A worldwide study of small and medium-sized companies (SMEs) – the Start-up Genome Project – found that SMEs most often failed as a result of an imbalance in growth in respect of five factors.

Balancing the growth between customer numbers, products, employees, the business model and the funding, including cash flow, to proportionally scale the SME was required for long-term success, venture capital company Knife Capital co-founder and partner Keet van Zyl said this week.

“These five factors must increase in scale proportionally and highlights the importance of business skills for SME success. While the individual entrepreneur or management team may be technically brilliant, business skills are critical for sustainability, specifically a commercially sound execution strategy.”

One of the core functions of venture capital fund companies was to bring these expert business skills to SMEs and, while venture capital companies tended to take minority shares in such small businesses, contracts ensured that they had seats on the boards of the businesses, while execution mandate deviation clauses ensured that the SMEs kept to the execution plan.

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Small business start-ups, typically artisanal, service or retail businesses, contributed 95% of the job creation taking place in South Africa, Van Zyl stated at a private equity seminar hosted by the South African Venture Capital and Private Equity Association and the Gordon Institute of Business Science.

“We need to foster these companies, because they are the heartbeat of South Africa.”

He pointed out that there were many isolated SME support structures in the country in the form of government support agencies and initiatives, venture capital firms, nongovernmental organisations, business incubators and business accelerators.

However, these diverse support mechanisms had to be bundled together to provide SMEs with broad support options to sustain their businesses, as well as personal networks to provide support and exposure.

“Entrepreneurship does not happen in a vacuum and government should provide a good enabling environment for such companies, including embracing the nongovernmental support initiatives of all stakeholders.”

SMEs spent around 8% of their revenue on meeting compliance regulations, while large companies spent only 1% of their revenue on regulatory compliance, highlighting the pressures facing smaller and start-up businesses.

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While most of the SMEs Knife Capital dealt with believed that they only required funding to be successful, Van Zyl noted that the main requirement for success was a large addressable market.

“Most start-ups are funded through personal capital, or [through funding from] friends and family, with angel investors, banks, venture capital funds and government collectively [providing] only about 23% of the funding for start-ups.”

There were many ways for South Africa to drive start-up and SME growth, specifically through tax incentives for people using their personal capital to invest in SMEs, such as out of their bonds or savings.

Further, similar to the UK, South Africa could greatly increase investment in SMEs through the provision of incentives to wealthy individuals for investing their personal capital into SMEs through a mechanism of risk protection in the form of a tax break for the invested amount should the SME fail.

“Incentivising investment in SMEs and start-ups can be a significant catalyst for growth because it can help make the entrepreneurship landscape robust and sustainable.”