In early September 2012, after the Marikana tragedy, we received the dreaded force majeure letter from our mining client in Rustenburg. This was a terrible blow – not only to ourselves but also to the 25 businesses we were supporting there. Most of these small businesses were also suppliers to the mine and had received the very same letter.

A board meeting was called immediately that day, and a decision was made to continue supporting the 25 entrepreneurs (with over 200 staff members between them) who were being funded on an enterprise and supplier development programme – despite the programme funding having been switched off.

It was not business as usual for these entrepreneurs. Their primary source of revenue – the mine – had evaporated. No one knew how long the force majeure would last and, without this source of income, they were doomed to failure anyway. No amount of BDS (business development services) could improve that prognosis … or so we thought.

Our Rustenburg mentorship team recognised the force majeure as a system shock, and this meant that a whole new way of thinking was required. A task team was set up using local and head office mentorship and other resources to create a framework and approach for dealing with this system shock.

Each and every one of the 25 entrepreneurial companies was included in the process and, six months later, this cohort of 25 businesses had not only survived but had actually grown by an average of 41% with a net gain in employment of 12%. What is more remarkable about the story is that not one of these businesses received funding during the crisis.

This story is an important one to tell during the current crisis. The narrative in the market right now is that funding is needed to solve the problem that Covid-19 has created. Funds are being set up to provide all types of funding – from loan funding at hugely discounted rates to grant funding and so on. As generous as the funders might be, there is certainly not enough to go around to have any significant effect on the majority of businesses that are feeling the devastating impact of the pandemic. It is a drop in the ocean of what is required. Funding is perceived as the elixir to all financial problems. Although this is certainly true in many instances, it is not true in all instances and in fact can be the very thing that destroys a business in the medium term. 

Two narratives

There are two stories unfolding during this crisis – the health story and the economic story. Our days are spent glued to the media, tracking infection rates and death rates, both locally and internationally. We see images of hospitals overflowing with patients and the heroes – the doctors and nurses on the front lines – working furiously day and night to save lives. Added to the imagery is the stark reality of bodies being buried in mass graves and morgues overflowing. Moral dilemmas are being discussed around decisions made by doctors as to who is given the use of a scarce ventilator and who is not. Everywhere, nurses and doctors are being called to duty. China, Cuba and other countries are sending medical personnel to various countries, much like a superpower would send troops into a war-torn country to help stabilise the situation.

But where are the daily graphs that illustrate companies ‘infected’ by Covid-19? Where are the daily graphs of those companies that have died as a result?

As I write this piece, I understand that over 2,000 companies have filed for bankruptcy during this period. The number is rising daily, and the economic impact is devastating on so many levels. But this is just the body count of the official economy. What about all those informal businesses that never registered for CIPC? My guess is that those numbers are in the multiples of the official numbers that have been released, and which may or may not be accurate.

South Africa has an army of business doctors and nurses

What about the business doctors and nurses? South Africa is in a fortunate position; there is an army of business doctors and nurses that has been created over the past decade through the proliferation of the business incubation industry. There are over 200 such incubators across the country including private, government, university and corporate incubators. As with all industries, there is a mix of good and bad. There are the fly-by-nights and the serious ones, the ones in it to make a buck and the ones in it to make an impact. As someone who has been in the industry for 20 years, I have watched the industry start with just a handful of players and then, with the advent of B-BBEE, seen the number of players mushroom. In 2017, the number of players began to decline as the market started to self-regulate and customers became far more discerning. The incubation industry continues to shrink, with many of the opportunists finding it harder and harder to operate.

South Africa – a leader in business support service providers

Because of Israel’s context, it has developed military technology and cyber-security industries that are globally recognised. The same is true for South African security technology. Our security context created a broad security industry that is regarded as one of the best in the world. But what you probably don’t know is that South Africa is also highly regarded in the business incubation space as a result of the context in which we operate. I consult to large corporates and governments across the globe on best practices in business incubation. We have an incubation industry here in South Africa that is more advanced than in many other countries in the world. And this industry is filled with passionate men and women who are devoted to building and supporting small businesses in townships, urban areas, peri-urban areas and in the deep rural regions of our beautiful country.

When I hear calls in the press to divert enterprise and supplier development (ESD) funds from these incubators to grant and loan fund structures, it breaks my heart. The very army of doctors and nurses we need to help rebuild the economy will be washed away in a knee-jerk reaction that will have little to no effect anyway.

A compelling economic right to exist must be the precursor to funding

I have been quoted often in the press about my view that funding alone is not the answer to fixing small businesses. Over the past 20 years, over 13,000 businesses have gone through our programmes. I have witnessed the undeniable proof that if you give funding to a company that is not ready for it, you effectively break that business. A company needs a compelling economic right to exist before it is ready for funding. It needs something unique to sell, someone to sell it to, someone to sell it and, if they sell it, they need to make a profit. Such a simple concept. Yet over 80% of the companies we receive in our programmes are not in this position. They do not have something unique to sell, they have not defined a market, they are afraid to sell (mostly because they fear rejection) and if they do happen to sell, more often than not, they have not costed correctly and are selling below cost.

This is exacerbated by the pressure to scale that funding brings with it. Putting funding into a model that is broken results in the money leaking out the bottom, and the entrepreneur landing up in more debt than before. The common situation with many entrepreneurs is the following story that plays out in one form or another: The entrepreneur works from home. They have one or two employees. These are most likely a friend or a family member who has been out of work and is earning less than a market-related salary. They produce a product or service. They price the product relative to the market. The most common form of pricing is the competitor’s price less 10%. There is no calculation of actual costs, just a crude back-of-the-cigarette-box calculation which seems to indicate that the price of 10% below the competitor’s price is okay. And it is. Because there is no rent built into the overhead and employees are being paid below market-related salaries.

Owing to good pricing (and good service), the entrepreneur begins to win more and more work. The result is that the home premises become too small and the number and quality of employees needs to increase. The entrepreneur needs a new office, and new furniture and fitout, etc. So they borrow money on the strength of all the work they are getting in. But now the problem is that they need to pay market-related rentals and market-related salaries. But their pricing is still positioned as it was before – 10% below the competitor’s. The entrepreneur enters the proverbial washing machine that few get out of. The margins squeeze to negative, the cost of debt becomes higher and higher as the company borrows more and more, and finally they succumb to the statistics of high business failure and all the devastating ramifications that come with failure.

Before one funds small businesses, one needs to ensure that the business model is sound and that, if you put R100 in the top, then R120 falls out the bottom. Coming back to the Marikana story, and more importantly to the Covid-19 story, the problem is that the whole model needs to change. It’s not just about getting the financial model to work. It’s about working out who is the new who (new market), what is the new what (new products), and what is the new how (new processes). All this needs to be done first, before funding will have any effect. 

To make this real, let us use the example of a restaurant. A restaurant that receives funding but does not make the move to take-aways will not survive a post-Covid-19 world. But, if they do make the move, does the menu stay the same? Are the portions the same? Is pricing the same? Are the processes the same? Most small businesses do not know how to think through these challenges in an unemotional and logical manner, and desperately need the guidance and methodologies that will allow them to comprehensively reimagine their businesses and create new models for a new world. Adding funding will simply exacerbate the situation if these models are not in place.

Don’t prevent entrepreneurs from trying again

My last point is about the re-entry rate of South African entrepreneurs back into the economy. A research paper I read some years ago highlighted a startling statistic that South African entrepreneurs have a re-entry rate of 1.1 as opposed to 3.6 times in the USA. What this means is that the average South African who becomes an entrepreneur and who fails does not re-enter the entrepreneurial fray. They move to employment (if they can find it). In the USA, on the other hand, the average entrepreneur will try 3.6 times before they decide to take up formal employment. So many of those entrepreneurs who close their doors as a result of Covid-19 must be coaxed back into trying again. We need to ensure that they are not excluded from the economy through the old mechanisms of blacklisting. 

According to the GEM (Global Entrepreneurship Monitor) report, South Africa has one of the lowest levels of entrepreneurship among developing countries. We have, theoretically, such a small base of entrepreneurs to leverage, that any loss of entrepreneurs to the ecosystem is extremely worrying as these are the people who will create employment, these are the people who will build the large businesses of tomorrow, these are the people who will build export businesses.

Let us make sure that, in all the chaos of this system shock, we do not make short-term populist decisions that will severely damage South Africa’s ability to rebuild our small and medium businesses, and ensure that they are built to withstand the next system shock. BM

Allon Raiz is a pioneer and maverick in the business-incubation industry. He is the founder and CEO of Raizcorp which currently supports over 500 businesses.