Purpose as a Driver of the SMME Startup Ecosystem Sustainability
By Anele Ngidi
An ecosystem is a community that is supported by a foundation of interacting organisms.
Each member has a specific role to play in the functioning of the ecosystem, and when a member does not perform its function, it all falls apart.
A startup ecosystem, therefore, comprises various interacting organisations and individuals, which serve as its organisms.
Typically, these include small, medium and micro enterprises (SMMEs), funders, enterprise support organisations (ESOs) and regulators. While all these organisms are important, they mean very little without the SMMEs themselves.
A 2022 study by the University of Western Cape revealed that 70-80% of small businesses fail within five years.
Some of the often-cited reasons for the failure of these businesses include lack of funding, lack of access to market and policies that are unsupportive.
However, this study specifically concluded that 40% of the success of small businesses is determined by “the person of the founder”.
Usually, issues such as entrepreneur readiness and credit worthiness among others, are mentioned in this regard.
While these reasons are valid, what is sometimes overlooked are the problems that SMMEs themselves create when the very basis of their existence is not sound.
This is where purpose comes in.
I recently attended a webinar where the speaker reminded me of some of the strategy and sustainability lessons from my MBA studies, some of which had admittedly been somewhat forgotten.
His presentation highlighted how focusing on purpose can help build more sustainable businesses, by considering all members of the ecosystems within which organisations operate and identifying opportunities of mutual value creation.
Even though the context was slightly different, this made me think about how the same concept could be applied to drive sustainability within the startup ecosystem.
Berkely University’s Greater Good Magazine describes purpose as an abiding intention to achieve a long-term goal that is both personally meaningful and makes a positive mark on the world. Within the business context, this would mean a situation where entrepreneurs establish their businesses not only due to personal circumstances, but primarily to solve specific unmet needs.
While it is also internally focused, purpose is largely externally focused.
Concerningly, a study by the Global Entrepreneurship Monitor released earlier this year indicated that in 2022, 89.5% of the surveyed early-stage entrepreneurs had established their businesses due to “a need to earn a living because jobs are scarce”. By implication, these businesses are less likely to be premised on solving for any clear market need, thus putting their sustainability into question.
While it is not impossible for businesses that are born purely out of some desperate need to succeed, if the main reason is merely solving the individual’s own unemployment problem, the odds of succeeding are reduced. Forming businesses that are not backed by a specific purpose can potentially result in a vicious cycle, where they are rendered unsustainable, and unable to solve the issues they are meant to solve.
A vicious circle can be described as a problem or difficult situation that has the effect of creating new problems, which then cause the original problem or situation to occur again.
For the purposes of this article, the focus will be on the unemployment problem, which the national development plan (NDP) envisions will be solved by SMMEs, through employing 90% of the South African workforce.
How this vicious circle would play out is as depicted in figure 1. Lack of clear purpose could lead to poor product/service design, inability to attract customers and grow, ultimately resulting in unsustainable businesses that cannot create sustainable jobs.
Out of being desperate and unemployed, some people would therefore continue to establish these-non-purpose led enterprises, resulting in the continuation of the problem.
Within the wider startup ecosystem, the vicious circle would unfold as depicted in figure 2.
SMMEs that do not have a clear purpose would limit the ability of ESOs to capacitate them.
From a regulatory perspective, this would result in challenges with implementing enterprise and supplier development (ESD), as envisaged in the BBB-EE codes. Funders would also not be able to play their role within the ecosystem, thus perpetuating the cycle of unsustainable jobs.
Despite many SMMEs being created over time, unemployment in South Africa remains high at 41.9% using the expanded definition employment rate.
Old Mutual Insure estimates 60-70% of the South African workforce to be employed in the SMME sector.
This suggests that SMMEs are yet to achieve the originally envisaged NDP goal. So, what is the solution? South Africa’s problems are many, thus creating numerous opportunities for solution-driven products or services. While one cannot dictate how the unemployed should solve their problems, those contemplating to start businesses should be encouraged to invest more time in identifying real gaps or problems.
This would set off a positive chain reaction known as a virtuous circle.
A virtuous circle refers to a chain of events where one good thing starts happening, leading to other good things happening, thus causing the first thing to continue happening. Focusing on managing specific pain points of potential customers would result in mutual value creation for both the SMMEs and customers.
This way, they would be more likely to establish purpose-led businesses which are sustainable and able to create sustainable jobs.
Often, when issues of SMME sustainability are discussed, a lot of responsibility is placed on big corporates, especially within the context of ESD and market access.
However, if SMMEs are to be effective in playing their intended role, they must also be somewhat held accountable for the problems they create. This includes ensuring that they establish businesses that stand a better chance of succeeding through better product or service design.
This would also make it easier for other ecosystem players to play their roles, ultimately resulting in a more sustainable SMME startup ecosystem.
Anele Ngidi is the Manager for the Project Management Office (PMO) at 22 On Sloane, Africa’s largest startup campus.
BUSINESS REPORT