Every fledgling small business must learn to fly
Tebogo Molotsi was the oldest of four children being raised by a single mother who was a domestic worker. As soon as she matriculated, she was jolted into getting a job so that she could help raise her siblings.
Molotsi dabbled in reception work, data capturing and payroll responsibilities. Unfulfilled, she left the cleaning company and registered a sewing business with her mother. Stitches Clothing was launched in 2012 and, with seven employees, was struggling to expand.
After battling to get loans from banks, Molotsi approached Zimele, the business incubator arm of Anglo American, and, in less than two weeks, was approved for a loan of almost R1-million.
Three years later, Stitches Clothing employs more than 40 people and manufactures more than 300 industrial garments a day. Molotsi plans to launch a specialised line of women’s safety garments in August.
“Never in my wildest dreams did I see myself as an entrepreneur, but it came so naturally to me; it felt like I was born for it,” she said.
Two other entrepreneurs, Jean Pierre Kloppers and Craig Raw, created an online reputation management company to turn online “neighbourhood gossip” into useful information that could inform the strategic decisions of brands.
They developed BrandsEye, a platform that enables companies to listen to what their customers say about them in online blogs and social media. The platform interprets the relevancy of the information, captures its sentiment and incorporates a crowd-sourcing layer to add nuance and emotion to the raw information it picks up.
The pair knew they were homing in on something big, something with global relevance. What they needed was the ability to tap into the right networks worldwide.
After going through a rigorous selection process, Raw and Kloppers were chosen as one of a group of entrepreneurs to be assisted by the nonprofit business support organisation, Endeavor. It provides networking, support and mentorship “to individuals with the biggest dreams, the greatest potential to create companies that matter and grow, and the highest likelihood to inspire others”.
Kloppers said: “We have a very significant global opportunity ahead of us, and having a partner who can connect us with interesting people in the right space – whether it’s investors, clients or partners – is immensely valuable.”
Molotsi and Kloppers are two very different entrepreneurs who have gained access to a broad range of business incubators available in South Africa. This enabled Molotsi and Kloppers to tap into places, ideas and markets that were far bigger than they could have anticipated.
The business incubators include those motivated by profit, those aimed at fulfilling black economic empowerment (BEE) or social responsibility requirements for corporates, educational institutions seeking talent, and those mandated by the government. An exhaustive list would include tens if not hundreds of examples, but here is a taste of what’s available.
The average for-profit incubator acts as a business partner to start-ups. Unlike “angel investors”, which buy into an idea in exchange for equity in the business (think Dragon’s Den on DStv), these incubators take on businesses that are already established.
For-profit incubators generally offer mentorship, training, expertise and help to establish a business plan. They also provide services such as rent, printing and secretarial work. Most offer their own process of “acceleration” for companies that are brought on board.
Raizcorp is one of the best known in the country. It describes itself as Africa’s “most established” for-profit business incubator, and supports more than 500 businesses in its Prosperator programme. This offers mentees business guidance, access to technical specialists and mentors, training, office facilities, and back office support such a reception facilities and book-keeping. In return, it takes an agreed-upon percentage of equity in the business.
If the business has not reached a stipulated growth rate after 24 months, Raizcorp hands back its equity and the company walks away.
Taking equity in return for cash or support is standard practice for commercial incubators. It is also common for them to expect running costs to be covered, either in cash or with equity.
Riaan Steenberg, an innovation expert and the director of Regenesys Business School, said: “There is usually a debt owing by the individual in a commercial incubator, even when they fail. Realistically, little of that is eventually recovered, but it could leave the entrepreneur in a negative position.”
Although hundreds of companies attest to the benefit they derived from the process, Steenberg said a mentee could come off second best.
“I think it’s quite exploitative. The idea is that you come to the incubator and they support you with services. But, basically, if you don’t perform, then that increases your debt to the company.
“They usually do not let it build up much, although there have been unscrupulous practitioners that have taken the whole equity of the business in lieu of rent.”
Many business incubators have set themselves up as intermediaries for companies looking to score on the enterprise and supplier development part of the BEE scorecard.
They have positioned themselves to receive donations from companies and channel them to the appropriate beneficiaries.
But, Steenberg said, this diluted the effect of small business development.
“Third-party companies provide services to the entrepreneur, but that was never really the intent behind the BEE codes. The intent was for you to give money to the end company.
“Now, with the incubator as intermediary, they’re not actually getting the money and they often end up with extra debt. At the end of the day who really won?”
Some large corporates have set up entities specifically aimed at meeting the enterprise and socioeconomic development requirements. Anglo American’s Zimele is one example.
Originally established in 1989, it has gone through several iterations to stay in line with socioeconomic legislation and now has six different arms. Zimele has provided employment to more than 38 000 people and its supported businesses have a collective annual turnover of more than R6-billion.
Stitches Clothing had been operating for a little more than a year when Molotsi applied for the R974 000 loan. The company’s Sebenza fund took no equity in Molotsi’s business, and requires that she pay back the loan with a comparatively low 6% interest. She will begin her loan repayments in July this year, meaning she has benefited for more than a year before the repayments begin.
There is also a broad range of private nonprofit incubators offering a number of services. One of these is the Hope Factory, a public benefit mentorship organisation that runs a four-year programme.
“We teach, equip, coach and aim to capacitate the business owner and then impact communities by those businesses prospering and creating more employment,” said Sipho Pilime, the programme manager of its Johannesburg branch.
The aim of the organisation is to avoid co-dependence developing between it and its mentees. It recruits from companies with a turnover of between R250 000 and R10-million.
“We cut across all industries. It’s a challenge because our mentors are generalists who have experience in one, two or three industries,” he said.
When necessary, the organisation pays to bring in experts to assist mentees. The BEE requirements are shifting the direction that the Hope Factory does things. It means sometimes taking orders from large corporates who are looking to empower their supply chain.
“A large corporate will approach us with a certain mandate, for example, to develop a black-owned courier,” Pilime said. “We’ll recruit a suitable company based on their requirements.”
Sipho Pilime of The Hope Factory says the organisation encourages independence. (Delywn Verasamy, M&G)
The organisation has developed a performance scorecard that its mentees update quarterly. It measures key metrics such as turnover, growth, profitability and growth in employment.
Although The Hope Factory avoids the development of co-dependence, Pilime does not criticise what commercial incubators do. “It’s not wrong, it’s just a different model. They offer space at a discounted rate, which is a huge thing.”
Endeavor is a nonprofit organisation operating internationally. Kloppers and Raw made two international trips at their own expense to appear before the selection panel. Their company contributes towards running the local Endeavor office to participate in the programme.
For them, the biggest benefit in being part of the programme has been the networking opportunities it has provided, and they have met the right kind of people from around the globe. The programme also arranges meetings with investors and offers co-investment opportunities.
“We’ll be trying to raise investment in San Francisco soon,” said Kloppers. “Let’s say we are able to raise $5-million. Endeavor will contribute to the round with their own half-a-million dollars in return for some equity.”
Being involved in Endeavor was worth it, Kloppers said. “It’s worth 10 times the contribution we make.
“[But] you make of it what you want to. I have been very proactive. I reach out to them regularly and ask them to connect me with people who can help us scale globally.”
The government has put several incubator-type programmes in place, and raised the possibility of several more. Probably the best known is the Small Enterprise Development Agency. This falls under the small business development ministry and offers loans and mentorship to qualifying companies.
The National Empowerment Fund and the Industrial Development Corporation offer funding to larger black-owned companies and industrially aligned initiatives respectively.
Steenberg said these and the government’s recent emphasis on creating economic zones and black industrialists indicated that it was moving in the right direction, but the incubators needed more focus.
“It takes a deliberate effort in a concentrated area over an extended period of time. I’m not sure that the current kind of broad-based strategies are actually translating into more people becoming entrepreneurs.
“Some of the things mentioned in the National Development Plan really could work, but it’s going to take billions of rands; it needs to be channelled correctly and needs to be monitored quite carefully.”
Small businesses needed more access to funding early on, Steenberg said. Molotsi agrees. “Business incubators should be providing funding. They could open doors and maybe start a relationship between upcoming entrepreneurs and the banking sector.
“A mentor is useful to some extent, but they will come in and tell you how to keep your petty cash. And you’re thinking, what petty cash? I don’t have any money.”