Social enterprises can contribute to generating the inclusive economic growth South Africa so desperately needs to address some of its developmental challenges.
Small and medium enterprises (SMEs) play a big role in the economies of developing countries, contributing up to 40% of national income in emerging economies and generating seven out of ten jobs. Social enterprises tend to fall into the SME category. Social enterprises represent opportunities not only for the economy, but also for the achievement of the United Nations’ Sustainable Development Goals (SDGs).
In a 2021 op-ed for Daily Maverick, Zak Essa, a consultant at the Bertha Centre for Social Innovation and Entrepreneurship Innovative Finance, examined the ways in which social enterprises are filling the gaps left by governments and non-profit organisations (NPOs).
“Despite the grim backdrop of pervasive poverty, unemployment and social instability, there is hope. In the oft-referenced National Development Plan (NDP) and many subsequent briefs, small businesses have been seen as a key component of any inclusive economic growth strategies. In fact, the NDP envisions 90% of new jobs being created by micro, small and medium enterprises by 2030. Outside of creating jobs and stimulating economic growth, imagine if a share of these businesses was also addressing the other development challenges we face as a country.”
Zak Essa, consultant at the Bertha Centre for Social Innovation and Entrepreneurship Innovative Finance
Social enterprise growth is needed across Africa
Across Africa, it is believed that there is value for developing countries when businesses combine profit generation with positive social impact – a key characteristic of a social enterprise. This was evident from South African minister of social development Lindiwe Zulu’s meeting with African Development Bank (AfDB) in 2023. The parties agreed that helping Africans to acquire the skills to start and scale businesses is critical to building resilience.
The AfDB article reported on the South African delegation’s visit with AfDB Senior Vice President Bajabulile Swazi Tshabalala and AfDB President for Agriculture, Human and Social Development, Beth Dunford. It touched on the following points:
- The South African government is prioritising social entrepreneurship as a long-term development strategy.
- Boosting entrepreneurship opportunities for youth and women is of particular importance.
- There is value in including issues such as social entrepreneurship and social enterprises in the AfDB’s country strategy paper for South Africa.
“We really think getting people the skills they need to drive the transformation of the country with ingenuity, energy, the resources they have, and to take forward their own ideas to really drive the private sector, which is the future.”
AfDB President for Agriculture, Human and Social Development, Beth Dunford
Investor shortages challenge social enterprises
In his Daily Maverick article, Essa writes that social enterprises are seriously impeded by the lack of start-up finance, particularly in Africa. This is despite requiring relatively small amounts to move from the start-up to growth phase, where responding to developmental challenges might happen at a larger scale. His article identifies how social enterprises are challenged by the same funding gaps that hamper most SME start-ups. However, investing in social enterprises involves financial as well as impact risk for funders, adding an additional layer of perceived and actual investment risk for investors. He notes that some of the funding challenges include:
- Social enterprises registered as NPOs make investor equity stakes impossible.
- Unpredictable or seasonal cash flow may make traditional debt inappropriate.
- Social enterprises may have limited capacity and limited networks for fundraising.
Essa’s article proposes that investors draw inspiration from the innovative ways social enterprises are changing business to re-think their traditional approaches to funding. Alternatives such as revenue-based debt or quasi-equity might allow for less predictable cash flows. He proposes establishing deal pipelines to innovation agencies, accelerators and incubators; establishing and marketing open application portals; and drawing on the private sector to accelerate social enterprise development.
“These businesses inspire optimism, but if we want more social enterprises to reach a stage where they can significantly contribute to solving the problems we face, we must invest and nurture them in their infancy.”
Zak Essa, consultant at the Bertha Centre for Social Innovation and Entrepreneurship Innovative Finance