South Africa desperately needs more entrepreneurs
Like most developing countries, South Africa desperately needs entrepreneurs to help address the serious socio economic challenges we face. Unfortunately, South African entrepreneurs are not making the difference that it should. According to the Global Entrepreneurship Monitor, South Africans seem to be losing their appetite for starting their own business with the amount of entrepreneurial intentions being half of what it was in 2010. By 2015, this was already 3.6 times lower than the African average. The 2015 Global Entrepreneurship Monitor report also indicated that a mere 9.2% of adults surveyed indicated that they intend to start a new business in the following 3 years.
This lack of intention to start a new business is often the result of low opportunity and capabilities, coupled with a high fear of failure. When scrutinising the Global Entrepreneurship Monitor report for 2016, it is clear that South Africans do not rank favorably in these 3 categories. South Africa is ranked 35th out of the 60 countries for perceived opportunities, 38th for perceived capabilities and 17th for fear of failure. These results put us behind a great number of African countries as well as a number of other developing countries.
To turn this worsening trend around, things clearly have to change. The question then, is what should be changed. The research seem to indicate that aspiring entrepreneurs list a lack of funding, stringent policy, inadequate access to markets and general risk aversion to be the main barriers to entrepreneurship in South Africa. When looking for funding, a business has one of 3 traditional routes it can follow. The first is to acquire a loan, the second is to sell a percentage of the company in order to raise capital and the third is to approach a governmental department for funding.
In order to qualify for a business loan, financial institutions routinely do a financial viability test before extending the loan. In essence, the institution attempts to assert whether the entrepreneur is willing and able to repay the loan. Willingness can be tested by looking at the credit history of the entrepreneur – did they ever default on any credit previously extended to them. Testing the ability to pay is somewhat more difficult. In the case of a private individual, income would be the predictor of the individual’s ability to pay, but since entrepreneurs often have no track record of the income the business will generate, ability to pay the loan back is difficult to determine. This makes it very difficult for aspiring entrepreneurs to get the necessary funding through loans.
The second route is for entrepreneurs to sell a stake in their company in order to raise capital. Even though this seems to be the more accessible option, entrepreneurs often struggle to convince potential investors to part with their money. Because most first time entrepreneurs are focused on their ground breaking idea – and not the business aspect thereof, they are often not ready to answer the necessary questions investors need answers to – and therefore do not attract the investment they need.
The alternative to getting the money they need from the private sector, is to approach one of the governmental organisations geared to helping aspiring entrepreneurs. Although governmental organisations won’t take up capital, loans for business are made by the Department of Trade and Industry (DTI) and its associated organisations like the Small Enterprise Development Agency (SEDA). These programs are however subject to a list of requirements, and might easily exclude a viable business that falls outside the scope of the investment area set by the particular department.
Funding, though one of the main hurdles to starting a new business in South Africa, is not the only one. Government policy on businesses also cause many aspiring entrepreneurs to give up before they started. Current labour policy for example, makes it very difficult and expensive to let staff go if the business cannot afford them or if they prove to be unproductive. Many small businesses remain small because of the inflexible labour policies and some aspiring entrepreneurs adjust their business models to avoid employing people at all. This is regrettable in a country where unemployment is already unsustainably high.
Another hurdle is the lack of access to markets that many young entrepreneurs experience. A great deal of the country’s population still lives in rural areas, devoid of the complex infrastructure often needed to get a successful business off the ground. A young South African with a ground breaking idea often struggles to share this with prospective investors or even to expose their business to the right consumer base. It is therefore no surprise that so many fledgling businesses die before seeing the light of day – with more South African businesses failing than their counterparts in the other BRICS countries. Should the business survive, they might still struggle to sell it to the local market because the seemingly risk averse culture in the country. Existing businesses seem to struggle to find support from South African consumers who would rather buy imported products than those produced here. It seems as though we need an international stamp of approval before consuming something.
How do we encourage South African entrepreneurship then in the face of these seemingly insurmountable challenges? Well, it is not all doom and gloom. A whole new world of opportunities are busy opening with the new advances in information technology. Because of these advances, barriers to entry are busy disappearing, allowing new entrants to flourish in markets previously controlled by big business. Even the smallest of companies can now petition millions of possible investors for money on platforms such as Kickstarter and Indiegogo. There are also South African versions of these crowdfunding sites called Startme and Jumpstarter.
The information revolution is however not only beneficial for entrepreneurs with funding difficulties. The other hurdle – access to markets – are also being addressed. It is becoming easier for new companies to reach beyond their geographical borders to advertise and sell their products and services, serving to quickly achieve economies of scale without the financial layout of expensive warehousing and transport costs.
Though technology is clearly making business more efficient, it is also changing the type of opportunities available. It is clear the advances in 3D printing, robotics and social networks will not only reduce jobs in the formal sector, but will enable our civilisation as a whole to operate on a higher level. The time of bigger and bigger corporates are slowly passing, making way for smaller and more adaptable companies that can move quickly as technology progress. These changes create a myriad of new business opportunities for the entrepreneur who has his or her finger on the technology pulse.
The only question that remains is therefore not how will entrepreneurs manage to survive in this new environment, but rather how South Africans should view their own future. The world is changing at an enormous pace, and if we do not change our way of thinking about our careers, the world will move on without us. It is therefore time to be bold, to embrace this new world of opportunities and to become a nation of entrepreneurs.
November 3, 2016 | Andre Heymans