The second annual conference on the “State of Entrepreneurship in South Africa”, hosted each year by FNB and Endeavor South Africa, focused extensively on the funding challenges faced by entrepreneurs in South Africa.
According to The Entrepreneurial Dialogues, the white paper detailing the conference’s key findings, the single greatest dilemma that entrepreneurs face when seeking funding is finding the balance between familiarity and distinctiveness. They have to be credible and their business idea understandable to potential investors, while also being unique and distinct. The tension between offering an idea that fits into the framework of ‘the known’ while also being distinctive enough to have a competitive advantage is crucial to securing finance. A viable business model and the right industry connections are also valuable plus points.
Banks not a funding solution
The conference’s panel of experts, which included Michael Sassoon of Sasfin Bank, Paul Harris, a non-executive director of RMB Holdings and Discovery CEO Adrian Gore, also focused on the role banks play in funding entrepreneurs. According to Harris, people often forget about the reality of banking. “Bankers take money from depositors, they add a margin to these funds, and they invest the money in companies or in individuals. When a bank does not get its money back from an investment made, it cannot go back to the depositor and say ‘Sorry Mr Depositor, we have lost your money!’ Such an incident would be the end of the bank,” he pointed out.
Based on the high-failure rate of businesses (it is estimated that 70% of new businesses fail), it is therefore understandable that banks are nervous about lending to new businesses. The panelists’ opinion: the solution to entrepreneurship funding problems in South Africa will not be found in the traditional banking sector. Early stage entrepreneurs should not expect too much from this source of funding.
Venture capitalists needed
Instead, the panel recommended that South Africa needs more high net-worth individuals who are willing to pull up their resources into venture capital funds and are willing to take equity risks with start-ups, by building investment portfolios, investors can share the risks by investing into the whole package or portfolio.