It’s no secret that entrepreneurs represent the engine of economic growth in emerging countries, and South Africa is no different. Government, corporates, the private sector and NGOs are involved at different levels in various initiatives intended to boost entrepreneurial activity throughout the country, and there is no shortage of programmes, organisations, competitions and initiatives targeting entrepreneurs at various stages.
“However, much of this activity takes place independently, and we realised there was a pressing need to create a platform that would gather together this common knowledge into a single repository,” says Malik Fal, MD of Endeavor South Africa which, together with FNB and the Gordon Institute of Business Science, published The Entrepreneurial Dialogues: State of Entrepreneurship in South Africa, in March this year.
“Our goal was to provide a broad-based view of the state of entrepreneurship in South Africa and pull together information on the myriad different issues that affect and drive this important sector of the economy.” The paper represents the culmination of broad-based research that began during Global Entrepreneurship Week in November 2009, when Endeavor and FNB facilitated discussions between stakeholders from government, entrepreneurial, corporate, academic and NGO sectors. It provides an in-depth view on issues such as access to capital; the culture of entrepreneurship in South Africa; enterprise development and broad-based black economic empowerment; incubator and SME support; and access to skills.
Some of the findings reflect what we already know. But the report also challenges a number of widely held misconceptions and in so doing, shines a spotlight on the real challenges.
Struggling to access capital?
One of the most interesting of these relates to the issue of access to capital. “Ask any entrepreneur what their biggest challenge is and they’ll tell you it’s access to capital. But, as Dr Mike Herrington, Global Entrepreneurship Monitor (GEM) South Africa Team Leader points out, South Africa has the same availability of capital when compared to other countries. In other words it’s a myth that there is somehow less money available in South Africa,” says Fal.
But entrepreneurs might argue that this doesn’t change the fact that they still struggle to get funding. And on this point, Fal agrees: “There are certainly challenges and hurdles to getting funding, even if they don’t relate to the amount of funding available,” he says.
Fal believes the issue needs to be grouped into two categories of challenge – those that relate to the providers of capital and those that relate to the seekers of capital. “Things need to change on both sides of the equation,” he says.
Providers of capital need to offer greater transparency and communication about what applicants need to do and the criteria they need to meet in order to access funding. But, more importantly, such communication needs to target specific categories of entrepreneurs. “Funding providers need to be clear about whom they are targeting, and then tailor their communication to specific groups. What we’re learning is that a shot-gun approach to such communication simply doesn’t work,” Fal explains.
Entrepreneurs who are looking for capital also need to make some changes. “Applying for funding is like going through boot camp so be prepared to pay your due. Entrepreneurs really need to do their homework – find out what information the funding organisation is looking for and don’t apply until you have all of it down perfectly,” says Fal. He adds that entrepreneurs who assume funding is due to them make a big mistake. “There is a culture of entitlement among some, who believe it is their right to get funding just because they need it,” he says. Simply put, the need for funding doesn’t make a compelling case for providing it.
Tapping into enterprise development fundingClosely related to the issue of access to capital are the White Paper’s findings about enterprise development (ED) and broad-based black economic empowerment (BBBEE). “Around R20 billion is earmarked for entrepreneurial development through ED, and the question on everyone’s lips is why this is not being deployed,” says Fal.
Part of the problem arises from an historic corporate mistrust of BBBEE. Fal explains that most organisations see ED as a social initiative instead of a commercial one. “Corporates need to be educated about the commercial value of enterprise development. Some companies are getting it right and are reaping the rewards of investing in their up- and down-stream industries, but much still remains to be done,” he adds.
There’s also a need for greater creativity when it comes to identifying suitable ED recipients. “Many ED applicants simply aren’t suitable candidates for funding because they lack the business skills and therefore the sustainability that companies are looking for. Part of the problem is that many of the skilled and educated potential entrepreneurs are employed in the corporate environment, so companies need to find a way of identifying these people and investing in businesses which they can run,” Fal says. There is of course a downside to encouraging skilled entrepreneurs to leave your employ and venture out on their own but, as Fal points out, if they are running businesses in your up- or down-stream industries, your company can reap commercial rewards in addition to the points earned for its BBBEE scorecard.
Building a skills-rich organisation
Contrary to popular belief lack of skills – not capital – is one of the biggest hindrances to entrepreneurial success. “We can learn a great deal from programmes launched in the US in the 1980s,” says Fal. Aimed at spurring entrepreneurship in minority communities, these programmes initially focused on increasing access to capital through subsidised grants. “However, people soon learned that it wasn’t lack of capital but rather lack of skills that was preventing entrepreneurs from growing and being profitable,” says Fal.
In fact, many of the subsidised grants became destroyers rather than creators of wealth because they created debt traps from which people, particularly those without the requisite financial skills, couldn’t escape. The skills of the entrepreneur are critical to success, and the White Paper reveals that entrepreneurs with a better education and experience in the corporate world of business have a greater chance of running sustainably profitable enterprises. “People might point to examples of successful entrepreneurs who dropped out of school, but these examples are by far the exception, not the rule,” says Fal.
The skills of the individual entrepreneur are not the only ones under the spotlight, however. Most entrepreneurs struggle to attract skilled staff to their companies, Fal points out, because they can’t compete with large organisations on salary. But there are ways of overcoming this, he adds. “Entrepreneurial companies need to focus on their broader employee value proposition. They need to sell the adventure that comes with being part of an entrepreneurial company and they shouldn’t shy away from approaching seasoned executives, many of whom are bored stiff in the corporate environment and would love to join an exciting, innovative company on the make,” he explains.
However, he adds that labour laws present a more challenging problem. “Current labour legislation is really onerous for small businesses and there is definitely a need for the Department of Labour to review it and possibly draft laws specific to small business needs,” he says.
How to build a robust entrepreneurial culture
“In many ways entrepreneurship is a deeply cultural thing; those countries that epitomise entrepreneurial success have it ingrained in the culture of their people and their society,” says Fal, pointing to the example of the US, a country built on the possibility of individuals getting ahead by starting their own small enterprises.
There are pockets of such entrepreneurial flair in certain communities in South Africa, but on the whole, our society does not value entrepreneurship highly enough. “There is no silver bullet but in order to foster a greater spirit of entrepreneurship, our society needs to integrate the issue into home life and the formal education system. What we are seeing is that a basic introduction to entrepreneurship is valuable even to people who are going into the professions or into corporate business. The education system has a much bigger role to play in teaching children and young people about the possibilities entrepreneurship opens up to them,” Fal says.
The broader South African society also needs to understand the value of entrepreneurship, he adds. “By and large, the South African community is still very conservative when it comes to the career options it presents to the younger generation. Youngsters are encouraged to do well in school, get a good degree and secure a well-paid and secure corporate or professional position,” he says. Of course a solid education is vitally important but there is equally a need to encourage and celebrate the entrepreneurial drive of those people who are inclined towards it.
“Unfortunately our society as it currently stands does not make room for those ‘outliers’. It either chases them away and they emigrate, or it stifles them to such an extent that it’s difficult for them to survive,” Fal explains. Added to this is a low tolerance for entrepreneurial failure.
Offering incubation and support
In addition to general societal support, entrepreneurs need the assistance of a range of different organisations, including incubators such as Raizcorp and NGOs like Endeavor and Enablis that offer SME-targeted support. “Again, we’re seeing that large-scale shot-gun approaches to support don’t work. Entrepreneurs require targeted, specific support.”
To this point, however, Fal adds an interesting caveat. “Many entrepreneurs are not well-positioned to make the best use of the services offered by the support organisations that exist, because they don’t have a clear sense of what it is they require. If support organisations and incubators work best by providing targeted help on a specific challenge, entrepreneurs need to have a sense of what that challenge is if they want to get the support on offer,” he explains.
It might seem an obvious point, but an anecdote related by one of the White Paper’s delegates reveals an alarming trend. Fal summarises: “The offices of Cipro and SEDA are close together in Tshwane and one of our delegates from SEDA pointed out that you can watch individuals go into Cipro to register a company and then immediately approach SEDA to ask what line of business they should go into. That’s deeply worrying.” Would-be entrepreneurs tend to over-rely on support organisations, sometimes to the point of wanting to delegate the entire running of the company to someone else. The reason? “They usually lack the basic skills necessary to run their business, so they don’t really understand what it is they need help with.” The recipients who get the most out of support organisations are those who can say, “I need help accessing the corporate market” or “I need assistance managing cash flow” – not those who say “I need help running my business”.
Fal is at pains to point out that the State of Entrepreneurship White Paper represents a beginning. “This is something we are going to research and publish each year, either taking a snapshot of the entire state of entrepreneurship in the country, or honing in on a particular issue,” he explains, adding that the intention is for the document to create a repository of information that can influence policy and action. “Our role is not to drive that action – that job falls to each stakeholder group, from Government and corporates, to funding institutions, NGOs, civil society and entrepreneurs.”
In closing Fal says, “It will take time but we want to see an improvement in the Total Entrepreneurial Activity Index, hopefully arising in some part out of the work and the research that we’re doing.”
Interesting facts & findings
- In spite of their reputation, banks, which are the least positioned to take on the high risk of investing in start-ups, are the dominant providers of capital to entrepreneurs. SA needs a broader, more diverse private equity and venture capital community that is specifically suited to investing in the high-risk start-up market.
- Around R20 billion is available through enterprise development funding, but little of this is finding its way to sustainable entrepreneurs.
- SA’s male: female ratio of entrepreneurs is 1,6:1. If this improved to a ratio of 1:1, total entrepreneurial activity would improve significantly.
- The ideal number of entrepreneurs in a successful incubator is between 40 and 60.
- South Africa’s entrepreneurial activity (7,8 % in 2008) still lags behind its peer emerging countries – 11,5% in Brazil, 24,5% in Colombia and 13,1% in Mexico.
Guidance for entrepreneurs
- Attracting skills: Tailor employee packages and incentives; appeal to young executives’ need for broader functional exposure; scout on an ongoing basis, not just when you need to fill a position; avoid unprofessional recruitment practices at all costs – being small is no excuse for being sloppy.
- Retaining skills: Share the success of the business with the founding staff who took risks with you and helped you build the enterprise.
- Accessing funding: Make it your job to find out exactly what information the funding institution requires, in what format and in what detail. Don’t submit your application until you have met all these requirements and are ready to answer difficult and searching questions about your entire business.
- Accessing support: Have a clear sense of the particular support you require and be able to frame it in a specific way.
- Differentiating: ‘Me too’ businesses clutter the space and compete in a saturated environment for limited funding and markets. Entrepreneurs with new offerings have a far greater chance of success.