ENTREPRENEURS looking for help to set up and grow their businesses may be in for a massive boon if the Department of Trade and Industry goes ahead with plans to roll out more incubators in South Africa. But creating sustainable incubators that develop quality businesses won’t be easy.
The Minister of Trade and Industry Rob Davies last month told the portfolio committee on trade and industry that the government was looking “quite deeply” at improving support to small businesses and that incubation programmes – where entrepreneurs have access to equipment and subsidised office space – were possibly among “the best programmes where we get results”.
Davies said the challenge would be how to scale this up. South Africa has about 40 incubation schemes, whereas Brazil has 400 – having grown this from 135 in 2000.
The Small Enterprise Development Agency (Seda), which has 31 incubation centres, believes that small businesses fail at a rate of about nine in 10 in the first two years of operation, but that after graduating from a Seda incubator the survival rate climbs to over 70%.
Seda’s Jayesh Ravjee, senior manager of technology and business incubation, said one consideration was how to get universities more involved in incubation, as is the case in countries like the US and Brazil. Currently local universities don’t have targets for commercialisation and were not as resourced as other universities worldwide to fund the setting up of incubators.
Ravjee said another consideration that Seda was currently looking at to boost the sustainability of incubators and the quality of businesses they incubated, is for incubator managers to take equity in incubatees. His idea is that any dividends would then be ploughed back into the incubator to help fund support such as rent and mentoring.
Raizcorp, a privately-run company takes a 33% stake in entrepreneurs it helps.
Allon Raiz, Raizcorp chief executive, said incubator practioners are caught in a dilemma because they must try tackle market failures without creating a “tame lion that can only live in the zoo”.
Raiz says subsidised rental and support often cripples those businesses that graduate from incubators, as many of them are not prepared to take on the extra costs.
Raizcorp use a panel of specialists to regularly interrogate incubatees on their business idea, while charging rental that is just under related market rates. The incubator also has a tough application process – it doesn’t take ideas, as businesses have to be already operating and turning at least R10 000 a month.
Currently Raizcorp has 220 incubatees – 90% of them black entrepreneurs. About 600 have exited the programme. About 5 000 jobs are created by these businesses which have a total combined turnover of about R300m.
But Julian Webb, an Infodev consultant who visited South Africa last month (MARCH), said he wasn’t so sure incubators should have subsidised rental and added that good incubators will use royalties or equity to recoup mentoring and rental costs.
Infodev is a World Bank programme which aims to boost support to incubators.
Webb said government officials, because were not that versed in business, should rather contract the management of an incubator to a private company who could then take equity in incubatees.
Micheal Reddy, chief executive of furniture incubation programme Furntech, said a key dilemma in incubation is the trade-off between quantity and quality.
He said only 10% to 15% of all incubatees became entrepreneurs that employed more than four people. The remainder teetered along as survivalist firms. But he said the idea of Furntech was largely get people off social welfare. Furntech has seven centres, with 66 incubatees generating a combined revenue of R4m and 191 jobs.
Mark Frankel, chief executive of Shanduka Black Umbrellas, which assists black entrepreneurs and has 57 incubatees across its three centres, said when the organisation started in 2005 it originally had an open-door policy, but that more intense application process has since been introduced to ensure that the incubator supported the right kind of person.
Frankel said because of the changes only four incubatees had graduated from the incubator, while many others have had to leave because they couldn’t pay rental or had ceased operating.
This article appeared in Business Day on 19 April 2011.
Stephen Timm is a