CHRIS HART: Venture capital flees as government shuts down small business support

Small business is the lifeblood of any economy, yet the government has been shooting itself in the foot — and small businesses between the eyeballs — regarding nurturing entrepreneurs.

A flawed but vital tax incentive programme for venture capital known as Section 12J (S12J) was terminated at end-June, yet there is nothing to replace it.

Hundreds of small firms and start-ups were boosted by S12J, which enabled taxpayer to channel part of their tax liability into an approved investment.

Instead of their taxes being swallowed up and disappearing into the black hole of the fiscus, which is not exactly noted for the efficient management of our taxes, the money could instead be used to back a business, with the investor reaping healthy rewards if the investment was a success.

S12J was criticised for the way in which some vanity projects were funded, but most projects it has brought to life have been worthwhile and sustainable businesses — largely black-owned, often in townships or rural areas, and always helping tackle this country’s shameful scar of mass unemployment. 

The future of venture capital in SA is uncertain without these S12J incentives. So what is to be done? If the government does not want to give incentives to support small businesses it should compensate for this by removing regulatory barriers these businesses face.

Try to launch a business and you will be swamped by an avalanche of onerous red tape. It does not matter whether you are big or small; the burden is equally daunting. Regulators require you to incur costs upfront — before you can start to bring in any income.  This can destroy any hope for budding entrepreneurs, tripping them up at the first hurdle.

Often fatal

I am referring to licensing requirements and similar obstacles. Before you can raise a cent you have to go through a lot of cash burn, which prolongs the hazardous start-up phase before you can reach break even.  It can be, and often is, fatal.

It is an enormous problem if all scarce resources are required to meet regulatory requirements instead of being able to focus on getting the business off the ground through attention to marketing and sales. From a financing point of view a red tape mountain is a barrier to getting a small business in place, since so many unproductive costs have had to be funded.

Surely the regulatory bodies should behave much more as nurturing bodies, rather than as policing bodies, regarding small businesses? Ask any small businessperson: they are far from nurturing. 

What about the investors, the venture capitalists? Without the S12J carrot, and facing the stick of red tape and bureaucracy, moving into other parts of Africa is looking attractive. Venture capital is starting to flee SA as the government has shut down the vital support S12J was offering. 

SA is a far worse location for start-ups than the environment in our neighbours. The obstacles and barriers that are a hindrance to establishing and operating a business in SA do not exist in jurisdictions such as Botswana, Rwanda, Ghana, Kenya, Mauritius or Namibia.  Even Nigeria is starting to move up the global competitiveness ladder.

Shut out

In these more business-friendly emerging market environments the potential of entrepreneurship can more easily be converted into opportunity. This is a shame, as the latest unemployment numbers illustrate anew the desperate need for the creation of new businesses to offer new employment opportunities. 

SA’s formal unemployment rate of well more than 30% — double that level for young people — is a direct consequence of too few SMEs. So where are these SMEs that need to be formed? They are shut out even before they can get going, or are set up for failure.

Youth Day is commemorated annually, but the young people are being failed. They want jobs, not pious speeches from politicians. There are so many problems faced by SA society that new businesses could be established to help solve: a problem is an opportunity for a canny entrepreneur. With the untimely demise of S12J people with money are more likely to invest outside the country due to a substantial and long-term drop in investor confidence.

One reason for the collapse of the S12J tax incentive is that small business has no voice. Those businesses that have the lobbying capacity will tend to support the raising of barriers to entry — because they are already in. The ones that really need the lobbying muscle lack the resources, and their voice is not sought.

There is nothing I am aware of to give a voice to this constituency, which so vitally needs a voice. Later this year President Cyril Ramaphosa can be expected to host another of his investment conferences, at which large firms will be rewarded for their generosity with a presidential handshake, or more likely by a Covid-19-compliant elbow tap.

However, the big successes are masking the many small tales of failure and desperation. It is time for the president to spend less time on the red carpet and pay more attention to the red tape that is strangling so many small businesses.

• Hart is executive chair of Impact Investment Management.