China’s ban of initial coin offerings (ICOs) this week has raised questions on whether other jurisdictions will do the same, and on how viable the vehicle is for SMEs to raise finance.
The Chinese government banned ICOs on Monday (September 4), effectively cutting about 40% of the ICO market out, while last month in the US the Securities Exchange Commission (SEC) began moves towards regulating ICOs.
In China 65 ICOs raised closed to $400 million over the year to July, according to Chinese news agency Xinhua.
Statistics by CoinSchedule, a cryptocurrency tracking site, show that to September 7 over $2.1 billion has been raised in 139 ICOs, up from just 46 valued collectively at $96m last year. The biggest ICO last year was $16m raised by a company called Waves.
So far this year four ICOs have each topped $100m, with the highest – Filecoin – having raised $257m. The majority of ICO funds – 44% - have been to raise funding for infrastructure, followed by data storage (13.5%) and trading and investing (10%).
In June, ICO funding hit over $550 million and it was the first month ever that it surpassed angel and seed VC funding.
Meanwhile Russia’s central bank said it won’t allow (for now) the trading of cryptocurrencies on official exchanges, nor the use of their technology for clearing and settlement infrastructure.
Despite this a Russian Blockchain venture fund, FinShi Capital said on Wednesday that it plans to will invest in ICO-related projects worth up to $1bn.
The fund aims that it has already raised $1.3m in a pre-ICO campaign, and aims to generate another $50m in an ICO in October.
'SARB offers no protection'
South Africa’s Reserve Bank also weighed in. It said as cryptocurrencies are not guaranteed by the Reserve Bank, there would be “no recourse or protection to consumers thereof”.
The Reserve Bank’s position on virtual currencies is set out in the Position Paper on Virtual Currencies issued in 2014, the bank recently established a dedicated fintech programme to increase focus and assist the existing working groups to research and analyse technology innovations in the financial services industry.
Part of the review is aimed at assessing the impact on cross border financial flows and stability of the financial system.
'Only temporary setback'
Despite this Bitcoin Foundation executive director Llew Claasen (pictured above) told SA tech publication Ventureburn that he reckons China’s ban is only a temporary setback for startups looking to raise capital through ICOs.
Claasen admitted that while there are people that are “darn right scamming” and those that are listing utility tokens as if they were securities, regulators should not place an outright ban on ICOs.
Where there is a clear expectation that those participating in the ICO will gain a share of the profits and be able to have a say in the governance of the company, the ICO can be described as essentially an initial public offering (IPO), he added.
However he said regulators should allow utility tokens to be raised - those where users can become part of a network by buying tokens but where they don’t necessarily profit from the tokens themselves.
It will however be hard to convince regulators. In the end more jurisdictions are likely to clamp down on what many believe is merely a massive casino game.
The sooner regulators get on top of things and issue clear guidelines - the better for real SMEs looking to raise cash.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
The first group of 40 high-growth companies in South Africa’s National Gazelles programme grew the value of their businesses by an average of seven percent in the first year of the three-year initiative, claim programme organisers.
The programme, which is administered by the Small Enterprise Development Agency (Seda) aims is to grow the value of each of the 40 participating small businesses by 20% over the next three years.
Mtiya Dynamics managing director Zukile Nomafu (who runs the programme together with Traction managing director Martin Feinstein) said the 40 were able to increase the value of their business’s net assets by seven percent on average in the year to June.
It means were they to sell their business they would be able to get seven percent more for it this time this year than last year.
Despite the increase being only marginally above the inflation rate for this period (which for ranged between a high of 6.8% and 5.1%, Feinstein believes that this kind of growth over this period “is not bad” for the average business.
In addition Nomafu stressed that the programme is still in its first year and that subsequent years could see higher growth.
The increase in value, he underlined, is based on eight elements, with growth in revenue but one. Other elements include assets and liabilities, goodwill and customer risk.
Second cohort underway
The second cohort of the programme got under way in June, but the names of the 40 participating firms must still be announced by the Minister of Small Business Development Lindiwe Zulu.
The call for the second cohort went out in October last year. It follows the announcement by Zulu in July last year of the names of those selected for the first cohort. (see this story that appeared in Ventureburn).
Feinstein says the 40 firms chosen for the second cohort are not “your typical, highly scalable, low employee and tech” orientated business and that participants are drawn from a number of sectors in both rural and urban areas.
He says it means that initially one is not likely to see high growth from participants.
“So if you’re looking at the type of Silicon Cape (Cape Town initiative that backs tech start-ups) firm, there are plenty of programmes around for these firms,” added Feinstein.
Feinstein added that one challenge is that some participants at times don't provide timely reporting to the programme. He said this points to management being a “real issue” as many of the participants don’t keep up to date financial records.
He and his team deal with this by sending management specialists to help these firms to put in place better reporting and accounting systems.
He said those firms that have performed well so far have all been businesses that have – a clear differentiation in the market from competitors, are driven by a quality entrepreneur who is willing to work hard and invest money back into their firm and that have a competitive edge with their product or service.
In addition those participating companies that are committed and use the programme's value-builder diagnostic system to track growth are usually among the programme’s star performers, noted Feinstein.
These include companies such as: Grid (involved in electrical and infrastructure projects), Flatfoot (heading, ventilation, air-conditioning and mechanical engineering) and Comessa Food Services (Food manufacturing) – which are all black-owned firms.
In addition they also include Roses4U (Landscaping), Eco Furniture (Furniture store and suppliers) and Lakeshore Trading (Roads building and construction) – which are all woman-run businesses.
See this post here for the full list of participants in the first cohort.
Feinstein said the response to the value-builder tool from participants has so far been “extremely positive”.
While on the programme, each participant also has the chance to apply for grant funding of R1 million ($77,000) each – R800,000 of which can be utilised to fund productive equipment and R200,000 for training and support services.
Feinstein explained that while some participants automatically expected to get access to grant funding, applicants are not guaranteed of getting funding necessarily approved.
He said it was quite a process before grants are approved. Applicants must first gather quotes, which can lapse if the committee which approves grants and meets only once a month has not viewed the application yet. However Feinstein said his team is doing all it can to assist participants in the application process.
He added that an independent grants committee has to approve whether to give out grants to meet the requirements of the Public Finance Management Act (PFMA).
From the first cohort 31 applications have been submitted for grants, with 22 approved to the value of R16m (with R9.3m paid out so far).
While the first cohort of the programme has aimed to support 200 gazelles - with 40 chosen as the national gazelles for more specialised support, the programme will no longer offer mentoring or support to the 160 runner-ups.
Nomafu said the reason for the change is that the selection of two tracks in the past had created some confusion and unmet expectations that those among the group of 160 would get access to a similar level of support, when much of the support went to the group of 40 gazelles. “No one wants to be a second-class citizen,” he added.
Another change is the scrapping of the system where participants were chosen on a proportionate basis per their respective province’s representivity in the overall population.
The majority of firms (about two thirds) selected for the second cohort – like the first cohort – are black-owned companies. But Feinstein said his was rather because most of the over 350 applications came from such firms, rather than down to any selection bias.
The programme has still included firm from each of 10 sectors that it focuses on. Feinstein noted that interestingly that there are now more participant firms from manufacturing (many of them black-owned firms) than ICT.
The programme managers next want to introduce industry-specific mentors. Feinstein said he and Nomafu have worked “really hard” in the last three months to recruit more technical expertise that can complement the value-builder process.
The programme is ultimately too small to make a real impact on the SME sector. Yet it could help policymakers to determine whether what the country indeed needs is more help to go to small firms that are able to scale and create the jobs the country badly needs.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Start-ups could get access to millions of rands to finance government contracts, following an announcement this week by Finance Minister Malusi Gigaba (pictured here) of a new plan to get the economy going again.
The plan which was revealed today (July 13), includes a number of measures such as the partial privatisation of state-owned enterprises.
Among the measures Gigaba announced that the National Treasury would finalise a public procurement bill by March next year, while the Minister of Small Business Development Lindiwe Zulu will by February finalise a "complementary government fund" aimed at financing start-ups.
Start-ups need access to finance to undertake government contracts, all the more so with a 30% set-aside of state procurement for small businesses, which came into effect in April (see this story and this post).
The new regulations allow government departments, municipalities and state entities “if feasible” to ensure that those that win bids of R30 million ($2.2m) or higher subcontract at least 30% of the bid’s value to small businesses.
With the state spending about R500 billion on goods and services, small businesses are set to win big. Yet if winning bidders cannot secure funding to pay for equipment and staff, the measure could fail.
Late payments hindrance
In addition the government continues to pay late, despite regulations in effect since 2005 which instruct national and provincial departments to pay suppliers within 30 days on receipt of an invoice.
The problem is so acute that both the Department of Performance Monitoring and Evaluation and The National Treasury have units to track late payments and intervene on behalf of suppliers to get departments to pay late invoices.
In May in the budget vote for the Department of Performance Monitoring and Evaluation Minister Jeff Radebe said since the unit was set up in early 2015 the department had intervened in 207 cases of non-payment of valid invoices, and R327m had been paid to service providers, as at end of March.
According to a news report the National Treasury’s Office of the Chief Procurement Officer said last month that it had received over 5,000 queries about invoices unpaid by government departments, amounting to R620m, between July last year and the end of March. Just under half had so far been resolved.
There's perhaps no need to set up a new fund. Zulu's department could use the Small Enterprise Finance Agency (Sefa) to drive lending to start-ups. The agency lent out R1.1bn to over 43,000 small businesses in the 2016/17 year.
But the rapidly increasing rate of impairments, most linked to loans lent directly to small businesses (the agency also lends via intermediaries), is making it unsustainable to do so.
Impairments were at a massive 47% of total loans as of the end of March, Sefa chief executive Thakalani Makhuvha told MPs last month. This is up from 38% in of its loans book in 2015 and 25% in 2014 (see this earlier post).
Makhuvha in April last year said a number of business owners who took out bridging finance to bankroll tenders failed to honour payments. Some defaulted after not performing on contracts.
He said the agency often opens joint bank accounts with clients as a form of security, but that this has not stopped some from later changing to another account.
One way to resolve this would be for borrowers to cede contracts to the agency. But under current treasury rules this is prohibited. Makhuvha says the agency is in talks with national treasury to permit cessions.
It will be crucial to resolve this if the 30% set-aside is to have any substantial impact
Another way would be to increase the use of credit guarantees In the 2015/16 year Sefa issued just R40.5m to financial institutions (including banks and non-banking institutions) down from R50.7m the year before.
Banks have largely abandoned the scheme in recent years saying they have run up too many bad debts and that the claims procedures are too lengthy (see this post and here).
Sefa has now linked up with non-banking financial institutions, including micro-enterprise funding companies and private corporates to offer credit guarantees to groups of small businesses.
In its 2015/16 annual report Sefa said it had enhanced business processes and IT systems and added that it was in discussion with banks to formulate new portfolio guarantees with new terms and conditions, the most attractive change being the scrapping of co-vetting of transactions with the banks.
Zulu's department should learn from more successful credit guarantee schemes in India (see this post), Chile (see here) and Malaysia (see here)
Use Financial Sector Code
A third way is to compel banks – many of which are already involved in contract finance programmes with the state – to have bridging finance products for start-ups.
For example Nedbank has partnered with the Enterprise Public Works Programme and reported in March last year that it had lent R40m in contract finance to 180 start-up entrepreneurs, said spokesperson is Tracy Afonso, Head of Professionals and Small Business Banking at Nedbank.
The government can use the Financial Sector Code (an industry charter under the Black Economic Empowerment policy) to compel banks to lend contract finance to start-ups.
The Financial Sector Code compels banks to invest a collective R48bn between 2012 and the end of 2017 in various targeted investments, including black farmers, black SMEs, transformational infrastructure and affordable housing.
Banks have far exceeded this. Between 2012 and 2015 banks lent out over R209.3bn, the Banking Association of SA (Basa) said in March. Of this, R41bn went to black SMEs.
The new draft code has yet to be gazetted by the Minister of Trade and Industry Rob Davies.
Black business however is not satisfied. While the targets for the new code have not yet been finalised, Black Business Council secretary general George Sebulela wants banks to ring-fence at least R50bn for black SMEs, which could be geared four or five times.
Some of this money could be used to fund black start-ups seeking funding to undertake state contracts.
Perhaps the department need not go to the trouble of setting up a whole new dedicated fund. The government is already struggling to find revenue to fund other pressing needs.
Using a mix of credit guarantees, direct finance through Sefa which is backed by cessions and concessions from banks through the Financial Sector Code to fund black start-ups - the department could help make it easier for start-ups to contract with the state,
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
When President Jacob Zuma in 2014 announced the setting up of a new small business department many South Africans felt that the government was at last serious about supporting small business. Yet now approaching its third year the Department of Small Business Development has little to show for itself.
In November 2016 during a parliamentary briefing the department came under fire from MPs who said it had done little in the way of supporting small businesses or improving co-ordination of small business support across departments, entities and municipalities.
The chair of the National Assembly’s small business committee, Ruth Bhengu even remarked at the time that there is “no problem at policy level, the problem is at implementation level”.
'Hamstrung by budget'
The department in its defence claims that it is hamstrung by a small budget (for example the National Treasury slashed a third off the department’s requested allocation from the fiscus for the 2015/16 year).
Yet if it is to get a bigger allocation from the fiscus it will have to prove that it can spend its existing allocation of about R1.4 billion ($106m) a year wisely. In its 2015/16 annual report the department itself notes that it had failed to implement eight planned programmes for that financial year.
Little progress against red tape
Among these was a provincial red-tape reduction study which the department had to defer to the following financial year. Despite this it was able to carry out workshops with 81
municipalities on guidelines to reduce red tape.
Yet holding workshops alone don’t amount to tackling red tape if the actual laws are not removed or made easier for businesses to adhere to these through the use of technology, better trained public servants or streamlined procedures.
Small Business Minister Lindiwe Zulu’s initial pledge that she would look at how to reduce red tape for small businesses particularly labour laws has seemingly come to nought.
Red tape in some respects is worsening. Since the department’s inception the time it takes to register a business has increased (even as online registrations have grown) – from 19 days in 2014 to 46 days in 2016, according to the World Bank.
New labour laws (see this earlier post) require firms to convert temporary workers into permanent staff after three months (although firms with fewer than 10 employees and start-ups are exempt from these).
A national minimum wage planned to take effect in May 2018 will hit small firms the hardest. An advisory panel’s proposal to allow firms with fewer than 10 employees a one-year period to phase in the new minimum wage looks to have been dropped by government, labour and business (see this post).
To combat red tape the department could do more to publicise the use of regulatory impact assessments (RIAs) among government departments when new legislation is considered. RIAs are useful mechanisms in ensuring that any new legislation doesn’t end up killing small businesses, but far too few government departments make use of them.
Little monitoring, research
Another serious flaw in the government’s assistance for small business is that the state carries out very little monitoring of its own programmes and next to no research on the sector. This was highlighted by a 2015 review of the department’s programmes (see post)
The department doesn’t publish any detailed reports on the impact that its programmes have made (although the department noted last year that a review is currently under way of two of its programmes).
Nor does it carry out much research on the sector. South Africa, unlike other emerging economies like India, Malaysia or Brazil, doesn’t run a regular census or survey on the on the small business sector.
Without consistent research and evaluation and monitoring of programmes, it is easy to understand why programmes are simply started and run without too much consideration for the impact they have on new firm creation, creating sustainable jobs and encouraging more innovation and exports.
No voice of small business
The department has also done little to address the voice of small business – which is often drowned out by big business or absent because business owners are so busy trying to keep their businesses afloat.
A national small business advisory council – set up in 2006 by the Minister of Trade and Industry – could help, but few small businesses even know it exists.
Even if they did, there is no way to access its minutes, and so they can’t participate in debates on the sector or hold the government to account on what it is doing to support the sector. This renders the entire council a waste of tax payers’ money.
A new council has not been announced despite the small business ministry having issued a call for nominations went out in August 2015. The council instead needs a remodelling to encourage openness and participation – or it should simply be done away with.
Then there’s the department’s Small Enterprise Development Agency (Seda) which has never made much of an impressive impact.
For one the agency’s budget of R750 million ($56m) is miniscule when compared to that of similar agencies in Chile or Brazil (their agencies have a budget three and 17 times larger than Seda’s, respectively (see this post).
Seda also helps few businesses (just less than 11,000 in 2015/16, compared to for example Brazil’s Sebrae which in 2014 assisted 2.2 million businesses or one in five businesses in the country (see this and this post).
Seda might be able to improve its impact if it made use of better business advisors and mentors. Shamefully many of its business advisors have never run a business before.
Seda’s new head said in August last year that efforts were being made to improve the skills of its internal business advisors and the quality of its mentors (see this post)
Added to this though Seda is steadily growing its incubator network, the bulk of its incubators are aimed at supporting fairly unsophisticated firms, rather than supporting entrepreneurs that develop more innovative ideas or those that would be able to have a bigger impact on employment.
Little focus on job creators
This support for run-of-the-mill businesses seems to be inherent in the government’s small business support over the years.
Much of the department’s focus for example is on supporting informal businesses – through business skills training offered to informal traders and attempts to partner with municipalities to develop better trading infrastructure in townships.
Yet the department appears to be doing little to assist the real job-creating firms – start-ups with innovative ideas.
The one exception is the launch last year of Seda’s Gazelle programme (see this post), an attempt to help 120 high-growth businesses to grow over three years by helping them source finance and business support. It’s a gamble which might just come off if the private sector is roped in sufficiently.
Rare victory with set-asides
Despite its challenges however the department has scored one important victory for small businesses – in getting the National Treasury to draft regulations that call for state departments and entities to get winning bidders to outsource 30% of the value of contracts to small businesses.
The regulations are expected to take effect from April 1 this year. But the measure will not be compulsory for state entities to carry out. This may dampen its impact (see here).
Ultimately the department’s central challenge is the way it is configured. Small business support is spread across a wide range of departments at provincial and national level and is also located at the level of municipalities.
All this amounts to about R15.5 billion ($1.2bn) in support to small businesses, according to DA MP Toby Chance, who sits on the small business committee.
Better co-ordination would therefore help. Yet more effective than just another line ministry might be a small business function in The Presidency or a high-profile committee headed by the president and staffed by heads of agencies and private-sector organisations that assist SMEs (similar to Malaysia’s National SME Development Council).
Importantly, if it is to make more of a radical impact the department and the government as a whole should be more bold and step out with more aggressive instruments that incentivise funding and support from the private sector.
The Treasury’s Jobs Funds, the R&D tax incentive, 12J venture capital tax incentive, Technology Innovation Agency’s seed fund and the use of the BEE codes’ supplier and enterprise development to get big companies to help and buy from more black suppliers show that the state is onto something.
In the end the best way for any government to help small businesses is to strip away as much red tape as possible, hire better and more accountable public servants and incentivise the private sector – big firms and organisations – to ratchet up support to small businesses.
Getting this right could result in real radical economic transformation.
*For more on the Department of Small Business Development's plans for this year see this recent post.
Timm is a South African who writes on small business. This opinion piece was included in the 2017 Global Entrepreneurship Monitor (GEM) report for South Africa (find it here). Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a