HILARY JOFFE: SME Fund may be small, but its effect could be large
Everyone agrees that small and medium businesses are the way to go to drive job creation and growth. But despite myriad government policies and funds in place aimed at creating and supporting small black-owned businesses and the many private-sector hubs, incubators and enterprise and supplier development initiatives, we seem to be making remarkably little progress. That's evident in a recent study by the World Bank and International Finance Corporation which finds that SA's micro, small and medium enterprises employ 50%-60% of the workforce and contribute 34% of gross domestic product, but the sector has been stagnant over the past decade, with the number of enterprises hardly higher in 2017 than in 2008 - and a rate of new business creation that is low compared to other African countries.
There clearly are some serious gaps in the market, not to mention failures in policy. And while the R1.4bn SA SME Fund, which was launched formally this week, is tiny in the scheme of things, it could serve as an important catalyst for new models and new ecosystems that could help to break the logjam. The SA SME Fund is an initiative of the CEO Initiative, the collective of leading CEOs that teamed up with former finance minister Pravin Gordhan in early 2016, in the wake of Nenegate, to avert a ratings downgrade. The CEOs quickly came to the conclusion they should also be doing their bit to tackle SA's economic challenges and out of that came the SA SME Fund, spearheaded by the founders of two of SA's most spectacularly successful start-ups - Discovery's Adrian Gore and Bidvest founder Brian Joffe.
The fund has already committed R725m and by August will have committed its entire R1.2bn of investible capital, says SA SME Fund CEO Ketso Gordhan. It invests in fund managers - 10 have been carefully chosen - rather than directly funding SMEs. And importantly, it has zeroed in particularly on two missing pieces of the market in SA.
The first is venture capital. SA has a well-established conventional private equity industry but very little true venture capital - the ability to invest in untested business models and back a team that typically has no track record. Gordhan points out that total venture capital investment in SA last year totalled $70m (about R1.02bn) - less than a third of the $240m that the US invests in venture capital every day. The SA SME Fund wants to help to kick-start venture capital in SA, along with the ecosystem needed to sustain it. Two areas it has targeted are the creation of a bio-tech venture capital fund, and the commercialisation of university research and intellectual property.
The second big missing piece is the ability to scale up moderately successful black businesses to be great businesses that can create substantial employment, compete with established players and potentially list on the JSE in the coming decade. Gore officially launched the SA SME Fund's CEO Circle at this week's event. The CEO Circle will select black-owned businesses that are at least five years old and have more than R50m annual turnover and revenue growth of at least 20% a year over three years, with strong leadership teams. Ironically, such enterprises often struggle for support because they are too large to count for BEE points that companies get for buying from black businesses.
The CEO Circle will create an ecosystem in which top CEOs - 10 are in already - will help to provide funding, access to markets, and mentoring (what Gore calls access to "social capital") for those businesses, aiming to grow them tenfold. The ambition, says Gore: "In 10 years we want 10 big black businesses, each with turnovers of more than R500m, and we want 200 small and medium enterprises."
That may be small in the context of SA's unemployment and growth troubles, but the catalytic impact could be big.