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For years now, we’ve been told that entrepreneurship and small businesses are key to economic and job growth. But all too often, small businesses aren’t put in a position to succeed. That’s especially true in South Africa. According to the National Development Plan (NDP), small, medium, and micro-sized enterprises (SMMEs) will contribute 60-80% to GDP increase, and generate 90% of the 11-million new jobs in our country by 2030.
But there’s little chance of that happening when more than 70% of new businesses fail in less than two years of being in operation. While some level of failure is to be expected (entrepreneurship requires a higher tolerance for risk), that number is far too high. As such, we need to ask why so many small businesses fail so quickly and what can be done to lower those failure rates.
Not uncoincidentally, exploring these factors can also go a long way to explaining what’s needed to ensure that more asset management firms succeed, especially as the sector embraces transformation.
Incubation
Business incubators can play an incredibly important role in reducing the failure rate of small businesses.
An incubator can offer entrepreneurs:
- A creative space to work out and discuss every aspect of their business
- More resources and experience than they would otherwise have when starting out
- The opportunity to develop a network of other entrepreneurs and start-ups to sustain their business in the future.
The last of these is particularly important. The right network can open up new markets to a business venture, something that can be even more important than funding and other factors typically associated with business failure.
While there are currently 58 business incubators in South Africa, the vast majority of early-stage small businesses launch with little to no support. All entrepreneurial journeys include some kind of learning on the fly, but for far too many South African businesses, that’s true of the entire experience.
More specifically, it needs specialist incubators that cater to individual sectors, while still encouraging wider collaboration.
Mentoring
When it comes to entrepreneurship, it’s hard to beat experience. And for small business owners who don’t have the necessary experience themselves, the next best thing is to receive support and mentorship from someone who does.
While South African figures are hard to come by, a survey by the UPS Store found that 70% of small businesses that received mentoring survived more than five years – double the survival rate of non-mentored businesses. The same survey found that 88% of business owners with a mentor said that having one was invaluable.
While most incubators and accelerators provide some form of mentorship, small businesses should also seek out mentors. While it can be helpful if the mentor has experience in the same sector, their overall business knowledge is much more important. By the same token, successful business owners should offer their mentorship services to up-and-coming entrepreneurs.
There are a number of programmes that both entrepreneurs and mentors can join if they want to interact with each other, but they can also find each other at entrepreneurial events and conferences.
Funding
With South Africa having much lower levels of generational wealth than other more mature markets, lack of funding is a major obstacle for the country’s small businesses. Without the proverbial “friends, family, and fools” to provide initial investment, many small business owners rely on loans or credit card debt to fund their ventures.
Fortunately, the country’s venture capital space is growing and much more sophisticated than it was a decade ago. Even there, however, structural problems remain. Seed funding is still scarce and there is a gap between early-stage funding and Series B opportunities, meaning that promising start-ups end up stuck once they reach a certain level of success.
A major reason for this gap is the lack of institutional funding in the country. Asset managers, pension funds, and even insurance companies should be encouraged to invest in small businesses as a matter of course. Doing so will help build more successful small businesses who can later invest in others, building a virtuous cycle of success.
Regulation & legislation
South Africa has some of the strictest regulation in the world when it comes to small business. This is particularly true when it comes to registering a company, regular compliance for the company as well as when laying off staff. While those laws are in place to offer necessary protection against the exploitation of workers by large corporations, they can be an obstacle to small and emerging businesses.
If the country is to have any hope of reversing those losses, then government needs to create legislation and regulations which are not only friendly towards small businesses, but which actively encourage their growth.
Asset management parallels
Many of these problems are also faced by the asset management sector, particularly when it comes to transformation.
It’s therefore important that existing asset management professionals adopt an approach which champions demographic and gender diversity, skills transfer and mentoring, and which cultivates and supports independent management-owned teams. It also needs to focus on internships, mentoring, and community-based projects.
Anyone taking this approach will cultivate, create and self-generate capacity that does not yet exist in the market. They will also empower people to take on opportunities they would otherwise miss. Doing so doesn’t just mean transformation and empowerment either. It also means attractive returns for institutional investors.
So, whether it’s small businesses or asset management firms, it’s clear that South Africa needs to address the factors that are hindering growth and change. By providing an enabling environment with the requisite levels of mentorship and incubation, South Africa can achieve the vision of the NDP and grow jobs and wealth along the way.
Author overview
Michelle Bholosha is an Investment Analyst with a deep knowledge and track record within the development of fund administration and reporting systems. She is an integral part of the Thuso Partners team in transforming the private market landscape in South Africa. Providing high-quality incubation, mentorship and funding, Thuso remains the leading platform for producing next-generation asset managers.
