Business Day: Disconnect between start-ups and big business stunting SME growth

In May 2016, Neo Hutiri won the Hack.Jozi challenge. He used his prize money to develop his smart medicine-dispensing locker system that could have become a game-changer for township communities. But more than two years later, his innovation has not taken off. Barry Dwolatzky, professor of software engineering at Wits University, sees this too often. “Research studies that have been done in Gauteng show that there’s a lack of connection between established and early-stage businesses in the province. There is no spider web that we see in the Silicon Valley value

chain, where older businesses give birth to new businesses,” he said in a panel discussion during SA’s first impact investing conference on Thursday.

Hutiri’s story is one that small and medium-sized enterprises (SMEs) and early-stage investment companies who took part in the conference see too often. It has become a way of life, they say, simply because SA’s economy is not built with small businesses in mind. In countries like Germany, small businesses are the life of the economy. They are slotted into the value chain of multinational companies such as BMW. A study published by German political foundation Friedrich Ebert Foundation in November 2017 showed that 99.6% of all German firms were SMEs responsible for 58.5% of all jobs. This constituted 54.9% of net value added in Germany in 2015.  SA on the other hand has about 250,000 formal SMMEs, findings of the Small Business Institute’s baseline study showed earlier this year.

However, SMEs provided only 28% of jobs in the country as employment is highly concentrated among the 1,000 largest companies, including government. The study also showed that large firms added more jobs and grew employment at a faster rate than SMEs from 2011 to 2016. “In SA, we have a lot of big corporates, which is not a bad thing. But the challenge is how do you make sure they don’t see collaborating with small businesses as a risk to their brand?” said Kizito Okechukwu, the co-chair of the Global Entrepreneurship Network (GEN) Africa.  Okechukwu’s organisation runs 22 ON SLOANE, the largest start-up campus in Africa. Situated in Bryanston, it provides technical support and office space to disruptive start-ups. He says the other challenge is changing the mindset of big business so it stops seeing disruptors as competition.  But getting start-ups off the ground is only one part of the problem. Jason Goldberg, co-founder of Edge Growth, says SA needs to do more to support enterprises that are trying to grow. One of the businesses Edge Growth had in its enterprise development programme tripled its revenue in a year. Two
years later, it was shut down. The business had grown itself to failure.  “We have a lot of scale-ups that get stuck in no-man’s land in SA…

The business becomes too big for the current management to manage. We need to help scale-ups scale because it’s not easy to grow an early-stage company,” he said.  Goldberg says the disconnect is that most support programmes assume that once a business has grown to a certain level, it no longer needs support, whereas it is at precisely this stage it needs it most because the business becomes more complex. But perhaps the most significant challenge entrepreneurs raised in the conference is access to markets for start-ups. Without the right level of sales, no amount of technical support, reduction in costs or even tax incentives will keep the business running, which is why becoming part of big businesses’s supply chain is crucial for SMEs.  “Solutions lie with small businesses being supported by big businesses,” said Okechukwu.  The government has put in place a number of regulations to deal with the issue of market access, including the preferential procurement policy framework and broad-based BEE (BBBEE) status levels to nudge big companies doing business with state institutions into including more exempted micro enterprises and SMEs in their value chain. But judging from the frustration of start-up entrepreneurs at the impact investment
conference, these regulations are not yet yielding the required effect, not least because the manipulation of BBBEE is now widely acknowledged. In April, the BBBEE Commission reported that SA companies were increasingly fronting their employees by establishing employee trusts. It told parliament that 83% of the 334 complaints it handled in the past year related to fronting practices.

buthelezil@businesslive.co.za
https://www.businesslive.co.za/bd/business-and-economy/2018-10-29-disconnect-between-start-ups-and-big-business-stunting-sme-growth/