SOUTH Africa has money to fund small, medium and micro enterprises (SMMEs), but funders were “hoarding” funds and applying models that disadvantaged the growth of these businesses.
Justin Naidoo, chief investment officer at MyGrowth Fund, who also believed that the “cheap dollar and euro liquidity” seeking emerging markets was being hoarded by a few major players in key industries.
Naidoo said recent studies had shown that 67% of all SMMEs failed within three years.
“South Africa has no shortage of capital; the problem is that those in charge of the purse strings are wilfully utilised models that do not match the characteristics of the average South African SMME, ensuring that the two will never meet. While the funder continues to grow, the SMMEs fail,” said Naidoo.
Role-players in the SMME sector said small businesses faced red tape including the regulatory framework, labour regulations and inability to access funding.
Naidoo described the state of SMMEs marketplace in the country as “dismal” and criticised companies for not taking care of SMMEs in the supply chain process while on the other hand financial institutions’ funding models were “conservative and outdated“.
He said although all companies with a revenue of more than R50 million were required by the Broad-Based Black Economic Empowerment (BBBEE) Codes of Good Practice to invest a percentage of their Net Profits After Tax in Enterprise Supplier Development (ESD) projects, some corporates practised fiscal dumping.
“It involves utilising capital to address corporate difficulties, in this case BBBEE and ESD scorecards, which includes preferential procurement - a major roadblock to doing business,” said Naidoo.
Preferential procurement was included in the BBBEE scorecard to ensure that companies spend a minimum rand value on suppliers within their own value chain to build them up by giving them preferential work over time.
Naidoo argued that if fiscal dumping occurred by placing capital with fund managers, then these companies obtained the points from the fund managers and no longer need to actually focus on firms in their supply chains.
“This is why SMMEs in really good supply chains still go under - they should have been given preferential contracts as per BBBEE regulations,” he said.
He also said in South Africa there was no differentiation between private equity (PE) methodologies and venture capital (VC), which was supposed to be aimed at SMMEs as soft friendly capital to aid start-ups in terms of going to market and creating a sustainable company.
Private equity was for mature enterprises aiming to expand at scale.
According to Naidoo, small businesses that sought VC-type start-up funding were scored using PE models, making the rate of approval “dismal”.
He said research he conducted together with the South African Enterprise Development Council, showed that 97% of SMMEs did not qualify for private equity funding, thus the capital they received was “fenced off by procedures designed to keep them out”.
Naidoo also called on direct foreign investors to “deploy"” the capital in particular institutions of a certain size, such as banks or mature funds
In October members of the SA Start-up Act Steering Committee met with President Cyril Ramaphosa to discuss what was needed to eliminate the red tape obstructing the growth of SMMEs.
Founder of Furaha Afrika Holdings and chairperson of the SA Start-up Act Steering Committee, Matsi Modise said there was no “better time than now” for the country to reposition itself as a gateway for high impact, high growth technology entrepreneurship on the continent.
Modise said South Africa was losing talented entrepreneurs due to “outdated and a disabling” policy framework.
“In order for South Africa to be an attractive destination for investors, talent and entrepreneurs, we must implement a Start-up Act which will be an all-encompassing pathway for South Africa to be an African start-up nation, “ Modise urged.
Southern Africa Venture Capital and Private Equity Association (SAVCA) chief executive Tanya van Lill said there were not enough Venture Capital fund managers with “big enough” funds to make investments needed.
“One of the biggest challenges they cite is that they battle to fund-raise themselves. Currently, investors into venture capital fund managers are high net worth individuals, family offices and some corporates together with the SA SME fund,” she said.
Van Lill also said there was hardly any other institutional capital flowing into the VC industry at the moment.
Role-players called for new and innovative financing models if South Africa wanted to establish itself as a hub for venture capital and a gateway to the continent, in addition to developing skills in digital and tech, resolving late payment of SMMEs .
Regarded as a potential enabler, the Start-up Act, proposed four key policy amendments for qualifying start-ups that included tax breaks and incentives for investors and automatic BBBEE level 1 status, and amnesty from current and future exchange control regulatory actions for investments.
Former Wesgro CEO and Digital Collective Africa Board Member, Tim Harris added, “There is an urgency to implementing these proposals now because South Africa’s tech leadership on the African continent is under threat, even as the world is waking up to the potential in the market.
“I was in Europe with a group of young African tech entrepreneurs and it was clear that momentum is shifting to Kenya and Nigeria. We are losing our competitiveness on the continent,” Harris said.