Accelerating the growth of small businesses in South Africa

South Africa’s rate of established entrepreneurship is extremely low compared to other African countries.  Given its per-capita GDP, South Africa should have a rate of early stage entrepreneurship three times greater than the current one.  With fewer startups and a low rate of survival, there is a thin pipeline of businesses with a high chance of scaling (IFC report).   There are over 5.7 million formal and informal micro, small and medium enterprises in SA, of these only 14% or about 798,000 are formalised. The majority of the informal SMME’s (micro enterprises) are based in rural and township areas and are majority women owned (by historically most disadvantaged black African women). Black and women ownership decreases significantly as the size of business grows, representing less than a 3rd of medium sized businesses, this is in a population of 60 million, where black Africans represents over 80% of the population and economically active population. 41% of the micro businesses are female owned and female ownership drops to 27% amongst medium sized businesses.  The factors that are driving these problems include - the legacy of apartheid which systematically excluded the meaningful participation of small and black owned businesses in the mainstream economy, low levels of education amongst the majority black African population, poor access to financial and non-financial support by small businesses.  For example according to the IFC 2019 MSME report, the total MSME funding gap in South Africa was estimated at usd30billion, the funding currently provided by commercial banks, DFI.s and private equity is usd16billion.  The main source of funding for the informal sector is government and micro finance institutions.  Unfortunately covid 19 had a severe negative impact on the private micro financing, so their numbers have dwindled significantly. South Africa has since the 1994 democratic elections introduced a number of initiatives to address the challenges above, including the black economic legislation which specifically mandates large corporates to procure at least 40% of their products and services from SMME’s, to contribute towards the small enterprise development by spending 1% of their net profit after tax in small, black and women owned businesses (this amounts to multibillion of potential  spend to small businesses).  Government has also introduced initiatives to fund and train small business in sectors such as ICT, agriculture, healthcare, education.  Over the decade a number of privately owned business accelerators and incubators have also emerged.  The key challenge is that all these initiatives are fragmented, there is no single platform that small businesses can access for these services.  On the other hand, corporates complain that they can’t find SMME;s that are sustainable who they can trust to source from.  Therefore all these great initiatives are not effective in growing resilient and sustainable small businesses that can create jobs and wealth.  SA currently has over 30% unemployment and very high levels of poverty and inequality.  The SME sector contributes around 40% to SA’s GDP and more than 80% of all employment.  This sector is very critical for the country and its economy. 

The solution involves  creating a bespoke digital platform that would provide integrated and focused financial and non-financial services to small and medium sized businesses. The technology design will be similar to a digital marketplace where you have a number of players.  

Before the entrepreneur can become a member of the platform, they will be vetted based on agreed compliance and pre-qualification criteria.   The platform will provide and or link entrepreneurs to the following services- 

1. Funding - debt and equity finance will be provided by Emunah Fund Managers.  SMME’s would also be able to access financial services from other financial institutions and development finance institutions through the linkages that Emunah would have  established.  

2. Access to Mentorship and training services.  Mentors that are passionate and experienced would join the platform.  Mentorship services will be provided both pro-bono and for a nominal fee by the entrepreneur depending on the services required.  To be successful this service requires a combination of generalist and sector specific skills and expertise.  We will also provided strategy development and governance support to the small businesses.  

3. Access to markets.  Emunah would utilise its strong corporate relationships and reputation and its deep understanding of the black economic legislation to connect qualifying small businesses with the right corporates.  Corporates are obliged to transform their supply value chain and to include small and black owned businesses.  SMMEs can access markets in the billions of Rands if they are well positioned and prepared.  Large corporates want to procure from small businesses but at the same time are concerned about reliability of small businesses and the risks this poses to their businesses.  By nurturing and growing these businesses, over time we will ensure that the large corporates develop the relationship and the small business is supported by Emunah to procure on a sustainable basis from a corporate.  Small businesses will also be assisted to market themselves and to raise their profile.  The corporate would pay an annual fee to access the small businesses and to pay for value add services that Emunah’s will provide.

4. Access to accounting and legal services.  We will partner with firms who are prepared to offer reasonable rates as part of their black economic empowerment scorecard and giving back to society.

5. Access to the community of like minded people who want to share and create a positive social and economic impact.   Through this platform we aim to create a community of people who will provide support to one another and share common challenges and ways to overcome these challenges.  We will achieve this by proving networking opportunities either virtually or physically and encouraging entrepreneurs and other participants in the platform to engage and connect. 

The target population and end users  are small businesses that employ at least 5 people, have access to a smart phone and the internet and operate in diverse sectors.  They have been operating their businesses for at least 2 years, have a market and a product/service that is in demand and have a potential to grow, reach bigger markets and create jobs.  Their services/products are in high demand - could be providing technology solutions, for example digital marketing, human capital development, diversity and inclusion and women empowerment services,  food and catering services, renewable energy services, etc.  This market is currently underserved for a number of reasons, including, the past apartheid economic policies that gave preference to large businesses and closed out small businesses from participating in the mainstream economy, the structure of the economy which had always been dominated by large businesses, the marginalisation of the majority of the population by financial institutions making it difficult for small businesses that are black and women owned to access formal finance.  The ecosystem for small businesses is currently fragmented and not well organised resulting in the needs of entrepreneurs not being adequately addressed.  Our solution will be client -centric and will provide a one stop platform marketplace where the critical services and community support that small businesses require can be provided and large corporates can easily access the services of these small businesses via the platform.  The services provided would be both financial and non-financial support.  The financial services provided will be both debt (mainly working capital) and equity finance.  Emunah would raise a Fund from development finance institutions and other investors as well as partner with like-minded SME founders.   The platform will further provide the much needed non-financial support to these small businesses, including mentorship services by experienced and passionate entrepreneurs and retired CEOs as well as training & development.  The platform will also link entrepreneurs to accounting and legal services.  This will allow the entrepreneur to focus on growing and marketing their businesses.  Most importantly we will create a community where entrepreneurs will connect will other entrepreneurs, share knowledge and experience with like-minded people both formally and informally.    

The team has been operating in South Africa for over 25 years each, with a combined professional experience of close to 70 years in the financial services sector spanning impact investing, corporate finance, SME development and funding and private equity.  Two of the Founders co-funded an organisation in 1996 (at the dawn of South Africa’s democracy) that provides microfinance loans to rural women in South. Africa.  Through this organisation, they built a multi-billion Rand investment company, which was owned by a not-for profit Trust. Over the 20 year period, the investment company invested in publicly listed and private companies and generated significant value for the Trust which in turn was able to provide micro finance loans to over 300,000 women entrepreneurs in rural South Africa.  The Trust used  the well known Grameen Bank model which was started by Professor Muhammad Yunus in Bangladesh.  This was a highly successful social enterprise founded, led and owned by women.  The Founders also established an SME equity impact Fund in 2016 which provided equity and other non-financial support mainly to black owned enterprises.  They raised funding from corporates, DFI’s and government.  This Fund is fully invested now to 15 SME businesses in diverse sectors including Edtech, manufacturing, AGRI-sector and financial services.  The Founders have a solid reputation in the SA business community and a well proven track record of delivering both financial and social impact, benefitting several thousands small businesses, mainly women-owned businesses.  They are well known as advocates and thought leaders in the area of women empowerment and development in South Africa.  They are hands on result oriented individuals who are values and purpose driven.  Over the years, the team has developed deep experience in capital raising and has established excellent relationships with commercial banks and DFI’s, private equity firms, venture capital investors and corporates.  As non-executive directors of blue chip publicly listed and private companies, the founders are well versed in the areas of corporate governance, risk management, strategy development and execution.  The Founders have also served as senior executives/CEO’s.  

This team is well positioned to successfully implement this solution because its Founders are embedded in the communities that they plan to serve and they have a deep understanding and appreciation of the challenges and opportunities this market segment presents.  Two of the members are based in Johannesburg and the other one is based in Cape Town.  Johannesburg is the economic hub of South Africa, with Cape Town coming second.   We have interacted with small businesses for over decades and the reason we have created this solution is because we have experienced first hand the challenges that small businesses face in accessing opportunities from the well established  corporate sector and accessing finance and mentorship as we have been in the forefront of working with  small businesses.  The small business ecosystem is currently highly fragmented and there’s no central depository of data/analytics that seek to really understand the challenges and to develop innovative/technological driven sustainable solutions for this segment.  

We have formed a company.  We have identified and engaged SME end-users at length about our proposed solution.  We have also engaged potential corporate subscribers and service providers.  We have developed the business plan and have raised seed capital (from the 3 Founders).  We plan to now formally appoint a software company to design the solution so that we can pilot our the solution with a select client base (SME’s, professional services providers and corporates).   With regards the Fund that we plan to raise, we have applied for relevant licences and have started engaging potential investors.  

The solution is currently not at a digital stage and is not serving anyone.

I am applying to Solve because I hope that through this process I can meet individuals or organisations that have developed solutions to solve a similar problem else where in the world.  The MSME sector faces similar challenges globally, especially in emerging markets, and certain countries have developed advanced solutions to serve this market.  South  Africa is relatively isolated and also tends to copy solutions from other markets/countries that do not necessarily speak to the unique nuances and challenges that we need to solve for, which  include black economic  empowerment, women empowerment and the transformation imperatives of the economy as a whole.   We have an enabling legislation that aims to promote the growth and development  of small businesses, but it seems we haven’t been able to crack it.  In our view, the only way to solve this challenge is to create a collaborative ecosystem that can provide holistic support to small businesses.  South Africa was only welcomed back to participate in the global economy from 1994 following the democratic elections, so the country is not yet fully integrated with the rest of the world, more especially the small business segment.  Historically, this segment have had issues regarding access to technology and know how, the affordability issue and the general openness to the adoption of technology.  A lot has changed since covid 19 and more and more small businesses have embraced technology, therefore this is an opportune time to launch a digitally driven solution at scale for small businesses, which over years can be accessed by millions.  Our vision is to built an African company utilising the best of of breed solutions by learning  from the global community.  What is critical is that we design the solution for South African entrepreneurs so that we can develop a system that would work in the long run.

What is unique with our solution is that we aim to connect the currently fragmented but well meaning stakeholders in the MSME ecosystem that have over the past decade formed themselves to support the development of entrepreneurship and the sector. Emunah is well positioned to successfully tackle this challenge for the following reasons: 1)   Emunah is owned and run by a seasoned team of women, with a combined experience of over 70 years in the financial sector, private equity and impact investing.  2) The team has an excellent reputation and brand in South Africa having worked with both SMEs and large corporates and the financial services sector over the past 25 years.  3) The team has successfully proven itself in the SME investment and development over years.  This unique experience in which we understand both the needs of small businesses and our deep relationship with the corporate sector and financial institutions, sets us apart from the competition.   We are also very passionate about making both the financial and social impact in South Africa and this sector is well positioned to do exactly that. 

In South Africa, the government, the business and financial institutions have developed a number of  initiatives to support the growth of resilient and impactful small businesses.  The catalyst for this focus was the introduction of the Black Economic Empowerment legislation in 2003.  The objective of this legislation is to promote an inclusive economy in South Africa, by promoting the participation of small businesses, black people, women, workers, youth, people with disabilities and people living in rural areas, through diverse but integrated socio-economic strategies.  The Black Economic Legislation which was amended in 2013 in order to broaden the legislation and to promote the development of MSME by large corporates in particular (enterprise development).  The Act prescribes preferential procurement from enterprises that are empowered (owned or managed by black people and women) and small businesses.  

There is a strong willingness by the private sector and government to collaborate and to scale the impact of this sector, given the critical role that the sector plays  in the economy from an employment and GDP contribution. South Africa needs more innovative ways to tackle high levels of unemployment (over 30%) and high levels of poverty and inequality.   

There hasn’t been an integrated platform that has been established to connect the dots in the ecosystem and we believe that our open and collaborative approach will go along to impacting millions of entrepreneurs and businesses over the next decades.   Over time, it could lead to increased innovation, built better data to inform policy making for the sector, energise and grow the entrepreneurship culture in South Africa.   Everyone agrees that small businesses require holistic support to grow their businesses, including, access to finance, skills, networks and markets and this is what this platform will provide under one roof. 

The fundamental reason we have formed this business is because we want to contribute positively to South Africa’s challenges of low economic growth, high levels of poverty and unemployment, by unlocking the potential of the MSME sector.  Our impact goals can be broken into financial and social impact for the SME’s, the corporates, financiers in the sectors and other stakeholders.

1. SME sector impact - we plan to impact at least 5,000 small businesses in year 1 and and 25,000 by year 5.  If we assume that these businesses employ at least 5 people, in terms of employment, this is 25, 000 to 125 000 people over 5 years.  If we assume that each person supports at least 3 people, we would impact 75 000  to 375 000 people over 5 years.  For us to achieve these impact goals, we will need to raise capital to scale the business, invest in marketing and employ the right team.  We plan to raise to raise outside equity capital from the end of year 1 once we are comfortable of the business trajectory and performance. 

2. Corporates -  There are +-400 publicly listed companies in South Africa and about 130,000 companies that identify as mid to large privately owned companies.  In the first year we want 100 corporates to join the platform and at least 1,000 by year 5.  The Founders have developed strong relationships with CEO’s and CFOs of the top companies in South Africa and will leverage  these relationships for our business.

3. Capital investment in the sector -  According to a report by the IFC, in 2019, the total funding provided to the MSME sector in South Africa was $16billion.  Commercial banks accounted for the majority of the funding extended to the formal MSME and microfinance institutions accounted for the bulk of finance extended to the informal sector.  The IFC estimates that the total MSME finance gap between supply and demand to be $30billion.  South Africa is not short of capital, however the business/banking culture is conservative and we also don’t have a thriving venture capital  and angel investing sector.   We believe that our business can unlock funding to this sector because the businesses that would be in our platform would over time become formalised, sustainable and growing businesses.  Our platform will de-risk these businesses making them more attractive to potential investors and funders.  

1. Gender equality.  As part of our investment criteria and process, we will ensure that the businesses that we attract to the platform are diverse.  Given the team’s profile and track record in women empowerment and development, we plan to have a bias towards supporting women owned businesses.  In addition we will ensure that the training and up skilling interventions address the needs of women entrepreneurs and workers. In South Africa, there is already a strong focus on women empowerment but the progress has been slow, we are therefore well positioned to focus and accelerate gender equality. The indicators that we will collect will include - % of women in management and leadership and the workforce, policies on gender equality (for example maternity policy, gender pay gap, health care,etc).  If there are no policies in place, we will ensure that they are put in place.   We will set targets and measure progress over time in partnership with our investee companies.    We have done this in the past and we have developed standards and frameworks which we will use in this business.

2. Decent work and economic growth.  Our solution aims to link small businesses with the mainstream economy and supply chains of large corporates thereby promoting the resilience and sustainability of small businesses. Covid 19 destabilised small businesses in South Africa and there is now an urgent need to rebuild the resilience of these businesses through a number of deliberate interventions.  Big business and government have an important role to play in the post-covid economic recovery for small businesses and that’s why we want large corporates to be central in our proposed platform.  What  will also be critical to success of these businesses will be the ongoing mentoring and training of entrepreneurs.  We will also set targets around minimum wages and compliance with legislation.  By supporting small businesses, these businesses will grow and will contribute positively to economic growth.  In South Africa the MSME sector contributes circa 40% to the country’s GDP, we can increase this contribution through our interventions above whilst providing decent work to the people that are employed by these businesses. 

3. Partnerships for the Goals.  Partnerships and collaboration is one of the core values of Emunah.  For us to make the impact at scale we will have to work with existing players in the ecosystem including Banks, accelerators, global Donors, relevant government agencies, etc.  We have a lot to learn and gain from creating these local and global linkages.   We have already started these engagements and we are confident that we will conclude critical agreements this year. 

4. No poverty.  We plan to support businesses that are in the rural areas in order to contribute to reducing poverty.  We have established a not for profit Foundation that would support entrepreneurship programs for women in rural and peri-urban areas and other socio-economic development activities in partnership with other NGOs.  We are currently negotiating a partnership in this area.

Our vision is to significantly increase the resilience and growth of small businesses in the short to medium term, thereby contributing positively to the growth of the sector and the country’s GDP.  We also want to increase the participation of women in the economy and create employment.   The following  critical activities and outcomes are planned -

1.  Access to Finance.  Access to Finance is one of the key challenges that MSME’s face.  This platform would make it easy for qualifying entrepreneurs to access finance both from the Emunah Fund and the other finance providers (DFI’s, impact investors, Banks, etc).  

Activity - we will raise  a Fund of  circa $30 million (about ZAR500 million). The Fund will provide both debt and equity into qualifying businesses, with an average equity investment of $200,000 and the debt would average $10,000.  In addition, MSME will access other Funding sources as well from Banks, Micro-finance institutions, Development Finance Institutions and others.   We will develop a system that would make it easier for small businesses to access funding.  

Outcomes - 

Year 1 to 3- 30% to 35% of funding would be allocated towards women owned and led businesses.  Provide debt funding to at least 200 businesses

Year  5 -  40 to 51% of funding would be allocated to women owned businesses.  Provide debt Funding to at least 1000 businesses. 

2.  Access to the large corporate supply chains.  

Activity -   Develop relationships with corporates in select sectors, initially (financial services,  professional services, mining and healthcare).  Analyse the value chain of these corporates to gain a deeper understanding of their needs so that we can better match small businesses to these businesses.  Sign up at least 10 corporates to the platform at pilot stage, 100 in year 1 and 500 by year 5.  

Outcomes - 

Year 1 - 500 small businesses would have access to the supply chain of large corporates and this number would have increased to 2, 500  by year 5. 

3.  Access to business mentorship, training & development and best in class Masterclasses -   

Activity - sign up at least 50 seasoned Mentors across Sectors to join the platform.  

Develop relevant online content for training and upskilling of entrepreneurs and their staff 

Outcomes - year 1 - 500 entrepreneurs would have access to free mentorship 

By year 5 -  5 000 entrepreneurs have access to free mentorship 

4.  Access to professional services (accounting and legal services).  Sign up accounting and legal firms to the platform.

Year 1 - all businesses in the platform have access to accounting and legal services at a reasonable cost.

We will utilise the combination of the web, sms and WhatsApp for our solution.  The majority of the interaction will be via the web, as we are targeting formal small businesses that have access to the internet.  In South Africa,the use of WhatsApp is also very high, therefore we will have to ensure that we use this platform as well.  

The Emunah team is women founded and led.  As we grow the company and employ more people, we want the team to represent South Africa’s diverse and rich heritage.  We are very deliberate in this because we want to leverage the unique qualities and talents of South Africans.  One of our core values is diversity and inclusion.  Diversity and inclusion is good for business and promotes social cohesion.   Our priority would be to provide an environment and culture that is inclusive which promotes excellence and empowers individuals to be their best.  South Africa continues to face challenges with respect to the relatively low participation of women in the economy and high youth unemployment rate (at close to 50%, compared to 30% for the adult population).  Starting with women empowerment, our plan is to have a workforce that has 51% female representation across all management and Board levels.  Secondly, we will offer training and internship opportunities to young graduates.  In this respect, we will leverage the government incentives that have been put in place to encourage businesses to employ young people.  We will also work with our partners to train and place our youth.  We will also promote equity ownership by staff to ensure the buy in and retention of the critical members of the team in future, we have set aside equity for staff.  We will also ensure that we attract people with disabilities as it is critical that everyone is given equal opportunities. 

Our end users are small businesses.  For the small businesses, we will provide value to them by linking them to business opportunities, funding, relevant content, high impact mentorship, access to markets, access to professional services (accounting and legal) and access to a broader network of other entrepreneurs and sector experts in South Africa and globally (given the networks that the Founders have).  By linking them to these services and resources, the entrepreneurs will be able to access any service that they require to manage and grow their businesses.  We also understand that affordability could be an issue for a small business that maybe battling to survive, therefore we will design pricing models that take into account the stage and needs of the business.  Some of the services, for example, mentorship services could be offered at no cost.  However,  end-users will be required to pay a minimum fee to be part of the platform.  The fee will be based on the size of the business and the  services that they want to access, some members will be able to access the platform for free.  The non-financial impact for the small business, include access to a community of like-minded entrepreneurs and people who the entrepreneurs will learn from, we hope we can create a sense of belonging for the entrepreneurs as well. 

For the corporate, we will provide access to small businesses that have already been vetted, are compliant, have access to ongoing professional services, can deliver on the corporate contract, etc.  The corporate would also rely on us to provide and manage the non-financial aspects to the small business, including providing  and/or arrange ongoing mentorship, strategy advisory, governance oversight (where appropriate), etc.  For this, the corporate would pay an annual subscription fee.   The bulk of our revenues will come from corporate subscriptions.  As indicated previously, business in South Africa is required by law to procure products and services from small businesses in order to the contribute to the country’s economic transformation, unfortunately business haven’t been that successful, therefore we will position ourselves as value adders and partners that would help them to solve for their compliance and business imperative.  It is important for business to be seen to be good corporate citizens that are contributing positively to addressing South Africa’s pressing social and economic challenges.  We believe that our service will improve the reputation of our clients.  

The professional services companies would also be another key player in this platform.  The value to them is access to potential customers as well as a contribution to the growth of small businesses. 

The Founders have already committed seed capital  to the business.  As a new venture in South Africa that is women owned, we can also access enterprise development grant funding from certain corporates (we are busy investigating this).  This will allow us to employ additional staff members.  We however plan to start with the development of the software platform using seed capital from Founders.  As we develop our business further, we will start to generate income from the platform and services that we will provide.  

In addition, we plan to raise a Fund which will allow us to earn management fees.  We can also access government grant funding that is linked to social impact performance metrics (job creation, women development and youth development).  In the past we were able to access grant funding from government, therefore we are comfortable that we can access this funding which we can also use to provide training and technical support to small businesses.  We are comfortable that after 2 to 3 years our revenues would cover our expected expenses by employing the combined funding strategy above. 

We have agreed a budget and equity contributions by the Founders to fund the business for the next two years.  We are also exploring enterprise development grant funding from certain corporates.  As part of the black economic empowerment legislation, large corporates are encouraged to invest in start-up either financially or in-kind (provide office space, mentorship, etc.).   We are confident that over the next few months we will raise grant funding from a corporate.  The co-founders have committed  seed capital of $100,000 for the first 2 years of operations.  We are comfortable that the Founders are in a position to honour their commitment.    We have been very conservative in our approach, none of the Founders are taking any salary at the moment, we have employed an intern on a 12 month contract to manage our overheard expenses and we have not committed to any large expenses.