advice so they can appropriately scale with the correct systems, processes and financial structuring will ensure a higher impact on the South African economy than investing the same money in a one-person band. One hundred percent growth in employment in a one-person band is one person; 100% growth on a ten-person band is ten people. For government, the return on investment from an income tax and corporate-tax point of view will be far higher if that investment is made at the right point in the entrepreneurial cycle.
Allon Raiz is CEO of Raizcorp.