South Africa suffers from a shortage of entrepreneurs. With the Brics summit of the Brazil, Russia, India, China and South Africa business communities fresh in our minds we recall that the country most similar to ours in its problems with economic development is Brazil.
And yet Brazil creates far more entrepreneurs per head than South Africa does. Why is this? A key culprit is black economic empowerment (BEE).
BEE codes divert our natural supply of potential entrepreneurs into the safer and easier path of buying into existing businesses at preferential rates, rather than taking the riskier path of going it alone and forming their own enterprises.
Fewer enterprises means less competition and fewer jobs, which explains a lot of other things wrong with the local economy.
Since BEE requirements are unlikely to go away any time soon, the question then is how to use them to maximum benefit to encourage entrepreneurship.
The solution here lies with one aspect of the codes: support for enterprise development. Currently a business may score up to 15 points on its BEE scorecard if it invests in enterprise development of businesses that are at least 51 percent black owned.
Not only should enterprise development have a much greater emphasis in terms of points awarded for BEE, but it is very useful in addressing a key point of failure for small, medium and micro enterprises (SMMEs): their low survival rate. And one important way of doing this is through incubators funded by big business.
In South Africa, private sector incubators are limited. They include those run by Raizcorp and Shanduka. Much more can and should be done by big business.
Incubators are expensive. There is room for a much greater role by private sector providers in all industrial sectors. Innovative funding concepts could be derived from the BEE codes’ provision for enterprise development funding. This is a huge opportunity just waiting to be seized.
A business incubator is a building that houses tenant companies that are in the initial phases of formation. It provides a mix of internal and external services for these companies to grow and create jobs. By doing this, incubators help new groups survive and grow when they are most at risk of failure. The goal is for those groups to graduate from the incubator as financially stable and survive on their own.
Incubators usually offer rental space, shared equipment and basic services and technology support services. Incubated companies outlast normal start-ups.
The role of the government in incubators can be problematic. Politicians may interfere in the staffing or design of incubator structures, or in selection procedures, which can destroy incubators. Since incubator managers in many countries are paid by the government, the result can be that they are inefficient and lack proper business training themselves. In South Africa, the government’s is lacklustre.
What then do incubators need?
First, a pre-arranged exit strategy. In Nigerian incubators, some established companies can be impossible to evict. Because of the attractions of low rentals and a supportive environment, it becomes more attractive to stay and there is no space for new incubatees. The average time for a tenant company worldwide to exit is two to three years.
The mission statement of the incubator needs clarity so that everybody involved knows exactly what the purpose of the incubator is, what its long-term goals are and how success will be measured.
Managers at incubators must all have business experience, followed by excellent computer literacy, a background in operations, financial management and interpersonal skills, motivation, vision and involvement in community affairs.
There must be tenant selection criteria, preferably by a board with some private sector representation. Selection criteria would be similar to those expected of a company seeking a bank loan – business plan and product marketability – plus extraneous factors policymakers might add as mitigating factors, such as ownership by women, young people and black people.
Having ties to a local university is useful. Not only does this provide potential start-ups with access to new ideas and technologies, but it allows student workers to gather experience while working in the incubator for use in their own careers – or for employment by the incubated company once it leaves the incubator. This provides jobs and exposure to entrepreneurship.
Business incubators also provide useful opportunities for industrial sector networking, especially to those new to this. This helps with access to funding, for instance. Networking can be supported by seminars and workshops, and as a recruiting ground for more potential incubatees.
Services incubators should offer:
n Assistance in locating financial services. The fact that a business has been through the incubator process is an indicator of potential success for venture capitalists;
- Networking opportunities;
- Basic business training;
- Accounting and financial management;
- Investor and strategic partner linkages;
- Links to a higher-education institution;
- Shared administrative services;
- Computer literacy;
- Advice on problem solving;
- Initiatives to promote entrepreneurship;
- Staff training and technology updates;
- A long-distance support network; and
- Exchanges with other successful incubator projects around the world.
Almost all countries show that forceful government intervention is destructive to business incubators. But there must conversely be some involvement by the public sector, not least in measuring success and in providing basic finances and infrastructure, and fulfilling the role of a facilitator.
Examples of successful government-run incubators in South Africa do exist, although not enough of them. The Gauteng Growth And Development Agency (GGDA) has incubators in the automotive industry. The Automotive Industry Development Centre (AIDC) is an implementing arm of GGDA. The AIDC works in partnership with Nissan South Africa, building a training academy for workers in the motor sector. Later there will be links to further education and training colleges and local universities. Nissan will install a simulator.
Similarly, the Ford T6 project, also under the AIDC, links SMMEs produced by Ford into the Ford supply chain. The GGDA also pays for electricity and water for a fixed period, while recently Ford installed a R55 million simulator. The Ford programme’s main goal is to incubate BEE entrepreneurs in the automotive industry.
Both Nissan and Ford intend to duplicate projects at all their local plants.
Since 2000, the Godisa initiative comprises six technology incubators countrywide. The aim of this combined effort of the departments of Trade and Industry and Science and Technology is to use technology in businesses to increase global competitiveness. The Small Enterprise Development Agency’s technology programme also supported technology incubators, 31 in all. The technology bias is because the government has identified business incubators as a policy priority in boosting hi-tech industrial development and creating jobs. But there is much more room for business incubators.
In Brazil, the prime function of incubators is to build innovative businesses and develop regions; they are less successful in terms of jobs created. In countries like Chile, universities support incubators to bring their products to market. These are different goals from normal SMME-supporting incubators, of which far more are needed in South Africa. The money is there if the spirit is willing.
Gavin Lewis is the DA spokesman for economic development in Gauteng.