- Some small and medium enterprises form part of South Africa's "missing middle" - companies that are too big to be funded as startups but considered too small for big investors.
- Investment firm Secha Capital has been providing SMEs with capital and resources to help them expand.
- Secha takes a minority stake in the company and provides capital of between R3 million and R15 million, but only invests for seven to ten years.
It's a common problem for small and medium-sized companies: they may succeed at first, but struggle to get the funding they need to grow.
For example, in the past few years, South Africa has seen the emergence of haircare brands such as Hair City and Native Child, which have proved popular with consumers. And yet securing the capital and resources for expansion has remained a challenge.
These small and medium enterprises (SMEs) form part of the "missing middle" - a space occupied by companies that are too big to be funded as startups, but too small to be considered by big investors.
Tumi Mphahlele, co-founder of iG3N and former head of corporate strategy at the Development Bank of Southern Africa, said she did not anticipate that accessing capital to grow her business would be as difficult as it was.
'We were ticking all the boxes'
Her energy storage company - which specialises in lithium batteries - began operating in 2019, but had spent a year first setting up its supply chain and staffing. The company then spent another year looking for funding to scale it up.
"I did not anticipate that it would be this hard, especially for the kind of business that we were in," Mphahlele said. iG3N was in both a growth and green sector with renewables, and the business was black-owned. "So we thought we were ticking all the boxes."
Because iG3N had not been operating for two years, it was considered too high a risk by funders. So they waited another year, while growing their business, which should have made it easier for iG3N to obtain its funding; instead, the company met with many hurdles, with some funders deciding to prioritise companies that had been in business for longer.
"Sometimes, we were growing as much as 300% month-on-month, but then there was another hurdle that we had to cross, and then another," said Mphahlele, describing the search for funding as a "full-time job".
However, the company's luck changed in November 2020 when investment firm Secha Capital provided it with capital in return for some equity. Mphahele said looking back, accepting funding and resources from Secha was the best thing to do.
It's a sentiment Lara Maré - co-founder and managing director of Rush Nutrition, a company that manufactures healthy snacks and beverages - agrees with.
"One of the biggest challenges as a small business is that you don't always have the human resources and capital in your business and are basically doing everything yourself, with not much room to breathe," Maré said.
The company, which was started seven years ago, manufactures snacks for its own brand and also processes products for other companies.
But not being able to find the skills to match the budget they could afford was one of Rush Nutrition's biggest problems, making its growth difficult. The company got backing from Secha a year ago, providing it with a cash injection and the skills-related support it needed.
"The industry is quite competitive and without them we would have been a small brand that fell by the wayside," said Maré.
She added that Secha sought out women-owned businesses for investment and that was a positive for Rush Nutrition, which was trying to find its feet in the male-dominated agribusiness sector. Its values, as an impact-investment firm, also match those of Rush Nutrition, which focuses on organic, responsibly produced products.
Kuhle Mnisi, operator-investor at Secha, spent some time as Rush Nutrition's COO, ensuring that it met its need for skills as it grew. The company is one of many that agribusiness and fast-moving consumer goods businesses Secha is investing in, including Native Child, which makes natural hair products, Hair City with its human hair products, shoe manufacturers Geestep and vegetable producer Cultura Fresh.
Mnisi explained that most funding in SA is focused on startups or bigger businesses, leaving those in the middle without support.
"Our investment basis is around investing and looking into SMEs that are in the missing middle. These are sectors that a lot of investors are not looking into," she said.
Secha takes a minority stake in the company and provides capital of between R3 million and R15 million, but only invests for seven to ten years. After that, the plan is to make an exit and let the SMEs continue to grow by themselves.
The next step is for Secha to invest in SMEs in Mozambique, Zambia, Lesotho and eSwatini.