smes = job creation. poverty reduction. growth. innovation. competitiveness. 1 presentation to...

SMEs = Job Creation. Poverty Reduction. Growth. Innovation. Competitiveness.SMEs = Job Creation. Poverty Reduction. Growth. Innovation. Competitiveness.SMEs = Job Creation. Poverty Reduction. Growth. Innovation. Competitiveness.SMEs = Job Creation. Poverty Reduction. Growth. Innovation. Competitiveness.

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Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:

DATE: 23 NOVEMBER 2010

PRESENTED BY:

CHRIS BALOYI

DATE: 23 NOVEMBER 2010

PRESENTED BY:

CHRIS BALOYI

PROPOSED FUNDING MODEL FOR SMEsPROPOSED FUNDING MODEL FOR SMEsPROPOSED FUNDING MODEL FOR SMEsPROPOSED FUNDING MODEL FOR SMEs

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Overview of PresentationOverview of Presentation

• Introduction / Why are SMEs so Important?

• SMEs Have a High Failure Rate

• Reasons Why SMEs Fail

• Proposed Funding Model

• Why Venture Capital

• Business Mentorship

• Proposed Funding Model in Detail

• Introducing BridgeFin

• Conclusion / Q & A3


Introduction / Why are SMEs so Important?

• Survey findings of OECD countries in early 2000’s show:

• SMEs account for the largest portion of the private sector economy, between

96 – 99% of total number of enterprises in countries surveyed.

• Above 60% of all companies in developed countries such as Japan, and

emerging countries (Malaysia, Philippines, Brazil, India) are SMEs.

• SMEs account for 60-70% of manufacturing jobs in most developed and fast

developing economies.

• SMEs are significant contributors to GDP in emerging economies (55%) .

• SMEs were main drivers of innovation and technological developments in

countries surveyed.4


Introduction / Why are SMEs so Important? (cont.)

• Local research studies confirm the OECD findings.

• UCT Graduate School of Business Centre for Innovation and

Entrepreneurship research findings show (2002):

• Of the 906 690 companies surveyed only 60 167 were considered large

companies.

• SME sector contribution to GDP was estimated at 41% at the time.

• About 50% of SA’s work force was employed by SMEs.

• The reasons why SMEs are important have been thoroughly

documented and debated in SA as much as elsewhere in the Globe.

• But the SME sector has seen little ‘focused intervention’.5


SMEs Have a High Failure Rate

• Up to 70% of all new businesses classified as SMEs in developed

countries fail in their first 2 to 3 years.

• In Africa the failure rate is estimated at between 80 – 90% over the

same period.

• Despite its status as a regional powerhouse South Africa is not

immune to the SME challenges and fairs equally to most African

countries, e.g. countries such as Ghana, Uganda and Namibia.

• The high failure rate is more prevalent in black-owned, controlled

and managed SMEs.

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Reasons Why SMEs Fail

• Lack of / limited access to finance for early stage businesses due

to:

• Poor business plans:

• Unrealistic business plans / ‘Pie in the sky business idea’.

• Overoptimistic cash flow projections.

• At times no business plans at all).

• Inadequate own contribution / equity.

• Lack of security / collateral.

• Financiers / investors often require proven cash flow generation for a period

of at least 12 months – catch 22. 7


Reasons Why SMEs Fail (cont.)

• SMEs are generally perceived as high risk investments,

characterised by:

• Poor Corporate Governance practices:

• Lack of ethics.

• Fraud.

• Inadequate management control.

• Control Flaws in vital contracts, business models and strategy.

• Inability to respond to changes in business cycles (e.g. recession).

• Uncontrolled, unfocused, unplanned expansion.

• Poor cash flow management. 8


Reasons Why SMEs Fail (cont.)

• Access to funding is partly the Challenge:

• More important is access to the right type of funding:

• Traditional bank funding (i.e. overdrafts, loans) is not appropriate for early stage

SMEs due to interest and repayment burden and the requirement for security.

• SA SMEs need seed capital funding where the financiers take equity in the SME

and share in the business risks with the entrepreneur.

• However, access to funding alone is not the solution. As research

indicates, SMEs lack critical skills for business success, such as:

• Financial management, book keeping, administration.

• Legal, regulatory, understanding of contractual arrangements.

• Marketing, sales and strategy.9


Proposed Funding Model

• SA SMEs need an integrated funding model comprising Venture

Capital funding linked to a Business Mentorship programme.

• The proposed model would ensure SMEs have access to

appropriate forms of funding while at the same time receiving

appropriate mentorship for business success.

• The proposed funding model ensures SMEs receive a mix of debt

and equity finance:

• With more reliance on equity funding at the early stages.

• Appropriate interest and capital moratoriums based on cash flow projections.

• Appoint Business Mentors with sector, product, market experience. 10


Why Venture Capital?/Advantages

• Venture capitalists take equity in SME and become part owners vs.

banks which require interest repayments:

• Dividends are payable once or twice a year, thus relieving cash flow.

• While interest is payable monthly, thus placing a strain on cash flow.

• Venture capitalists provide longer term funding (average of 5 – 7

years) than banks (often 12 – 24 months).

• Repayments to Venture capitalists are somewhat fixed ex post (i.e.

dividends and capital gains of divestiture), but interest is volatile.

• Venture capital financiers have representation in the management

of the SME to ensure good business management.11


Business Mentorship

• Business Mentors act as a sounding Board for new SMEs.

• Mentorship programmes have proved beneficial in developed

economies (e.g. UK).

• Business Mentors are people with proven track record in the target

sector, product or market:

• They are usually retired executives but can also be younger professionals

with a passion for SMEs and entrepreneurship.

• Alternatively Business Mentors can also be firms that specialise in advising

SMEs and entrepreneurs. Our company is one such firm.

• Proposed mentorship of new SME in its first 6 – 24 months.12


Business Mentorship (cont.)

• The challenge with Mentorship programmes is that these services

need to be paid for, otherwise the Business Mentor is not

motivated.

• The disadvantage with current payment structures is that the

remuneration of Business Mentors is not linked to performance,

thus the Business Mentor is paid whether the SME succeeds or not.

• Proposal is for the Business Mentor to enter into a tri-partite

performance contract with the financier and the SME:

• To provide ‘mentorship services’ and skills transfer to the SME.

• SME, financier and Mentor should agree on performance miles upfront:

• e.g. Cost cutting, profitability, return on investment, market share, skills transfer.

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Proposed Funding Model in DetailProposed Funding Model in Detail

• Proposal is for Govt and banks need to pull funds into a

dedicated SME Venture Capital vehicle(s) .

• Capitalise the vehicle with, say, 20% Govt and 80% bank funding.

• Provide limited Govt guarantee to the SME Venture Capital fund.

• Part fund SME Mentorship programme through Bank Sector

contributions to the Skills Development Fund.

• Currently banks contribute 3% of their net profits to the Skills

Development Fund. The idea is to tap into this Fund.

• Include the cost of Business Mentorship services to project

costs and provide as part of funding provided to the SME. 14


Proposed Funding Model in Detail (cont.)Proposed Funding Model in Detail (cont.)

• The proposed is to establish a national SME Venture Capital

financial institution with regional offices in 9 provinces.

• Capacitate the financial institution and regional offices with

appropriate skills to assess business proposals:

• One centralised credit / funding approval office to eliminate

inconsistencies and fraud.

• Credit / funding approval process must incorporate a critical skills gap

analysis and provide a recommendation of skills required to address

the identified skills gap as part of overall risk mitigation.

• Financial institution must create a provincial database of

Business Mentors across sectors, products and markets.15



• Graphical presentation of funding model

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Govt / DTi Bank 1 Bank 2 Bank 3 Bank 3

Big 4 Commercial Banks

SME Development Corporation

SME Venture Capital Fund 1

SME Mentorship Fund




BridgeFin Business Mentors

Khulula SME


• Proposal IS NOT to create a new financial institution but merely to

pull funding dedicated for SMEs into an existing financial

institution or DFI.

• Eliminate the current duplication of processes and mandates of

DFIs by pooling SME funds into one investment house.

• The financial institution should establish investment thresholds for

the various sectors – e.g. Small Enterprise Venture Capital Fund,

Medium Enterprise Venture Capital Fund, etc.

• Govt role: guarantee the funds, introduce tax incentives and

allowances for investors, SMEs and corporates that support SMEs. 17


Introducing BridgeFinIntroducing BridgeFin

• Highly qualified and experienced financial professionals:

• Credit and lending aspects.

• Practical experience in SME sector.

• Strong business acumen, entrepreneurial spirit, love for South

Africa and Africa.

• Proven transacting track record and business mentorship in

various industries / sectors in South Africa and the broader African

region – hence we have a good understanding & knowledge of the

African market, risks, challenges and opportunities.

• Young, dynamic, energetic, highly motivated team.18


ConclusionConclusion

• Proposed Funding Model is based on practical experience of

dealing with SMEs in SA and the broader African region.

• Also from research findings into factors affecting access to SMEs

in SA.

Q & AQ & A

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smes = job creation. poverty reduction. growth. innovation. competitiveness. 1 presentation to...

Documents

smes account

managed smes

economic development

portfolio committee

developed countries

african countries

poor business plans

business models