Perfect storm for small business as pandemic fallout goes on
Combination of several disastrous circumstances said to threaten survival of many lightweight firms
Perfect storms are “a rare combination of circumstances that combine to drastically aggravate an event”. The term is often used to describe a worst-case scenario that resonates with many small businesses in SA and internationally now as they face collapse due to Covid lockdown restrictions.
Researching and reflecting on how the pandemic has affected small businesses, many concerning trends emerge. Small busines sales are hugely reduced while fixed costs remain, a lethal combination that threatens their liquidity and long-term survival.
Globally, markets are gridlocked and supply chains have been seriously disrupted. Converting to or boosting digitisation of the business is proving difficult due to limited funding opportunities. And there is a hostile climate for innovative products and services, along with additional hurdles in accessing start-ups and seed funding.
Having little or no start-ups in the economy jeopardises SA’s future innovativeness. Temporary downsizing of staff becomes a permanent feature, adding to the huge unemployment deficit. And when it comes to government support many interventions are simply not bankable, or the rescue packages are plagued by bureaucratic obstacles that outweigh the benefits associated with empty promises.
Mindful that the pandemic is still ongoing and the outcomes on entrepreneurship still very much moving targets, a diagnosis of Covid-19 impacts on entrepreneurship was recently published by the Global Entrepreneurship Research Association. This covered the emergency policy decisions and actions taken by 54 national governments as a result of the pandemic. The findings from this research show that unprecedented amounts of state and government aid were channelled into propping up economies around the globe. In contrast to previous financial and other crises, many governments chose to make direct payments to individuals to incentivise continued consumption, avoid early evictions and safeguard social systems.
The report also highlights both differences and similarities between countries, often depending on the wealth of their economies. The point is made that developing economies are especially compromised in their ability to face a crisis of any kind, but especially so in the case of a pandemic owing to a lack of developed health and social security systems. In addition, developing countries may be even further compromised if they have “pre-existing conditions” such as problems with corruption, social upheaval or national debt.
Such pre-existing conditions seem to be overwhelming SA entrepreneurs as few small businesses were prepared for a crisis of the magnitude of the Covid-19 pandemic. That even before the pandemic SA was in a recession highlights how a “combination of circumstances combine to drastically aggravate” entrepreneurship activity. Indeed, a combination of several disastrous circumstances are aggravating the entrepreneurship problem in SA, including obstacles such as limited access to finance and markets, erratic energy supply, red tape (mostly in terms of rent-seeking activities, such as nepotism and corruption) and crime, which disproportionately affects small businesses relative to large firms. These demanding circumstances combine to worsen and magnify the effects of the pandemic to create a “perfect storm” for small business in SA.
Enterprise success can only be realised if conditions within the broader environment are favourable, while the opposite is also true — small business failure results from unfavourable policy and broader deficits in the environment. It is therefore of little consequence to have a myopic view and support strategy for small business while conditions in the broader marketplace are bleak and few opportunities are available.
Research shows that the relationship between the environment and small business performance depends on the relationship between multiple entrepreneurial environment factors and not on a single attribute. In fact, ignoring the interconnected nature of the entrepreneurial ecosystem can lead to perverse outcomes.
For instance, while incubators or enterprise hubs — which provide seed capital, mentoring, and often space to start-ups — have been proliferating in SA, there is little convincing evidence that these Silicon Valley-styled interventions contribute meaningfully to entrepreneurship. Such interventions, even when well-conceived and well managed, can take 20 years or longer to generate a measurable impact on entrepreneurship. If they are poorly managed and not aligned to the significant broader macro-environment challenges facing local entrepreneurs, these interventions can lead to perverse outcomes and rent-seeking behaviour.
The long-term consequences of the pandemic on small businesses are not yet foreseeable, but effective remedies are urgently needed to strengthen several elements of the ecosystem more or less simultaneously. The good news is that the vaccines have arrived in SA and this may in itself kick-start the economy and open up opportunities for entrepreneurs who have managed to survive the perfect storm.
• Urban, a professor at the Wits Business School, held the inaugural chair in entrepreneurship.
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