inovoIn his budget speech late last month, finance minister Pravin Gordhan announced that government was allocating R3.9bn over the next three years to small, medium and micro-enterprises (SMMEs), and co-operatives. The funds supplement the R1.5bn in contributions from the private sector, raised through the CEO Initiative, to set up a small-business fund to support entrepreneurship.

Gordhan’s announcement builds on previous government initiatives to support SMMEs, including a favourable tax regime and plans to spend 30% of government’s procurement budget on goods and services provided by such businesses.

This kind of monetary support is welcome news. The lack of adequate access to funding is one of the top reasons why SMMEs have such a high failure rate, low growth rates, and employ far fewer people than they potentially could. In providing this support, the government and the private sector are showing that they are serious about reaching the National Development Plan goal of having SMMEs create 90% of jobs by 2030.

However, secure, affordable funding is only one part of the equation. In my experience, working to help small businesses realise their potential, there are a couple of other hurdles (and ways to overcome them) worth highlighting that can make the difference between whether a small business sinks or soars.

The first of these is ideation and customer-focused innovation.

The Global Entrepreneurship Monitor has shown over the years that the failure rate for small businesses is significantly higher when the people who started them did so because they felt they had no other choice, such as if they were pushed into entrepreneurship because they couldn’t find jobs. By far and away small businesses driven by ideas that respond to real-world customer needs prove to be the most successful.

This is consistent with what I have seen in the field. The best, most successful entrepreneurs spotted a customer need that the market was not fulfilling adequately, if at all, and positioned their products as just what the customer needed and wanted. And they did not rest on their laurels after that. They continued to search obsessively for the next innovation they could introduce to their products and processes to make the customers’ lives easier.

Customer-focused innovation is what gives successful entrepreneurs the competitive edge and sets the stage for the future growth of their businesses.

It is also, thankfully, a mind-set that can and is being taught at many business incubators and mentorship programmes. As the government and the private sector scale up funding of SMMEs, so too should they consider scaling up the support they provide entrepreneurs to embrace innovation as a tool for them to out-manoeuvre competition and stay relevant to customers. Entrepreneurs themselves should seek out opportunities to learn how to come up with business ideas and solutions that are relevant to customers.

But once they have built a business that is responsive to and evolves with customer needs, entrepreneurs face a second hurdle: scale — or the lack thereof.

Many of the solutions that could take their businesses to the next level have a high cost threshold. This means that even though an entrepreneur may know that what their business needs to grow they cannot feasibly implement it at their current size. It’s the entrepreneur edition of the classic chicken and egg problem. The business needs to be larger to adopt the solution, but it needs adopt it in order to become larger.

This is the point at which many entrepreneurs get stuck, and their businesses stagnate.

Successful businesses have been able to get around this by leveraging economies of scale in some aspect of their operations. This then allows these businesses to pool their limited resources with other similar businesses to collectively access the benefits without actually having yet attained scale individually.

The same benefits of economies of scale is evident in the uptake of cloud services by businesses to streamline operations. Businesses using cloud services have been able to access communications, financial and data-management tools that offer a similar quality experience as those in place at larger enterprises — but for a fraction of the cost.

That said, businesses should always remain focused on and be guided by the needs of customer. Any solutions that help improve the quality of the customer experience translate to higher customer retention rates, which in turn improve profitability and lay the groundwork for future growth.

The future of small businesses lies in how well those serving the sector can provide the necessary support to help improve competitiveness, efficiency and productivity. If we, somehow, get this right, with any luck small business will become the engine rooms for growth and job creation that we hope they become, and they aspire to be.

This article was first published by Business Day on 14 March 2017.