These businesses constitute the largest segment of business ownership, with annual turnovers of between R1 million and R500 million, and they account for 59% of the South African workforce. Yet, they tend to be overregulated and are widely underappreciated, under-recognised, and under-supported. Now that is changing.
GIBS and Scale Up Partners have launched The Scale Up GIBS Centre for Private Business Excellence – a freemium online education and networking platform for missing middle businesses looking to scale up.
Before we can offer support to these businesses, however, they need to be clear about what is driving their choices, and what their strategy is regarding their business trajectory.
The scale-up choice
In Acumen 48, I wrote an article entitled The Scale-Up Choice: Striking the Balance Between Utility and Equity in Entrepreneurship, in which I outlined two types of privately owned business. The first – and this is where most businesses start – is the lifestyle business, which is formed to support the entrepreneur financially. The second is where the owner is intentional about scaling up to create equity value in the business.
While neither option is better than the other, it is the entrepreneurs who want to scale who require support to move a business to the next level of creating equity value. These business owners often need guidance on what is required from a financial, legal, governance, systems/operational, and strategic point of view. This will ultimately help the business owner garner greater opportunities to acquire funding to scale, preparing the business for resale through having the right processes in place, or perhaps even preparing the business for a possible listing.
My intention as a coach and business consultant has always been to support these businesses. This led me and my partner Jordaan Jacobs, under the GIBS umbrella, to launch The Scale Up GIBS Centre for Private Business Excellence.
Unpacking the structural barriers facing the missing middle
As a business coach and an entrepreneur, I understand that scaling a business is not easy. There are many issues that business owners in the missing middle face when wanting to grow, including:
- Access to capital: These businesses are considered too small or risky for commercial lenders to back, and lending models are not designed to accommodate high-growth, low-asset businesses of intangible value. It is estimated that there is a R500 billion funding gap for businesses in this bracket.
- Policy fragmentation: This results in government support being difficult to navigate and is dispersed and duplicative. It includes compliance burdens for business like tax, labour, and licencing laws, which disproportionately penalise smaller formal businesses.
- Infrastructure gaps: These include constraints on power and water supply, fibre instability and costs, along with logistics constraints that disrupt businesses and erode profitability.
In addition, many of these business owners find themselves in what we call the “founder’s trap”, where the attraction of growing a business is appealing, but the founder is unable to manage the extra growth, because up until this point, everything has revolved around them. This means that the business can only grow by how much extra load that one person can carry. So, as the business starts growing, it gets knocked back, putting the business onto a repetitive stop-start loop.
This is where the Scale-Up Centre will add value. Through practice, informed by science, we provide business owners with an enterprise mindset, tools, knowledge, and techniques to allow them to build a robust business and navigate these obstacles. The programme aims to provide clarity, confidence, and control through three key interventions:
- Developing a functional focus – which includes enhancing the systems discipline within the business, including, cashflow, people, and operating rhythm.
- Enabling a transformation focus – which homes in on leadership development, organisational culture, strategic clarity, identity, and resilience.
- Institutional focus – which delves into governance maturity, performance management, control, succession, and stewardship of the business.
Moving beyond education, the Scale-Up Centre has been designed as a multifaceted platform to create an enabling environment in which these entrepreneurs can operate. The aim is to start influencing the ecosystem by providing a broader understanding of these businesses through building up a database and providing in-depth, rigorous peer-reviewed academic research on this class of entrepreneur.
GIBS backs the missing middle
It is for this reason that our partnership with GIBS is so exciting. It means we have the backing of a recognised and respected institution, a leading business school, which gives the programme its academic credibility. Professor Manoj Chiba, GIBS lead for the Centre, stresses that the Centre needs research credibility to underpin it. He explains, “We need research that is housed in rigorous, scientific, methodological thinking. It must not be grounded in anecdotal assumptions. We need to be able to answer, what is the evidence really showing us?”
This research must not only be relevant to academics; it must also inform policy and be of value to business owners. Through our partnership with GIBS, we can also ensure that this research is delivered in a way that makes it accessible and relevant to our members. Chiba says research can be delivered through white papers, podcasts, or short bite-sized videos. We agree that it is extremely important that businesses have access to that information in a form that suits them.
Chiba also notes the need for case studies that inspire business owners through local stories that are relevant in a South African context, given the unique challenges local businesses face. As Chiba says, “While most people want to read about the Discoveries, Capitecs, and Amazons, case studies prove to us that anything is possible and that local business leaders can build big businesses.” He refers to a R4 billion turnover business based in the South of Johannesburg, which is quietly getting on with things but has many valuable insights to share.
Having the backing of GIBS also means that thought leadership on this subject can be delivered through the broader public and private ecosystem, ensuring the missing middle garners greater attention from the country’s leaders.
Partnering for innovation
The Scale-Up Centre is also about networking and innovation. It has therefore caught the eye of Strate, South Africa's central securities depository, which electronically processes the clearing, settlement, and safekeeping of securities for all South African exchanges, including the Johannesburg Stock Exchange. Headed by André Nortjé, Strate plays a central role in South Africa’s financial system, using secure, world-class infrastructure to safeguard around R18 trillion in assets in custody. To do this, it must be at the cutting edge of technology and security, which requires a highly innovative and entrepreneurial mindset.
For the Centre’s entrepreneurs, the opportunity lies in exploring how Strate’s market infrastructure could support private companies in new ways. As Nortjé explains, the aim is to see how businesses in the “missing middle” might, over time, access securities issued through established market infrastructure, opening alternative sources of funding beyond traditional bank or private equity finance. He believes that investors who already support public companies may also see value in well-prepared private businesses. For Scale Up Centre members, that could create an important new funding pathway.
This is part of Strate’s broader ambition to support market innovation and growth by exploring how trusted public market infrastructure can, over time, create new opportunities for private companies. But for that to happen, entrepreneurs need to be business ready. As Nortjé explains, Strate wants to help bring promising businesses into the ecosystem in a way that supports innovation while protecting both the companies involved and the integrity of the Strate brand. That is where the Scale Up Centre can play an important role, helping these businesses work with governance specialists, lawyers, and accountants to build the structures, discipline, and credibility they need to access investors.
There are three non-negotiable requirements for a business to be considered by investors. These are:
- A sponsor to lead and manage the investment process.
- Flawless governance structures, as investors want assurance that they are investing in a properly governed business with accredited directors and record-keeping.
- Impeccable accounting practices, where there is accountability for the business and its assets.
- The Scale Up GIBS Centre for Private Business Excellence
The Scale Up Centre is not an incubator or about enterprise development. It is designed to facilitate businesses moving from the mindset of business as a utility to one where businesses are transformed into enterprises which can meaningfully support economies through productivity and employment.
The centre aims to work with three tiers of business: future giants with turnovers of R1 million to R10 million, building giants, companies with turnovers of R10 million to R500 million and legacy giants, businesses with turnovers over R500 million.
Jordaan and I work personally with the building giants and legacy giants. The freemium platform is aimed at content to enhance the capabilities of future giants through free webinars, videos, networking, as well as a 12-month bespoke online programme, including coaching, to walk future giants through the scale-up journey. (See Figure 1.)
To find out more about The Scale Up GIBS Centre for Private Business Excellence, please email us on keith@scaleup.partners or jordaan@scaleup.partners or visit our platform on https://scaleup-partners.circle.so/c/start-here-3ad203.
KEY TAKEAWAYS
- The missing middle is one of the largest business segments in an economy, but it remains underappreciated, under-recognised, and under-supported.
- While some privately owned businesses remain lifestyle businesses, those that want to scale face multiple challenges that can only be solved through a greater understanding of the sector.
- The Scale Up GIBS Centre for Private Business Excellence has been launched to support entrepreneurs to scale, enhance academic research about the missing middle, and work to develop a healthier, more enabling ecosystem.
- Funding is a major barrier for entrepreneurs looking to scale, and the Centre will help them with their sponsorship, governance, and systems requirements.
- This programme is not an incubator; it is an education, networking, and coaching platform for entrepreneurs looking to take their businesses to the next level.
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