It’s a testament to the importance of Social Entrepreneurs in SA, whose mission is to assist or incubate ‘regular’ entrepreneurs. The social impact of a support base for small business is huge, and many argue that small business development at grass roots is paramount for sustained job growth in South Africa.
Being in the business of ‘social enterprise incubation’ (www.heartglobal.org), successful and sustainable incubation models are of much interest to me. Their sustainable growth and support service to identify talented entrepreneurs will most definitely define the next 5 years of development in SA.
I believe that, with South Africa’s BEE codes and a focus on Enterprise Development, there will be a pot of cash in the market available for small business as donors begin to move beyond their CSI hangover and get down to the real business of development. So, if we assume that there will be this pot of cash available, let’s now turn our attention to the service providers (ie players) in the space.
Investec’s (actually Lisa Kropman’s baby) Business Place and Charles Maizel’s Black Umbrellas is probably a good place to start as both offer black, small business office space, computers, telephony, bookkeeping, etc and all at a nominal fee to entrepreneurs.
These types of hub / incubator environments are becoming all too common worldwide (my first personal exposure to incubators is the infamous original hub in Angel, Islington, UK – go to www.the-hub.net) and I have spent many an hour contemplating incubators and where/if there is real value / social impact in them.
The Business Place (http://www.thebusinessplace.co.za/), Black Umbrellas (http://www.blackumbrellas.org/) and many other incubators have much in common:
- They both offer office space, computers, telephony and support services (accounting, legal, etc) under one roof
- They all assume that having many businesses under one roof in a shared office environment increases collaboration between businesses and builds capacity.
- All have some sort of ‘mentoring’ / workshop environment to build capacity (BTW – this is NOT incubation – incubation assumes a far more active role in the business than just ‘workshops’)
- They often share the problem of sustainability. To launch one of these incubators in every town in South Africa is going to cost a BOMB of capital and ongoing operating costs.
- Most social impact assessments I’ve seen are very vague and often assume, by their mere existence, they are an incubator.
Is this not just ‘charity’ for small business?
I am of the belief that there are ‘no free lunches’ in life, and everything must be earned. The same goes for start-up entrepreneurs. Reducing their operating costs creates a ‘fake’ safety net and doesn’t build the productive capacity of a business. Market forces are there to separate the ‘men from the boys’ and ensure that productive efficiency is maintained. Besides, these ‘nominal fee’ support services do not keep the entrepreneur efficient, if anything it could create lethargy, inertia and eventually create an unhealthy dependency often seen between donors and charities.
(BTW, I am a great fan of well-managed time deferred loan capital, to keep an entrepreneur on his toes)
Everything must be earned, and I believe that there are 2 core elements missing from these incubators:
- A defined capital structure to support an entrepreneur from startup and scaling up. Capital support is often missing at early startup phase, and this bridge needs to be built before the enterprise can seek finance from traditional institutions at latter stages of its incubation.
- Proper incubation support to assist in business strategy, brand building, financial planning, etc etc (this is the real development work, not office equipment and cheap rent)
Incubation sustainability
I can see 3 major challenges for incubators in South Africa:
- Betting on the right horse: The selection process of choosing a talented entrepreneur can be very challenging, and is critical to success.
- Getting Paid: Incubation is a BDS (Business Development Service) usually carried out by the Mckinsey’s / Bain’s of the world. It is an expensive and sweat equity process, especially at the startup stage. Attracting talented management consultants into the development space is a costly process, and few have the actual skills to do the work. Remember startup entrepreneur incubation is very different from trying to shave 4% off the operating costs of a multi-national’s income statement.
- Finding a sustainable business model: Where the Busness Place and Black umbrellas are already running at a financial loss, and growing larger liabilities, the real business of supporting entrepreneurs lies in ‘developing’ / incubating them in a manner which builds their productive capacity. These fees need to be paid by someone, and should NOT be given gratis. Thus a proper capital structure needs to be built.
Social impact of incubation (this is how NOT to do it - my comments in red)
Excerpt from The Business Place website (http://www.thebusinessplace.co.za/about_us.aspx)
The following statistics from a recent impact study among 247 of entrepreneurs on the database in Johannesburg alone revealed positive results illustrate the impact of The Business Place.
* Joburg Branch sees an average of 5 000 visitors a month. so what? … how does people visiting your office reflect social impact?
* 79% felt that the Information Centre is friendly, accessible and helpful (yipppeee) of the sample, 30 new business were started in the last year, and 103 existing businesses were assisted. assisted in what way?
* These businesses generated 311 full-time jobs and 159 part-time jobs. Is this from The Business Place’s intervention?
Other branches report similar successes. The minimum estimated total turnover for businesses assisted is R17 784 000. Once again, what part of that is ’social impact’ from Business Place’s intervention, which wouldn’t have happened anyway. ‘If i build a road and people walk on it, does that imply social impact if they could have just walked on the path next to it?’
IF ONE IS TO REPORT DATA ON SOCIAL IMPACT, THERE MUST BE MORE DETAIL SUPPLIED … to really ascertain the real social value of The Business Place.
Some interesting incubation / mentoring service providers
- Endeavor South Africa – www.endeavor.co.za
- Raizcorp – www.raizcorp.com
- Heart – www.heartglobal.org
- Edge Growth – www.edgegrowth.com
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Hi Max
Agree with your comments which also reflect my own personal views. I like both Lisa and Charles, and what they are doing, but I have a problem about “incubators in general and more specifically in SA”.
I also looked at Godisa funded incubators, … and the least said the better.
Having analysed the incubator arena for the pat 5 years, we created what we refer to as a physical and pactical incubation programme, that looks at SROI and ROI in our new Adopt-a-Pothole programme.
The one problem I have always had was:
1. what, where and how much impact is acheived in real terms.
2. what is the value exchange proposition that results in upstream and downstream benefitiation impact on all stakeholders. Can it be quantified and measured?
…
We beleive that it must.
I have read thousands of SR reports … and the majority are very unclear on what is the ratio between Rands and direct visible impact.
Laurinda, your sentiments are echoed throughout the industry. In my experience, donors or investors don’t care, are too scared (or couldn’t be bothered) to determine a true-ish indication of social value … and even in the SROI arena, a standardised measure for social value has not been determined. If you combine that with the fact that most social enterprises are very grassroots and barely surviving, asking them to even start considering to launch into such a project is a ‘big ask’.
Downstream, when the ‘big cash’ is invested, this is when these considerations start becoming more applicable (but then, how many service providers are there to determine the ‘blended value’).
Well Max, your analysis is quite interesting but quite misguided in my opinion. when we analysed why smme’s fail in South Africa ( and most do fail) these were the reasons:
1. costs are too high for any start up ( especially those from PDI areas). This includes renals, telephone, internet etc etc. If Max can change telkoms costs or the landlords then this would go a long way toward helping smme’s. we supply these through ED contributions and I feel even a fairly sound business with a turnover of R 2 million would benefit from this subsidy. I know I would.
2. Vehicle and distribution costs. All businesses need a vehicle if they are serious. Otherwise you find smme’s taking taxis to do quotes. Now Max I am sure your mom bought you a car but its not the same for Sipho from Soweto. we provide this and its a huge benefit to smme’s
3. Mentorship and skills which you have identified. This is vital. schools and even universities dont teach you how to be a an smme, its usually your dad. we provide this.
4. Credit is key but I dont want an smme to use that credit on vehicles and telephone costs. Max, please try and get a loan from a bank without any collaterol? and a loan of a few thousand doesnt go a long way anyway. Max you may be able to get a loan from your mom interest free as this is how most people do it…sans the banks
5. Marketing. You try Max and sell your service or product as a young black smme to anyone. People dont buy if they dont know you or you have a track record. Most people who have had a track record have made their mistakes and learnt.
an incubator allows a 3 year process of growth. Succeed or fail the smme will learn in a safe environment with some subsidy. The black umbrellas process requires smme’s to pay a R1000pm fee and to provide records of their business.
Some will succeed and some will fail. what I love about the space at the moment is that for most young people in south africa there is no longer a choice. The jobs are few for low skilled individuals as unemployed grows to 50% ( my figure)so the only option is starting an smme. if this can be garnered now we could create magic.
In terms of sustaianbility of course we could take equity in every smme in the system like raizcorp does but why should we? I hate the model where a startup has to give almost everything away because he doesnt have the cash. I like the model where if a smme is successful they can come to us and offer us a share or they can help another 3 smme’s because of the support they were given from us ( pay it forward). This means growth.
and why is sustainability so important anyway. Its the new buzz word for NGO’s and social enterprises. However I have a massive amount to say about this and have only found a tiny few who have been truly sustainable ( and they are just businesses without a large social impact) while the biggies have usually been given a massive bequest.