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The launch this week by the Minister of Small Business Development Lindiwe Zulu of the National Gazelles initiative means the South African government will finally be supporting high-growth businesses. But will it work?
The initiative may be a chance for the department, launched last year, to make an impact on small business development. When small business fell under the Department of Trade and Industry, the department’s frank minister Rob Davies admitted that the government had been less than successful in supporting small businesses.
How it will work
Each year a public call (one is out now) will go out each year for prospective firms. To take part firms must be at least two years old, employ at least two people and have an annual turnover of between R2-million and R30-million.
Auditors Ernst & Young and KPMG will then evaluate the submissions and select 200 finalists. An evaluation team will then further assess those selected and choose 40 firms, which will be given specialised support and access to funding from various stakeholders, including funds, universities, business association and incubators.
Neither Seda nor the programme itself will offer funding. However, the participants will be assisted with the process of applying for funding from various institutions. The plan is for the programme to run for 10 years.
The South African programme will initially be run as a pilot by Mtiya Dynamics and partners after which Seda will take over the running of the initiative, Mazwai details in videos posted on the initiative’s website.
High-growth is good
There is good reason to back high-growth firms. US academic Scott Shane has shown (in this paper) that in the US most jobs are created by just a few fast-growing firms (about six percent of all firms).
A 2013 report by Endeavor (using 2010 data from the World Bank’s Enterprise Survey) reveals that firms growing at 20% or more per year represented only 13% of South African firms, but created a quarter of the country’s net new jobs during the previous three years.
This makes these firms indispensable if South Africa is to meet its National Development Plan’s target of having small firms create 90% of the 11 million jobs by 2030.
Endeavor’s jobs calculator estimates that 44 000 small firms growing at a rate of 20% per year would be enough to create these 9.9 million jobs. It would take 7.4 million micro firms to create the same number of jobs. So high-growth firms are pretty valuable.
Not a good track record
Yet worldwide governments have not been too successful at fostering high-growth entrepreneurs.
The main challenge notes academic Erkko Autio is that it is often hard to prove that a programme was successful because it produced winning entrepreneurs.
Often it’s because it picked winners in the first place. But then what’s the point of selecting good companies if private initiatives could have done the same thing?
But a recent eight-year study by Autio and his college Heikki Rannikko of Aalto University of a programme run by the Finnish government to foster high-growth companies, proves however that governments can be successful with such programmes.
The authors found that each one euro spent by the Young Innovative Firms run by the Finnish National Technology Agency generated 1.11 Euros in additional sales. This matters as participants can receive support valued up to one million in euros over the three-year length of the programme.
Autio stresses that to avoid picking the wrong firms the Finnish programme steered away from picking the wrong companies by having panels of judges and milestones that are vigorously focused on removing participants and retaining successful ones.
Finland may be an advanced country but key will be for the South African programme to adopt measures that ensures only the best are kept and nurtured.
One successful South African accelerator head says those entrepreneurs he supports are grilled regularly by panels that rip into their business ideas and regularly leave them in near tears.
It’s this kind of raw, yet honest approach which is needed if high-growth programmes are to succeed.