Remodel  BEE and incubators to give entrepreneurs a start.

(Published in Independent Group  (Star, Cape Times, Pretoria News, etc)"Business Report" 17/4/13)

Dr Gavin Lewis, DA

Incubators

South Africa suffers from a dearth of entrepreneurs. With the Brics summit still fresh in our memories it is worth recalling that the country most similar to ours in the problems it faces when it comes to economic development is Brazil. And yet Brazil creates far more entrepreneurs per head than South Africa does. Why is this? A key culprit is Black Economic Empowerment (BEE).

BEE Codes divert our natural supply of potential entrepreneurs into the safer and easier path of buying into existing businesses at preferential rates, rather than taking the riskier path of going it alone and forming their own enterprises. Fewer enterprises means less competition and fewer jobs, which explains a whole lot of other things wrong with the SA economy.

Since BEE requirements are unlikely to go away anytime soon, the question then is how to use them to maximum benefit to encourage entrepreneurship.

 The solution here lies with one aspect of the codes, support for enterprise development. Currently businesses may score up to 15 points on their BEE scorecard if they invest in enterprise development of businesses that are 51% black owned. Not only should enterprise development be accorded a much greater emphasis than it currently gets in terms of points awarded for BEE, but it is very useful in addressing one of the key points of failure for SMEs – their low survival rate. And one important way of doing this is through big business-funded incubators.

In SA private sector incubators are limited. They include those run by Raizcorp and Shanduka. Clearly much more can and should be done by big business.

Incubators are expensive. There is room for a much greater role by private sector providers in all industrial sectors.  Innovative funding concepts could be derived from the BEE Codes’ provision for enterprise development funding. This is a huge opportunity just waiting to be seized.

A business incubator is a building that houses tenant companies that are in the initial phases of formation. It provides a mix of internal and external services for these companies to grow and create jobs. By doing this incubators help new companies survive and grow during a period when they are most at risk of failure. The goal is for those companies to graduate from the incubator in a financially stable state and be able to survive on their own.

Incubators usually offer rental space, shared equipment, shared basic services, and technology support services. The survival rate of incubated companies is much higher than that of normal start ups.

The role of government in incubators can be problematic. Politicians may interfere in the staffing of incubators, or in the design of incubator structures, or in selection procedures, which can destroy incubators.  Since most incubator managers in many countries are paid by government, the result can be that they are inefficient and lack proper business training  themselves. In South Africa, government’s performance on incubators is lacklustre.

What then do incubators need?

First,   prearranged exit strategy. In Nigerian incubators, some graduated companies can be impossible to evict. Because of the attractions of low rentals, and a supportive environment, it becomes more attractive to stay, so that no new incubatees can be taken on because the incubator is full. The average time for a tenant company worldwide to exit is two-three years.

The mission statement of the incubator needs to be clear, so that everybody involved knows exactly what the purpose of the incubator is and what its long term goals are, and how success will be measured.

The management staff at incubators need to have business experience first and foremost, followed by excellent computer literacy, and operations background, financial management skills, interpersonal skills, motivation and vision, and involvement in community affairs.

There must be tenant selection criteria, preferably by a board with some private sector representation. Selection criterion would be similar to that expected of a company seeking a bank loan – business plan, product marketability, etc, plus any extraneous factors policy makers might like to add in as mitigating factors – women or youth owned, black owned, etc.

Having ties to a local university is always useful. Not only does this provide potential new start ups with access to new ideas and technologies, but it also allows for student workers to gather experience while working in the incubator for use in their own careers – or for employment by the incubated company once it leaves the incubator to start up on its own. This provides both jobs and exposure to entrepreneurship.\

Business incubators also provide useful opportunities for industrial sector networking, especially to those new to this. This helps with access to funding, for instance. Networking can be supported by seminars and workshops – and as a recruiting ground for more potential incubatees.

Services incubators should offer include the following:

·      =  Assistance in locating financial services; the fact that a business has been through the incubator process is also an indicator of potential success for venture capitalists

·      =  networking opportunities

·       = basic business training

·     =   marketing

·       = accounting/financial management

·       = investor and strategic partner linkages

·      =  linkages to a higher education institution

·        =shared administrative services

·        =computer literacy

·        =business and problem solving advice

·       = programmes and initiatives to promote entrepreneurship

·        =ongoing staff training and technology updates

·        =a long distance support network

·       = exchanges with other successful incubator projects worldwide.

Almost all countries show that forceful government intervention is destructive to business incubators. But there must conversely be some involvement by the public sector, not least in measuring success and in providing basic finances and infrastructure, and fulfilling the role of a facilitator. 

Examples of successful government-run incubators in South Africa already exist, although not enough of them. In Gauteng the Growth and Development Agency (GGDA) has incubators in the auto industry. The Automotive Industry Development Centre (AIDC) is an implementing arm of GGDA. The AIDC works in partnership with Nissan SA by building a training academy for workers in the auto sector. Later there will be links to FET colleges and local universities. Nissan will also install a simulator.

Similarly the FORD T6 project, also under the AIDC, links SMEs produced by Ford into Ford supply chain e.g. bumpers, load liners etc. The GDDA also pays for electricity and water supply, for a fixed period, while Ford installed a new R55 million simulator .  The Ford programme’s main goal is to incubate BEE entrepreneurs in the automotive industry.

Both Nissan and Ford intend duplicating projects at all their plants in SA.

Then, since 2000, the GODISA incubators in SA (a combined effort of the Departments of Trade and Industry and of Science and Technology) comprise six technology incubators countrywide. The aim is to use technology in businesses to increase their global competitiveness. The Small Enterprise Development Agency (SEDA) Technology Programme (STP)  also supported technology incubators, 31 in all. The technology bias is because Government in SA has identified business incubators as a policy priority in helping to prioritise high-tech industrial development and create jobs. But there is much more room for business incubators.

In Brazil, the prime function of incubators is to build innovative businesses and develop regions – they are less successful in terms of number of jobs created. In other countries (e.g. Chile) universities also often support incubators to bring their products to market. These are different goals from normal SME supporting incubators, of which far more are needed in South Africa. The money is there if the spirit is willing.