ON TUESDAY investment banking group Goldman Sachs joined Warren Buffett's Berkshire Hathaway in announcing it would be pledging a $500m charitable loan to support 10 000 small businesses in the US.
"We participated in things that were clearly wrong and we have reason to regret, and we apologise for them," was the comment made by Lloyd Blankfein, Goldman Sachs chairperson and CEO.
The quantum of the deal in the US context is not massive, but what I found interesting was the motive for doing it - charity.
Every week we receive press releases from banks and financing houses telling us about all the good things they are doing for small firms in terms of business support services and financing. So often it comes across as their good deed for the day.
This is wrong and the big funding bodies like banks and the Industrial Development Corporation need to make a mental leap if they are serious about creating sustainable investments.
For example, I interviewed an entrepreneur a couple of months back. He recently received funding from a grassroots investment fund. Apart from a quick photo session for the media, the original funders have never come back to follow up on the progress of their investment. If they had, they would have found out that he has not only grown as a business owner - which in theory lowers their risk - but is ready to once again expand his business.
Meaningful clients in the making
The lenders saw it as a charity project, not a long-term business prospect. In such a case, they lose out.
Going out saying that you support 10 000 small businesses because it looks good on a social responsibility scorecard and in your press coverage is wrong.
Rather say you are making a long-term investment in a group of 10 000 entrepreneurs to build sustainable businesses, which can ultimately employ 100 people each. As the lender, you lower your risks and the small business becomes a more meaningful long-term client.
If you treat small- and medium-sized enterprises (SMEs) as that quaint little piece of your business you roll out when somebody asks what you contribute to society, you are approaching it the wrong way.
If you treat someone or something like a charity case or a nice-to-support, that is how it is going to behave. Treat it like a serious business, and it will conduct itself accordingly.
A comment made by a guy who runs an SME incubator was that because funding was being dished out for the wrong reasons, entrepreneurs themselves were not taking their business ventures seriously.
Banking on sector expertise
When things go well they take the kudos, but when they go pear-shaped they simply walk away from the venture. The funder shrugs and writes off the "investment" because it was made in the name of social responsibility.
South Africa is an economy dominated by big players. Occasionally a "disruptor" will come along, but in general it is tough for a small business to gain traction in most industries.
The problem with that is government's belief that small business is the way it is going to tackle our mounting unemployment. So, opposing forces have to be faced and a mentality change is needed if we are serious about the sector.
Having said that, I think many of the big banking groups have finally twigged that they can't get their heads around the SME space and are reaching out to people who have a better grasp of it.
On Thursday Nedbank will announce a funding deal with incubator Raizcorp, while Standard Bank has teamed up with Franchize Directions to assist in interacting with South Africa's franchising sector.
To make that jump away from the "soft and fluffy" attached to small business, the big funding sources need to cut through the idea that supporting SMEs is a good thing.
Instead, they need to draw on the skills of entrepreneurial mentors like Allon Raiz, Scott Cundill and Rob Smorfitt to make sure that instead of treating up-and-coming entrepreneurs as social responsibility projects, they are seen as the major clients of tomorrow.
- Fin24.com