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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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Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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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Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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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Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
Proposed Funding Model in Detail (cont.)Proposed Funding Model in Detail (cont.)
• Graphical presentation of funding model
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Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
SME Venture Capital Fund 2
SME Venture Capital Fund 3
SME Venture Capital Fund 4
BridgeFin Business Mentors
Khulula SME
Proposed Funding Model in Detail (cont.)Proposed Funding Model in Detail (cont.)
• 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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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
Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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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Presentation to Portfolio Committee on Economic Development:Presentation to Portfolio Committee on Economic Development:
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