Start-ups might not be the business

Johannesburg - The expectation is that start-up businesses create jobs and stimulate the economy, but there's some fifth column scepticism that perhaps the emphasis placed on the small business sector is overdone. Quite simply, it's not the answer to South Africa's economic ills.

That's not to say there have been no efforts to get small business on its feet. In the last 12 months alone, there has been a veritable flood of incubators, small business communities - such as Silicon Cape - and government-backed businesses. They all have in common the aim of providing a kickstart to the small business sector.

Why do start-ups achieve so little for South Africa's entrepreurial sector? One answer might be found in the 'SA Start-Up Index', launched in November 2009 to track the progress of entrepreneurial start-ups and raise awareness of these businesses.

In effect, the companies included in the index were ranked by four criteria which included vision, the money the company had successfully raised, and the sort of investors it had attracted. In acknowledgement of new media influence on small business, company website traffic was also gauged as well as the possibility that the company's idea could be replicated worldwide.
 
As of mid-September, the index was led by IT publication ITWeb and urban energy business Optimal Energy. This was followed up by online platforms Zoopy, Mxit and Yola.

Much of the employment created by these firms is highly skilled and specialised. As a result, the success of these businesses will not, therefore, make a dent in a South African labour force which remains largely unskilled.
 
Financiers a factor

It is not just the employment side of the equation to consider when weighing up the real contribution of the start up business sector. There's also how financial institutions view the sector, and whether they see value by backing it.
 
Fredell Jacobs, CEO of the SA Start-Up Index told Fin24.com: "The way we see things we are very far from what we hope to achieve. Our ultimate aim is to create a viable entrepreneurship ecosystem that incorporates comprehensive development opportunities for start-ups and existing business."
 
He pointed out that just R200m of the R5bn which is sitting in private equity investments in recent years had been used to fund start-ups and this was a long way off where it could be.
 
Jacobs did, however, acknowledge that more could be done to increase awareness around sustainability as the fundamental criteria for creating new business.
 
Entrepreneur coach Brian Walsh agreed saying: "Considering the massive rate of failure in small business and how terribly prepared newbie business owners are, there is far too much emphasis on start-ups and not nearly enough on growing existing businesses."
 
Walsh said he believed there should be more focus on collective businesses, where multiple new entrepreneurs get together to create businesses. "The truth is we are learning why so many fail and what can be done about it, but us as private self-funded development companies don’t have the same capacities of public and corporate initiatives."
 
The funders agree that they still find it very difficult to weigh up the risks associated with funding start-ups. Marius Le Roux from the Standard Bank small business lending unit told Fin24.com that the bank was doing a lot of work to try and better understand the risks around start-up and growth businesses.
 
"Historically banks have looked at small businesses on value [of business generated] and as a start-up you are going to be perceived as not generating a lot of value," he said.
 
He adds: "Banks have seen start-ups as high risk and not gone out of their way to find risk mitigants, a situation which is changing."
 
This he says means that entrepreneurs who can successfully grow one business will then be able to develop a balance sheet which they can leverage off, but it is the getting started which is hampering funding for the sector and preventing decent small businesses growing meaningfully.
 
Asked how it was changing, Le Roux told Fin24.com that banks were not just paying lip service to getting to know their customer. Standard Bank was actively looking at which SME's were going into quality growth phases and working more closely with them to stimulate this growth.
 
It is not just in South Africa that start-ups are receiving a lot of attention. With large-scale corporates still aggressively cutting their cost base and formal employment falling across the board, there has been a lot of focus on the role that start-ups play in the economy.
 
Tim Kane, a researcher for the Kauffman Foundation recently released a report on the role of start-ups in creating employment.
 
He observed that start-ups themselves had been net creators of jobs for all but seven years in the history of US employment data going back to 1977.
 
Kane concluded in his research: "States and cities with job creation policies aimed at luring larger, older employers can't help but fail, not just because they are zero-sum, but because they are not based in realistic models of employment growth. Job growth is driven, essentially entirely, by startup firms that develop organically."
 
 - Fin24.com
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