Self-reliant business incubators key to growing sustainable SMMEs

SA faces unprecedented levels of unemployment. The government recognises the potential of the small, medium-sized and micro enterprise (SMME) sector to address this problem and has several policies and initiatives in place to support the sector.

According to the Small Enterprise Development Agency, about 2.5-million SMMEs were registered in the country in the second quarter of 2022. Collectively, these businesses provided 9.31-million jobs, which constituted 59% of total employment at the time.

As elsewhere in the world, the SA government considers business incubators to be a specialised small business development mechanism that has the potential to strengthen the SMME sector. Business incubators can, therefore, contribute to growth-orientated enterprises to address issues of small business failure and unemployment.

Consequently, several public, university and private business incubators have emerged nationally to support and help grow sustainable and profitable SMMEs. Despite the emergence of business incubators, the SMME failure rate in SA remains one of the highest globally.

Public business incubators are purposed to promote entrepreneurial activity among new and fledgling business ventures and facilitate the transfer and utility of resources and technologies. Public business incubators promote quality standards and improved productivity, thereby addressing the failure rate of SMMEs. University business incubators facilitate innovation and entrepreneurship via the commercialisation of research. They provide business support, resources, infrastructure and network opportunities for start-ups emerging from the academic community.

Private business incubators promote entrepreneurship and innovation for profit. In addition, private business incubators accelerate the growth of start-ups by providing comprehensive support in terms of resources, network opportunities, mentorship support and access to venture capitalists.

Despite the numerous business incubator programmes run by local government entities, private organisations and universities, their effect on the success of the SMME sector has not been well established. Previous scholars have, however, noted that the potential benefits of these programmes are often blocked by challenges such as the lack of financial sustainability and skills shortages.

Other key inhibitors include limited business knowledge and skills, poor incubatee selection criteria, limited business space, lack of support from stakeholders, uncommitted clients and intense competition for resources. These inhibitors affect the ability of business incubators to perform optimally and in turn adversely affect the quality of support they can offer incubatees.

We investigated the factors that hamper business incubators’ performance by conducting a cross-case analysis between public, private and university business incubators in SA. We interviewed relevant and experienced business incubator stakeholders, such as CEOs, COOs, business incubator managers, business development officers and incubatees over a six-month period in 2022.

Our findings suggest that business incubators are in survival mode, so their sustainability is a grave concern. Our results indicate that a lack of financial resources was the number one inhibitor of success, followed by a lack of organisational resources.

We further found that business incubators able to generate sufficient internal revenue (paid services, rental income and taking equity in incubated start-up enterprises) to cover operational costs had more autonomy and relative independence in their approach to business incubation (that is, delivering to their vision and mission).

Conversely, when business incubators were unable to generate sufficient internal revenue and were reliant on external revenue (funding from the government, private organisations, and philanthropists), they had less autonomy and independence.

Business incubators that rely on their sponsors for external revenue to survive often disengaged or “decoupled” from their primary vision and mission because of misalignment between objectives. Decoupling occurs when the incubator management must meet the objectives of their sponsors to secure funding and extend the business incubator’s sustainability.

Our findings furthermore show that a lack of financial resources affected the ability of business incubators to attract and select competent human capital, such as the invested human skills, capabilities, expertise and competencies in the operations of a business incubator.  Incompetent human capital had an effect on the quality of incubation programmes they offered.

A lack of organisational resources, particularly business incubators’ brand awareness, resulted in their inability to attract, develop and maintain a pipeline of good-quality proposals, which affected the quality of incubatees that these business incubators selected.

Given the important role business incubators play in small enterprise development in SA, it is critical that both business incubators and their stakeholders understand the factors that hamper their performance. By understanding and attending to these factors, business incubators as a mechanism for economic development can be strengthened and avoid the risk of being dismissed as ineffective and irrelevant.

To enhance their efficacy, business incubators should strengthen their ability to generate internal revenue and seek additional revenue streams. They should also focus on legitimacy and developing their brand and brand awareness by re-evaluating their marketing strategies, engaging in marketing intelligence and capitalising on their affiliations with well established organisations.

• Matthee and Solomon are lecturers in the department of business management at Stellenbosch University. They write in their personal capacities.