I read with some interest the article (https://www.moneyweb.co.za/news/south-africa/can-sa-create-an-additional-100-black-industrialists/) from Ray Mahlaka, looking at the “Black Industrialist” programme in South Africa and I feel there is a side to this story which is core to maximising this initiative.
At least once a week, we receive applications from entrepreneurs who have been approved by the Black Industrialist, Agro-Processing grants or similar schemes for millions of Rands of funding. What are they looking for ….? Funding.
Say what?
Take for example the film production business which has been “approved” for R3m in grant funding. Their only catch is that they need to raise another R1.5m in capital to unlock the grant. What about the food manufacturing business which has been “approved” for an R8m grant – they just need to come up with a further R12m to access the funding.
Last week we had a logistics business that had R5m in grant funding which fell through because they couldn’t find R500 000 to pay for some capital equipment required for the grant.
Many people don’t understand that these grants are commonly called “matching” grants which means that the Department of Trade & Industry (DTI) will match a certain percentage of the contributions put in by other investors. For instance the Black Industrialist Scheme (BIS) grants are typically 30-50%. Unless the entrepreneur can contribute the other 50 – 70%, they won’t receive the grant funding.
What is interesting about all 3 of the instances I touched on above was that when they take their “approval” letters to private sector lenders, they are turned away. The questions that invariably come up:
- How are you going to service the loan from the bank?
- What collateral are you going to put up?
- What team have you got in place to look after our money?
We can debate risk appetite from the banks but at the end of the day, if the credit committee and affordability rules are “X”, then you can shout until you’re blue in the face, these entrepreneurs with no capital of their own are not going to unlock the approved grant funding.
The grant system needs coordination with the private sector
Government comes in for a lot of stick around economic policies but I would argue that many of it matching grant systems, do work and unlock a significant amount of value for businesses in South Africa.
For example, very few people know about it, but there is an Export Marketing and Investment Initiative which assists South African businesses to showcase SA manufactured goods by funding businesses to present at international trade shows. According to one of our partners, they took over 400 businesses overseas in 2017 at a cost of R32m and this saw combined sales of over R4bn.
Another of our partners has extracted over R5bn in grants and tax incentives for technology focused businesses over the past 7 years.
There are plenty of success stories, despite a decade of economic malaise.
I come back to the example of the food manufacturing business. It’s a 2 year old business turning over R1.5m per year, its founder is a real hustler – good enough to be able to get letters of interest from a big listed corporate – and good enough to be able to get through the DTI application process for the BIS scheme. But the guy is in his mid-twenties with no real asset base. Where is he going to find R12m?
In his case, he probably could have unlocked the R12m through a combination of Supplier Development and debt funding but he arrives at the bank asking for a R12m loan from an entry-level business banking consultant. The bank takes one look at his personal finances, another look at his business finances and the math simply doesn’t add up.
What he actually needed was a combination of finance and legal skills to help him structure and present the deal but when you’re so busy trying to survive as a small business, you have no way of paying for these specialist skills.
If the DTI had taken a portion of the R8m that it had approved upfront and allocated it toward bringing these skilled people into the business for a certain period of time, you could have achieved a couple of things:
- Important skills transfer to the entrepreneur
- Improved due diligence around the quality of the business you ultimately want to lend to
- Given the entrepreneur access to finance and Supplier Development initiatives they probably didn’t even know existed
Role models and knowledge transfer are so important and In Ray’s coverage of the Black Industrialist initiative, Brian Naidoo the MD of Microfinish is held up as a success story. A quick Google search shows that Naidoo has experience in the property sector, put his own capital into buying the business originally, has done extensive work with the DTI and been on a number of international roadshows and trade delegations.
I don’t know Naidoo at all but it’s clear that he has access to skills and access to people who understand the requirements of both government and the private sector.
One of our partners – Knife Capital / KNF Ventures – always talk about the concept of Knowledge, Networks and Funding (KNF) as the cornerstone to entrepreneurship success, with funding being the least important. If you want to make the Black Industrialist scheme work, throwing money at the problem isn’t going to solve it. You need to inject the knowledge element into these businesses to give them the best chance of survival.
** Marc Ashton coordinates a network of finance professionals passionate about developing entrepreneurs in South Africa. You can connect with him on LinkedIn (https://www.linkedin.com/in/marc-ashton-9638034/)
