GIBS forum on SME incubators

There has been so much going on in the last week that I have got behind in my posts! Three to write today, beginning with the Gordon Institute of Business Science Forum focusing on small and medium enterprises (SME) incubators.

GIBS is rightly taking the question of SME development very seriously, with the topic drawing a lot of attention particularly in respect of its potential for job creation and reducing the chronic state of unemployment in South Africa. Four of the leading private sector incubators were represented, each practicing a different business model.

From the left:

Mark Frankel, CEO of Shanduka Black Umbrellas. This is an NGO owned by Cyril Ramaphosa's Shanduka Group and specialises in integrating its inubates into manufacturing and services supply chains. It does not take equity in its incubates, but provides advice, coaching and in some cases infrastructure support in the form of offices and other support services

Allon Raiz, CEO of Raizcorp. Allon has been in this business the longest, 14 years, and has been recognised by the World Economic Forum for his endeavours. He has over 200 businesses on his books, takes equity in them but does not provide cash.

Marc Elias, CEO of Seed Engine. They specialise in tech startups and take equity stakes in their incubates, as well as seeking angel investors who can fast track the businesses.

Yusuf Randera-Rees, CEO of Awethu Project. Awethu is the odd man out in this group, focusing on micro business owners from deprived communities - they have had 30 000 applicants to their programme. They are also the only incubator in SA who select applicants and then choose the business for them to run, taking 25% equity in the business, giving the enterprise development funder 25% leaving the entrepreneur with 50%.

Have you noticed something? Three out of four of them are Jewish! What is it about the Jewish community that makes them such good business people?

From the discussion it became clear that incubation is a growing business practice not just in SA but worldwide, as the hunt for the next generation of entrepreneurs intensifies. Worldwide, competition and innovation is accelerating and for SA to compete we have to find and nuture potentially successful businesses and new business owners.

Allon made the interesting point that for him the term incubator implied sickness, so they came up with the term Prosperator which they trademarked as their brand of incubator. More than any of his competitors, Allon has been able to create a branded business model with systems and methodologies that are a model for entrepreneurs to follow if they want to create value in their businesses and be able to sell them on - in other words, separate the business out from its founder. What Pavlo Phitidis from Aurik Business Accelerator calls creating a business rather than just a job for oneself.

All of them have tapped into the increasingly lucrative Enterprise Development funding pot, stimulated by the Department of Trade and Industry's BBBEE regulations. These give points to businesses that fund enterprise development and since most of them do not have the expertise to do it themselves, outsource it to specialists like our panel at GIBS. Others in the field include Aurik and Micro Enterprise Development Organisation, MEDO, run by Judi Sandrock who founded Anglo Zimele (Anglo American's ED arm) and was for a time CEO of the Richard Branson School of Entrepreneurship.

I asked the question, did GIBS invite any of the government-run agencies such as SEDA/SEFA or GEP. Apparently they did but they did not respond or accept - which is a pity, because they play an important role in this arena, dishing out millions of rands of taxpayers money which we need to see gives a decent return on investment.

All of the panelists believe the main disincentives to small business are restrictive labour laws (difficulties in hiring and firing), huge regulatory hurdles to overcome, lack of education and training in industry-specific knowledge and expertise, and lack of access to information. They were also depressingly negative about the state of entrepreneurship amongst blacks, explaining this is due to the cultural preferences of black parents who advise their offspring to get a good education then find a job rather than start a business.  The lure of large salaries in government and business also acts as a bar to entrepreneurs.

Allon alluded to what he called the three phases of business in South Africa - before 1948 when an English speaking man could leave school or university and walk into a well paid job in a big corporation. 1948 - 1994 when Afrikaner males could do the same thing, and even more so work in government or state-owned enterprises. Post 1994, its the black middle class who are the favoured employees. In none of these phases was entrepreneurship the chosen route for the best and brightest.

I would have liked to have more of the nitty gritty on the numbers - the success and failure rates of incubates, the cost of launching a successful business, the time it takes, the most important support factors, the characteristics of winners and losers etc. But I guess this is competitively sensitive information that they are reluctant to reveal.

The rate of entrepreneurship in South Africa is low compared to other African countries, and this is something we need to fix urgently if we are going to grow the economy in the 5-8% range needed to seriously dent unemployment. We will hear later this week if the new government includes a small business ministry - which is not a guarantee of job creation but will be a sign Zuma and his advisers at least have their hearts in the right place.