The corporate investor – a missed opportunity By Pascal Fröhlicher

With private sectors catering predominantly to high income groups there is a limited understanding of how to serve the majority population. Spotting the potential of lower income customers is where major corporates fall short. Pascal Fröhlicher, an expert on Entrepreneurship and Impact Investing in Africa, expands on the subject.

Narrowing economic disparity should be a pressing goal for anyone with an interest in South Africa’s economic wellbeing. But this type of change, when done sustainably, often moves slowly. Looking at the success rates of numerous remedial policies underscores this point: most have struggled to have a significant impact on South Africa’s extreme economic stratification. Short-term measures can catalyse long-term change, however. This was the thesis behind the hotly debated black economic empowerment policy, whose goal when conceived was to alleviate economic inequality and improve integration of the majority of the population into an economy that competes on a high level internationally. This was again the thesis when the BEE codes were amended to shift the policy’s focus from ownership redistribution to a more comprehensive framework that is supposed to strongly support enterprise development. And while the policy has had limited success so far in moving the needle towards its transformational goal, there is plenty of evidence globally that the new iteration could be used as a catalyst for change — in everyone’s favour. For that to happen, South African corporates have to begin doing what top tier companies all over the world are doing: thinking like investors. Global corporates are increasingly recognising the value of engaging with and enabling innovative ventures to achieve their own strategic business goals. These goals could include anything from entering new markets and testing new business models, testing new products and services (effectively using them as an external R&D department), diversifying their supply chains, or achieving social goals. Whatever the purpose, most are testing it as a way to de-risk some of their core business activities and grow their reach.

Unsurprisingly, technology leaders like Intel, Google or Facebook are leading the so-called “corporate venturing” trend. The tech giants’ models involve setting up venture funds that are strategically aligned to each company’s core business model. They find, finance and in some cases, incubate, ventures that are focused on activities that support the company’s key goals. This model accomplishes two things: it helps the main company — the “investor” — develop a channel for testing and expanding innovative ideas, ensuring that they are at the cuttingedge of their industry. It also fosters a culture of entrepreneurship, encouraging an economic environment where individuals see opportunity in executing ideas and creative problem-solving. Successful “corporate venturing” investments and exits will only propel this trend. South Africa’s corporate sector has dabbled little with this approach to business development. But Enterprise Development could be used as a catalyst for doing more. The reason it has not, at least so far, is because most corporate leaders fail to recognise the potential to develop their own businesses with the help of entrepreneurs who have the potential to be more innovative and who are willing to assume a much higher level of risk. Instead, the Enterprise Development “function” of most South African corporates is either outsourced to external providers or relegated to a department that is not actively involved in core business strategy development. The Enterprise Development Report 2013 found that most corporate professionals responsible for leading Enterprise Development at their companies were based in human resources, corporate social responsibility or general BEE compliance departments; very few reported to have a direction relationship with the company’s procurement or strategic business development divisions. Those which did noted that their Enterprise Development programmes focused on entrepreneurs who distribute or source non-essential products or services. While these initiatives may have positive impacts for those who are directly involved, they are incapable of addressing core issues for either the corporate sponsor or so

include anything from entering new markets and testing new business models, testing new products and services (effectively using them as an external R&D department), diversifying their supply chains, or achieving social goals. Whatever the purpose, most are testing it as a way to de-risk some of their core business activities and grow their reach.

Unsurprisingly, technology leaders like Intel, Google or Facebook are leading the so-called “corporate venturing” trend. The tech giants’ models involve setting up venture funds that are strategically aligned to each company’s core business model. They find, finance and in some cases, incubate, ventures that are focused on activities that support the company’s key goals. This model accomplishes two things: it helps the main company — the “investor” — develop a channel for testing and expanding innovative ideas, ensuring that they are at the cuttingedge of their industry. It also fosters a culture of entrepreneurship, encouraging an economic environment where individuals see opportunity in executing ideas and creative problem-solving. Successful “corporate venturing” investments and exits will only propel this trend. South Africa’s corporate sector has dabbled little with this approach to business development. But Enterprise Development could be used as a catalyst for doing more. The reason it has not, at least so far, is because most corporate leaders fail to recognise the potential to develop their own businesses with the help of entrepreneurs who have the potential to be more innovative and who are willing to assume a much higher level of risk. Instead, the Enterprise Development “function” of most South African corporates is either outsourced to external providers or relegated to a department that is not actively involved in core business strategy development. The Enterprise Development Report 2013 found that most corporate professionals responsible for leading Enterprise Development at their companies were based in human resources, corporate social responsibility or general BEE compliance departments; very few reported to have a direction relationship with the company’s procurement or strategic business development divisions. Those which did noted that their Enterprise Development programmes focused on entrepreneurs who distribute or source non-essential products or services. While these initiatives may have positive impacts for those who are directly involved, they are incapable of addressing core issues for either the corporate sponsor or society at large. In all cases, the result of passive approaches like these is lost money and opportunity. Financially, the potential returns are limited, given the high investment costs required for such a programme. But the opportunity to learn strategic lessons and test new markets and business models is also lost. For South African corporates to remain competitive — both in their own home market and internationally — they should seize the opportunity to use Enterprise Development as a framework for engaging in cutting-edge corporate venturing. This will require them to think at the highest level of how Enterprise Development can support their strategic goals, both within and outside of their supply chains. It also necessitates moving Enterprise Development functions from their marketing, corporate social responsibility and human resources departments into the operational and business development side of the company. Finally, it will demand building up venture capital expertise, as they will need to comfortably wear an investor’s hat for Enterprise Development to succeed. Looking through an investor’s lens will allow South African corporates to follow their pioneering global counterparts towards the goal of building and strengthening sustainable and inclusive supply chains. For example, in financial services there are innovative new models emerging that cater to a customer base that the banking sector has largely failed to engage so far. Right now, these ventures and platforms are competing with traditional institutions. Corporate venturing is an avenue for alignment and shared value instead. There may be a glimmer of recognition of the potential value of this approach. In 2015, Barclay’s Africa Group launched Tech Lab Africa, which claimed to be the “first ever corporate venture accelerator” in Africa. Its mission was to “discover, nurture and empower the next generation of technology innovators”, and of the 90 applicants it received across the continent, it found 10 to support through a six-week acceleration programme. These companies ranged from mobile wallet solutions to unsecured lending platforms to digital healthcare solutions. Barclay’s programme was not South Africaspecific, but the low-income and base-of-thepyramid-focused ventures it attracted highlights the strong potential for such programmes to help South African corporates reach new customer markets while meeting the immediate requirements of supplier diversification and economic inclusion under BEE Enterprise Development. And long term, it could also ensure that corporates foster win-win relationships for everyone — for entrepreneurs, the corporate sector and South Africa’s economy at large. This would strengthen South Africa’s economy by catering for the entire population and prepare businesses for expanding into Africa.

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