South Africa's Jobs Fund Is Not For Startups and Small Business

Is the Jobs Fund supporting small business?
At a  workshop with the Black Business Council the Jobs Fund (see associated presentation)  has indicated it will not fund:

Start-up companies and initiatives with no track record or proven capacity to implement.

(To access the presentation, please see the “Latest News” section of the Jobs Fund
The New Age reports that start-up companies need to  partner with empowered companies with proven track records. The intent behind this is to ensure that the Jobs Fund targets projects that have the strongest case for success, in terms of addressing unemployment.
The logic behind this decision however is questionable for six related reasons.

South Africa Jobs Fund meeting its objectives?

First, adopting this approach is unlikely to meet the Jobs Funds objectives. The Jobs Fund states its goals as follows:

• The ultimate goal of the Jobs Fund is to identify and learn from effective interventions and programmes that will contribute to accelerated job creation and a better functioning labour market.
• The specific goal of the Jobs Fund is to provide a mechanism that can identify and fund creative solutions to overcome identified barriers to job creation and active labour markets.
• In the process, the Jobs Fund aims to create a minimum of 150 000 sustainable jobs in South Africa over a five-year period. A “sustainable” job in the context means a new, full-time equivalent job that is self-sustaining beyond the lifetime of the initial grant.

The goals are laudable, however it will not offer answers to the question – What interventions are potentially scalable to encourage start-up activity? This is potentially the biggest unanswered questions in our attempts to bring about more equal ownership of the economy. The Jobs Fund has however structured itself in a way that it will not learn about the experiences of start-ups in South Africa. Ironically, this approach limits the role of potential jobs arising from South African start-ups.

Small business creates jobs

Second, small business must play a role in job creation. However, the revised criteria not only places onerous conditions on start-ups, but also signals that it will focus on high growth sectors and labour absorbing sectors. The focus aims to align spending with opportunities that have strong focus on growth, and could create jobs. However, successful small businesses will emerge not only in current growth sectors, but in sectors that are embryonic.
Reading between the lines it is thus conceivable that the small business are left out from a potential funding source as by their very nature they are often in sectors that are outside government definitions of “high growth” sectors .
To be fair, the current reports on the Enterprise Development window shows that funds are directed at intermediary organisations, some providing financial and non-financial support to small business. The point being made is that the Jobs Fund should work more closely and more directly with small business especially in terms of government supported venture capital.

Unfair to startups

Third, the terms of entering into partnerships are unfair to startup owners. Essentially, what The Jobs Fund is suggesting that start-ups enter into agreements with larger companies, with larger empowered companies holding the trump cards. Arguably, partnerships could be based on a non-financial contribution. Even in this case, it is an onerous process to undergo, to access potential government funding. To be clear, start-ups need all the support they can get, but potential founders are less likely to emerge when they are required to (a) find matching funding and (b) possibly give up equity to a larger partner.

Support opportunity Based Entrepreneurship

Fourth, opportunity based entrepreneurship creates jobs. The Global Entrepreneurship Monitor (GEMS) shows that across the globe focusing on opportunity based entrepreneurs yields good outcomes on the creation of jobs. Testing what makes opportunity based entrepreneurship works is thus crucial to the goal of creating long-term sustainable employment.

Misunderstanding Risk

Fifth, the Jobs Fund does not understand risk in a way that is supportive to the goal of job creation. The Jobs Fund adopts an approach that is focused on the These criticism of The Jobs Fund should however be viewed in relation to a startling admission:

The Jobs Fund is not intended to tackle the long-term, structural causes of low growth and unemployment. (emphasis in original).

The approach advanced by the Jobs Fund is thus inherently contradictory. On the one hand, it seeks to create sustainable jobs. On the other hand, it aims to do that without tackling the underlying causes. It fails to understand the risk of long term structural unemployment requires tackling the underlying reasons for structural unemployment. This can be done through supporting start-up activity, but also supporting interventions that focus on making access to value chains more accessible.

Crowding out venture capital

Sixth, start ups will compete with the Jobs Fund for limited funding.  Xolani Ndungane is quoted in Engineering News as follows:

Our target is higher, not just in terms of jobs, but also in terms of the amount of money we bring in from the private sector to co-fund the initiatives,”

The stated aim is to raise an additional R 10 billion from the private sector. There would be no problem with raising additional funding if the criteria supported new entrants into the economy, especially black small business. However, as it stands the raising of funds may impact on the already limited venture capital funding available for start-up funding. Should companies be incentivised to support Jobs Fund, or directly support opportunity based start-up businesses?

A Lost Opportunity?

Sadly, the positioning of The Jobs Fund does not change the opportunity basket available for start-ups and small business. We could receive a better impact for the initial R 9 billion invested by government in the Jobs Fund, through supporting start-up activity. The first investments in start-ups might not yield much needed jobs immediately, but could over the longer term begin to transform the underlying reasons for economic equality. Ultimately, the Minister of Finance is not going to be able to report to Cabinet about lessons learned about starting up in the South African economy, and that means we have not taken steps to utilise public funds to understand the practical steps to structural change in the economy. In short, the current approach to funding projects by The Jobs Fund fails to support a key vehicle of economic democracy and employment creation – start-ups.