FNB Fairland Campus. Image: Devina Haripersad.
For the South African entrepreneur, current interest rates, fuel price hikes, an electricity crisis and a dwindling Rand against the US Dollar has rendered the economic landscape in the country a battlefield.
What are their hopes and dreams of creating an industry powerhouse in the face of raging energy challenges, with even middle-class clientele battling to make ends meet and stifling global happenings that are out of anyone’s control? The situation seems hopeless.
Yet still, if the applications for business loans that have landed on the desk of banks across the country are anything to go by, the spirit of entrepreneurship is raising its weapons and taking up that gauntlet.
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Running on empty, they are fighting through the darkness, with their backs against the wall.
“The youth of South Africa have proven their resilience during the hard days of Covid-19, bringing forth viable business ideas and seeing it through. The current economic gloom has not dampened their enthusiasm and deterred them from rising to the challenge,” said Heather Lowe, Head of SME Development at FNB.
FNB has nodded in the direction of the robust entrepreneur, across the economic battlefield. It has cast a glance at their shortcomings and challenges, offering itself as armour bearer and set forth to hand these entrepreneurs practical weaponry.
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Gordon Little, FNB Commercial CEO, explained: “You have these entrepreneurs coming out from previously disadvantaged backgrounds, without assets for collateral, without bank statements and the typical things a bank needs in order to grant them access to capital but with a working business model that just needs holistic investment for development. This was a gap we were looking to fill”.
Today, 8 November, the bank launched its fourth instalment of its Vumela Enterprise Development Fund, where it will put forward R200 million for deployment into what the bank is calling alternative SME financing solutions.
But how ‘alternate’ is this funding model? FNB Commercial, together with Edge Growth, manage the Vumela Enterprise Development Fund and through it makes equity investments into high growth SMEs currently struggling to access finance through traditional channels.
The development funding applies to both early-stage ventures as well as more mature expanding businesses.
These are businesses that are either too large for microfinance, don’t meet traditional credit criteria in terms of collateral and balance sheet requirements, or are too small, at too much of an early stage for private equity, and don’t generate the exceptional returns that venture capital seeks.
So far, there has been three tranches of the fund’s deployment over the last decade and a bit.
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Each instalment since its initial launch in 2010, has set out to meet a specific need in the SME sector.
“Back in 2010, Vumela offered early-stage funding. But that’s developed over time and we’ve been thinking about what gaps we can fill and where we can step in,” said Richard Rose, the CEO of Edge Growth Ventures.
It was in 2018, that the bank started to focus on the provision of more bespoke forms of funding.
As weathered and textured as the economic history of the majority of South Africans is, so are the number of complexities that surround each specific case of budding or developing entrepreneur within the landscape. For this reason, the experts have recognised the need for contextual funding.
“We saw – particularly during covid – that there are SMEs in their very early stages that just really need access to small amounts of capital – something like R50 000. It’s a contextual funding. The context is they need money and they need money quickly, but they don’t have financial statements; they don’t have management accounts and they don’t have the things the typical commercial lender really needs in order to fund them,” explained Rose.
The Vumela fund has thus identified two major gaps around which the fourth instalment of Vumela will be centred.
The first gap is amongst early or seed-stage SMEs, who cannot access funding due to their lack of investment readiness and/or performance risk within their operations.
Vumela designed the Accelerate Loan in response to this. This is rapidly accessible funding for capital expenditure, working capital or operational expenditure.
The Accelerate Loan comes with higher risk, and as such, the bank says that it will initially be piloted within the ecosystem of participants in Edge Growth and FNB Business Development Support Programmes.
The second gap speaks more to tech-enabled South African scale-ups. These businesses, relative to international counterparts, take longer to raise Series A and B funding rounds and receive lower valuations. Because lower valuations follow them through successive funding rounds, the cumulative dilution of founder shareholding can mean that entrepreneurs who do manage to secure funding end up with excessively diminished stakes in their businesses.
Vumela has, therefore, designed the Venture Debt product aimed at supporting businesses with significant potential without diluting founder equity. Venture Debt is a non-dilutive loan.
The bank reckons that Vumela together with the development support programmes are the five smooths stones the bank is placing in the hands of approximately 150 businesses to help them fight the giants they face on the economic battlefield.
At the same time, the initiative is hoping to support the engine of job creation and transformation. “SMEs are the engine of job creation, transformation, and reduced wealth inequality. Over the past decade we have analysed and mapped the South African funding ecosystem in detail, and we are becoming more confident in the potential of Vumela to effectively address the needs we have identified. Today, Vumela plays a critical role in alternative financing,” Lowe concluded.
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