SA needs a favourable environment to help entrepreneurs thrive
There is need for an investment community that is focused on small start-ups as access to finance is the main problem for small businesses
Nobody needs reminding that our unemployment crisis is pressing, and a real threat to social stability. We have also heard many times how important small businesses are to providing the jobs we need so badly. The government says small businesses are a priority, and we even have a minister of small business.
Yet research by the respected Global Entrepreneurship Monitor shows that SA lags both its fellow African economies and its global peers when it comes to entrepreneurship. The findings of the most recent report on SA entrepreneurship make for depressing reading. The country has participated in this research for 16 years, and shows “persistently low levels of entrepreneurial activity relative to other countries participating”. Entrepreneurial intentions have dropped by more than a third since 2013, and almost 50% since 2010. Our rate of total entrepreneurial activity (TEA) is 2.5 times lower than the rate for Africa as a whole.
We have to reconcile these dismal findings with two other facts. One is that we do have a good record for producing world-class entrepreneurs — the emergence of Stellenbosch as an entrepreneurial hub is one example of SA’s ability to produce top level entrepreneurs. Many of our largest companies today, such as Discovery, are highly entrepreneurial in nature, and remain so.
Second, SA’s bustling townships provide further testimony to the inherent entrepreneurial spirit of our country, but it is rare for these microenterprises to grow into stable companies providing long-term employment opportunities. Herman Mashaba’s iconic Black Like Me remains a relative outlier as an example of a township-based business that became a sustainable company.
One might well conclude that while we have plenty of entrepreneurial spirit in the country, we do not do well at providing the right conditions for them. I would argue that the differences between these two forms of successful SA entrepreneurship hold the clue to what needs to be done to create an environment that is more conducive to entrepreneurship.
The accepted wisdom is that access to finance is the biggest challenge faced by entrepreneurs, and for once it appears to be right, at least partly. Of course there are many variables, and it is difficult to identify one as the most important. Others would include personal qualities like ability and ambition, as well as external factors like government policy and, of course, the general economic climate.
But the Global Entrepreneurship Monitor’s findings do support the view that access to finance is critical. Two thirds of South African businesses that closed in 2016 did so for financial reasons — either they were not profitable or they could not find the finance needed to keep their doors open. Tellingly, “50% more SA entrepreneurs discontinued their businesses because of lack of access to finance, compared to the average for Africa”.
In my analysis, our problem is that our economy has a predominantly institutional focus, which leads to relatively illiquid financial markets focused on sophisticated financial products offered by banks. We have a dearth of financiers with capital to invest in start-ups — the venture capitalist with an appetite for risk and an eye on the future is a rare bird in our part of the world.
That’s why the majority of SA’s entrepreneurial successes have in fact been led by individuals with strong links to the financial and investment establishment, and in whom it is willing to invest. The Adrian Gores, Michael Jordaans and Jannie Moutons all fit into this mould. What we signally lack is an investment community that is focused on small start-ups with no existing access to formal financing systems.
The good news is that things seem to be changing. We now have an industry body for the venture capital and private equity market, and search results show that there are several venture capital funds specialising in early-stage investing. But more venture capitalists won’t necessarily solve the problem: there is good reason to believe most SA entrepreneurs have not kept up with the times when it comes to interacting with them.
Internationally, and this is particularly true for angel investors (those investors putting up their own money), today’s investors increasingly have tightly defined goals and definitions of value, and successful entrepreneurs target those investors likely to be interested in the business they have to offer.
In this more focused and investor-centric process, investors are initially looking to identify entrepreneurial ideas they can understand and that address an industry or segment they understand. They also need to feel confidence in the investor. Only once all these preliminary conditions are met do they call for a business plan.
Contrast this with the traditional approach of spending a lot of time creating a business plan and then distributing it to investors as widely as possible. This “spray-and-pray” approach no longer works in an age where marketing is becoming more and more targeted, and “curated” is a high mark of praise.
Key interventions will thus be to help small-scale entrepreneurs pitch correctly to venture capitalists. At the same time, the government could look for ways to make genuine seed capital more available. This is something we must — and can — get right to take advantage of the entrepreneurial potential that we know exists in this country. Our joint economic future depends on it.
• Mafanya is manager of the Diageo Empowerment Trust SA.