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Small and medium-sized enterprises (SMEs) are the backbone of economic growth and development in Sub-Saharan Africa. Recent estimates show that 80% of Africa’s workforce is employed by SMEs. A thriving small/medium enterprise in Africa can create jobs, provide income, reduce poverty and more.
One challenge SMEs are up against is access to financing; it’s the second most cited obstacle facing SMEs in emerging markets and developing countries. SMEs are often referred to as the “Missing Middle” because they’re caught in the gap between microfinance and traditional institutional financing.SMEs in Africa – the missing middle – offer unique opportunities. Let's take a closer look at SMEs in South Africa and what could be done to spur SME growth in South Africa.
What’s a SME?
To learn how to best serve SME growth in South Africa, you first need a working definition of SMEs. SME stands for “Small and Medium-sized Enterprises.” It’s a term used to classify businesses based on number of employees and/or annual revenue. SMEs play a significant role in many economies, providing employment, driving innovation and contributing to economic growth.
There is no standard, international definition for SMEs because “small” and “medium” are dependent upon the size of the domestic economy. McKinsey & Company defines a SME generally as “a separate and distinct business entity, together with its branches or subsidiaries, if any, including cooperative enterprises, managed by one owner or more predominantly carried on in any sector or subsector.”
What SMEs in South Africa Need
With the high unemployment rate in South Africa, job creation is an integral part of the economic recovery. SMEs are a major driver of job growth in the country, employing between 50 and 60% of South Africa’s workforce. However, SMEs face many challenges that keep them from reaching their full potential. Here are a few needs that SMEs in South Africa have.
Support From Financial Institutions
SME funding in South Africa often comes internally from friends and families, not commercial banks, because they don’t have the required credit criteria. Organizations like The World Bank are working to improve SMEs’ access to finance and find innovative solutions to unlock new sources of capital.
Business Training and Education
Investing in capacity-building programs for SMEs can provide entrepreneurs with the necessary skills and knowledge they need to run successful businesses. Even small investments of time and resources in business training programs can go a long way in ensuring that SMEs thrive.
Investment Capital
Investment could provide vital capital to SMEs in Africa (the missing middle), and has the potential to amplify their impact on local communities and economies. Access to financing could help SMEs break out of the missing middle and unlock their full potential.
What’s Impact Investing?
Impact investing is one form of SME funding in South Africa. It's a way to invest capital that may generate financial returns alongside positive social or environmental outcomes.
The lack of access to capital for South African SMEs is a significant issue, with most businesses struggling to get the necessary funding for their operations. This problem has been exacerbated by the fact that many SMEs in Africa fall into the missing middle.
Contribute to SME Growth in South Africa
As an Africa-focused venture capital firm, Renew Capital provides opportunities to accredited investors who want to invest in African SMEs and help them grow. We’re committed to helping SMEs in Africa—missing middle companies—get access to the funding they need to make a lasting impact on their communities and the continent.
Applicants to the Renew Capital Angels network must be accredited investors per the U.S. Securities and Exchange Commission definition. In addition, applicants should understand and be able to handle the risks involved in investing in frontier markets.
This blog should not be viewed as investment advice, or as a solicitation of an offer to buy or sell securities or to adopt any particular investment strategy. Impact investing, and investing in frontier markets specifically, is speculative in nature and involves a high degree of risk. Investors should fully understand all risks and consult with their independent financial, legal and tax advisors to determine whether any particular investment or investment strategy is appropriate for them. Renew Capital does not make any recommendation regarding the appropriateness of any specific investment opportunity for any specific investor.
