One large business vs. 1000 little ones

Possibly, the most important question in public policy is “who benefits”.
In answering this question, not only can distributional outcomes be assessed, but often the underlying power structures. The recent reporting on the Public Investment Commission investing R1.5 billion of government employee pension funds in CAMAC Energy raises just this question: “Who benefits”.
Three features of CAMAC Energy are important. First, the company has several investments across the African continent, mostly in oil and mining. Second, it is regarded as a high risk penny stock in New York. In fact, reports show that the first tranche of PIC investment staved off its liquidation. Third, the owner of CAMAC Energy is described as well-connected to political leaders, including those in South Africa.
Now, imagine if the PIC decided to spend this money on businesses in South Africa. For arguments sake, let‘s remove the question of patronage from the equation. The exercise is to explore the possibilities of spending R1.5 billion on venture capital for smaller businesses.
The simplest option would be to divide the total into equal stakes of R 1.5 million each given to one thousand small businesses in South Africa. Assuming that each of these businesses employ the founder and create an additional two jobs, this would yield 3000 jobs. However, we know that business failure is high, so something in the region of 1500 jobs could have been created. More to the point, even in a pessimistic scenario 500 new businesses would be created, with substantial impact on the asset holdings of the owner and her family. The broader social good would be served not only with broadening ownership, but also with small impacts on economic growth.
Another option would be to limit the selection of companies for venture capital to those working with successful franchises or incubators. The investments decision are more cautious aiming to scale currently successful experiments. The number of jobs could easily reach between 5000 and 10000 new jobs, assuming that small successful franchises runs two shifts a day.
The possibilities are however even wider. In one of the tech incubators, a company is conjuring up an open source solution to a problem facing businesses, and in so doing establishes in addition to the software cloud services. This company supports the businesses of 200 South African companies, who provide extensions and maintenance around the software that has been created. The impact on direct and indirect jobs would multiply quickly, and a guess of around 10 000 jobs would be plausible. This is not as farfetched as it seems, as research suggests that South Africa could create 145 000 jobs from cloud computing.
A more adventurous option of matching funding would expand the funds available and test the plans of entrepreneurs. Entrepreneurs would be required to receive matching funding to access government funds. This is common today in American cities. Entrepreneurs would proposition venture capitalists, banks and invest their own cash to access government funding. The total available funds would now be R 3 billion, and the potential gains for economic growth and employment much greater. More importantly, the small number of angel investors could grow rapidly, thus supporting an ecosystem for entrepreneurs seeking smaller sums of equity investment.
The mind could run wild with possible options. For instance, imagine investing R 500 million into manufacturing companies in the “East Rand”, to support the Ekhurhuleni initiative to create a aerotropolis. Or investing R 200 million into the burgeoning tech sectors in Johannesburg and Cape Town. Or, investing in logistics to support smallholder farmers to bring goods to market.
The possibilities are in fact endless, and in each of these policy options the distributional impacts on opportunities, jobs and economic growth would be greater than investing in CAMAC Energy.
These proposals should not be construed as suggesting that all pension funds start investing in risky startup activity, or that the success of any of the ideas mentioned here is guaranteed. Rather these ideas are meant to show in the world of investment opportunities, spending R 1.5 billion on a single company raises substantive questions. This is especially true given that the investment in Camac is comparable in size to investments in agencies like the Jobs Fund and the National Empowerment Fund, which have larger mandates.
In answering the question “who benefits”, it is certainly not small business. The ANC has in its explanation of the term “radical economic transformation” argued that it means amongst other things, an expansion of economic opportunity and equal ownership of assets. It is a certainty that this agenda is not aligned with an investment of R1.5 billion in CAMAC Energy.
The investment in Camac begins to shed light on the underlying power structures that guide investment decisions. However, the important conclusion is that we have prioritised one opportunity with limited gains for our society, over possibly starting one thousand small businesses.
An edited version of this article first appeared in the Sunday Times : Business Times 
 

Small Business Development Department – Contact Information

The Small Business Development Department is moving quickly to get up and running, and has recently released contact information. The Small Business Development Department provides the following information:

The department will focus on enhanced support to small business and co-operatives with an emphasis on programmes to advance entrepreneurship among women, youth and people with disabilities to contribute to job creation and economic growth. Support mechanisms will include: access to finance and markets;business skills development; an improved regulatory environment; advancing localisation; and leveraging public procurement.
Stakeholders in the SMME and co-operatives sectors are encouraged to continue to deal with officials of  the dti’s Broadening Participation Division (BPD) until the Department of Small Business Development is fully functional.
 

Contact Details – Small Business Development Department

Please note the advice on continuing to interact with Department of Trade and Industry. However, contact information for our new department is available, and are listed below.
Customer Call Centre: 0861 843 384 (select Option 2)
E-mail: sbdinfo@dsb.gov.za or contact@dsbd.gov,za

Small firms may not be SA's saviours

Small firms may not be SA’s saviours

WHAT do Clem Sunter and Julius Malema have in common? They share the policy goal of creating a million small businesses in South Africa.

The arithmetic is seductive: by creating the businesses, jobs and new assets come into existence. If these outcomes were achieved, the results would be spectacular.

For Malema and his supporters, a substantive change in ownership patterns would have been achieved. For Sunter and his supporters, more open and transparent markets would provide evidence of successful market-based reforms.

The pair obviously differ on how the million new jobs would be created, but the agreement on a target is useful and rare in an increasingly polarised South Africa.

Small business as a creator of jobs and wealth is an influential idea and, some would say, one whose time has come.

To arrive at this outcome, important assumptions must be true — the most important being that small businesses need to survive beyond 36 months, which is when they could be described as “established businesses”. As important is that the growth of small business will be labour intensive or, at the very least, require additional labour.

But an article published on the website Econ3X3 asks us to confront a world in which neither of these assumptions hold true today. The authors, Andrew Kerr, Martin Wittenberg and Jairo Arrow, who are academics at the University of Cape Town or Stats SA, use Quarterly Employment Survey data to estimate the contribution of big and small firms to job creation and job destruction. Their major finding is that large firms have higher rates of net job creation than small ones.

It is important to remember in interpreting the findings that the authors are measuring both job creation and destruction.

Traditionally, in South Africa we have measured only job creation and assumed that about 50% of new jobs are created by small business.

The problem with this assumption is that we tend not to measure the loss of jobs over time. In fact, it is more correct to say that small businesses destroy lots of jobs, because the majority of these firms fail before their third year. Kerr and his co-authors argue: “Firm death as a cause of job destruction is stronger among smaller firms: only 7% of the 37 000 job losses of the largest firms has been due to closures, as against 34% for the smallest firm category. (The 34% entails thousands of small firms.)”In fact, they suggest that a firm with 500 employees is a threshold for positive net employment creation. The arithmetic of a million new businesses each employing a couple of people thus needs to be questioned, because very small firms do not have the cash flow to employ people.

However, the deeper question remains: Why do small businesses contribute so little to net job creation? Kerr and his co-authors do not provide a definitive answer, but point to the possibilities of setting wages by collective bargaining, although they also hint that labour legislation may not be as onerous to firms as is widely believed.

A deeper look at structural factors could reveal constraints to the survival of small businesses, such as the pricing of steel or the availability of high-quality bandwidth. More research needs to be undertaken in this regard.

The core lesson for setting policy targets is twofold. First, the idea of creating a million new small businesses has gained ground and plays a useful role as a rallying cry.

Second, if we are serious about small businesses contributing to job creation, a different target needs to be developed. That target would focus on the number of successful small businesses after three years. It is a target that Sunter and Malema need to pay attention to if small business is to play a meaningful role in contributing jobs and creating new wealth.

• Hassen is a public policy analyst who writes about small business. See zapreneur.com

• This article was first published in Sunday Times: Business Times

Win an entrepreneurial course with Seed Engine

The highly regarded Seed Academy entrepreneurial course is being offered for free to one South African entrepreneur with an awesome business plan in celebration of Mandela Day. The course is valued at R 16 000-00, and is taught over 10 weeks (one evening a week). In order to stand a chance of winning this course, you need to produce a business plan and deliver it by the 20 August 2014. More details are available on the Seed Institute website.

So Just How Do I Write A Business Plans?

Jeff Miller, Chairman of Seed Engine, has offered an 18 step process to completing the business plan, and it helps to simplify the process and for you to apply your mind and heart to developing a business plan. It is so helpful we turned it into a graphic. Click for a higher resolution.
seed engine business plan
The 18 steps are:
1. Think of an idea that would make a difference to your community.
2. Find a like minded partner or two with complementary skills.
3. Spec the product or service in detail.
4. Identify why your product is better and why customers will prefer yours.
5. Define your target market and customer base.
6. Do some research with potential customers to see if they welcome the idea and whether they would use the product or service.
7. Work out the cost price of the product or service.
8. Work out the selling price.
9. Do research on competitors to see if the business is competitive.
10. Identify a list of suppliers.
11. Identify a list of potential customers.
12. Work out a simple marketing plan to reach your customers.
13. Work out the type of employees that you require and put a cost to it.
14. Work out other costs that are required to run the business.
15. Put a simple business plan together using all this information.
16. Put together a three minute pitch for the business.
17. Identify friends and family who could invest in the business.
18. Send your business plan to lara@seedinstitute.co.za by 20 August 2014.

Business Plan Competition for Young Entrepreneurs

SME Toolkit and Business Partners has a business plan competition for young entrepreneurs.  The SME Toolkit is proud to launch the 2014 Business Partners Limited / SME Toolkit SA Global Entrepreneurship Week’s Business Plan Competition for Aspiring Young Entrepreneur. The competition has prize money of R 20 0000-00, as well as mentorship packages for regional winners. More important than the prize money, are the workshops that successful entrants will be invited to. The workshop is called ” Creating an effective business plan” and will provide aspirant entrepreneurs with skills and insights to improve their business ideas. Moreover, the plan culminates in the annual global entrepreneurship week, and thus provides an excellent opportunity for networking and learning.

The Competition is divided into three phases:

  1. First, you enter to win a seat at a “Creating an effective business plan” workshop in an area near you
  2. You then submit a business plan to qualify for the regional judging
  3. Regional winners will be awarded and go on to compete in the national competition, which will take place during Global Entrepreneurship Week in November

Who qualifies?

To enter the competition, you have to be:

  • Between the age of 18 and 35
  • A South African citizen
  • Aspiring to start a business, but haven’t started operating yet

What do you have to do to enter?

To enter, download and complete the application form, accept the rules of the competition and remember to put your best foot forward. Click here to download the entry form. 
 

What can you win?

Besides the great exposure you get by being in the competition, there are a range of fantastic prizes to help you get your business off the ground. This includes Business Partners Mentorship for both the regional and national winners, as well as a R20 000 cash prize for the national winner.

Deadline

They need to receive your entry by no later than 07h00 on Monday, the 11th of August 2014. So don’t delay! Enter now and move one step closer to getting that business off the ground!