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A Snapshot of Entrepreneurship in South Africa

The research and results arising out of the White Paper on the state of entrepreneurship reveals some of the challenges facing entrepreneurs – and debunks several commonly held myths.

Juliet Pitman

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Malik Fal

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”.

Looking ahead

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.

Juliet Pitman is a features writer at Entrepreneur Magazine.

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Business Landscape

Customer Control For Entrepreneurs

How can small companies exert a degree of control over their customer base and help ‘guide’ them in such a way that they remain loyal and continue purchasing from them?

Gary Harwood

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No organisation, irrespective its size, industry, and geographic location, can succeed without customers. And given how the digital environment has made it easier for competitors across sectors to emerge, entrepreneurs are especially under pressure to balance customer needs and desires, with value propositions that still make them money.

There is clearly a fine balancing act to manage.

On the one hand, you have people who (thanks to technology) are aware of the power they have over product development and pricing. After all, if a competitor sells a product or service at a lower price, who is the customer going to go with? Add to this, the ability to customise solutions according to data analysis of specific end user needs, then you have a situation where many entrepreneurs feel they are facing a never-ending struggle.

On the other, small to medium businesses must be able to produce products and services in such a way that cash flow is maintained. As any entrepreneur can attest to, not having a reliable cash flow is tantamount to business failure. So, how can small companies exert a degree of control over their customer base and help ‘guide’ them in such a way that they remain loyal and continue purchasing from them?

Related: How English Language Skills Play An Essential Role In Building Trust With Your Customers

Managing expectations

One of the most important elements in this regard is managing customer expectations. The emergence of social media and the power it has to influence people’s buying decisions, cannot be overestimated. Today, more than ever before, the likes of word of mouth, marketing, and public relations as a direct result of social networking can often grow or sink a burgeoning business.

It has also created a dynamic where customers feel that if they leave a negative comment or ask a question, they expect a response almost immediately. For entrepreneurs already trying to do everything themselves while managing the business, this can often be a major cause of frustration. But it does not have to be the case.

By setting parameters up front with customers in terms of response times, queries, and even experiences, small businesses can start leveraging the power of social networking and other digital communication technologies for their benefit.

Being pro-active and taking charge of these expectations puts the organisation in more control than if a hands-off approach is followed.

Being open

Openness and transparency might sound like luxuries no entrepreneur can afford, but these concepts build strongly from managing expectations. Having open discussions with customers on aspects of support, product requirements, and even their (the end user) own expectations can greatly assist a small company to provide a more bespoke approach to products and services.

Related: 5 Techniques To Leave Customers Grinning And Vowing To Return

In addition, by providing customers with various resources (think troubleshooting or ‘self-help’), the entrepreneur is empowering them to take control of their own experiences with the company. It also means they are not as reliant on company resources if they were to phone the organisation or email a complaint. The added benefit to this approach is the customer can manage their own experiences when they have the time to do so irrespective of whether it is 10:00 or 22:00.

Granted, the path to customer control (perceived or otherwise) is not an easy one to take. However, no entrepreneur can afford not to take notice of these requirements and put the customer at the forefront of their thinking.

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Business Landscape

What Can Businesses Expect From The Future Of Work?

While the future of work will always be a constant process of innovation and change, here are a few things that business today can expect in the near future.

Josh Althuser

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The phrase “future of work” is something professionals have been talking about since the birth of the traditional workplace in the late 19th century.

Once defined by cubicles that were arranged neatly side by side with meeting rooms and, of course, the head office with an amazing view of the skyline, today’s offices are strikingly different.

Over the last decade, there has been a surge in the development of open-plan offices, and more and more companies are moving their employees to co-working spaces and experimenting with remote work. For businesses that are still straddling the traditional office, but looking to embrace the future of work, it could be overwhelming at first. While the future of work will always be a constant process of innovation and change, here are a few things that business today can expect in the near future.

Expect flat hierarchies

In 2017, most companies have recognised that employees, especially younger ones are turned off by the conventional hierarchies that once dominated the world place.

Related: 5 Inexpensive Workspace Improvements That Boost Productivity

Start-ups and small businesses often pride themselves on their “flat” workplace culture, which aims to give both leaders and employees the chance to give input on an equal level. In theory, these structures aim to make room for more innovation and also to help workers feel more appreciated in their roles.

Yet, it doesn’t come without its issues. There have been various studies showing that egalitarian workplace structures can be disorienting and can potentially result in higher turnover rates, as employees feel lost in their roles. Thus, it will take time for the workplace to strike a balance between structure and equality, but so far it seems we are well on our way. 

The architecture of the office space is changing rapidly

Chances are you’ve heard of open-plan offices. With corporate giants like Facebook and Google companioning the flexible workspace, company around the world are breaking down literal walls to create airy and open offices that encourage collaboration.

Again, much like the flat workspace, open-plan offices need to be considerate of individual needs. While many workers appreciate the chance to work in a more informal setting, the open office has also faced criticism for introducing new distractions by not including enough private areas, which can lead to a downturn in productivity. As a result, more companies are turning to co-working spaces, which offer both workspace and community space.

Co-working spaces differ from open-offices in the way that they provide community management, structure, and flexibility, ensuring that workers have their needs met, whether that means a private office for the whole company or a hot desk for workers who just want to come in a couple of times during the week. 

Related: Workplace Evolution 2.0: Are You Ready For The New Era?

Remote work will be commonplace

Allowing employees to work remotely has proven to be successful. Companies have been introducing remote days over the last five years, and some even allow their staff to telecommute on a full-time basis. In the early days of the freelance ecosystem, remote work was considered to be unprofessional, but we have learned over the years the allowing employees to telecommute, even on a part-time basis can make them more productive and satisfied in their roles.

There’s no doubt that advancements in communication tools, such as Slack, have allowed workers more freedom, but there are also enormous benefits for businesses as well.

Companies can save on overhead costs by moving teams into a co-working space, or take out a flexible lease in combination with allowing workers to work outside of the office, even if it’s just a few days a week. By saving on rent and utilities, leaders can make room in their budget to invest in employees, by offering educational workspaces or purchasing new equipment.

Overall, these changes have a long way to go before they become permanent fixtures in the workplace. In fact, many businesses are now experimenting with various workplaces trends to find what works best for them and their employees.

Yet, even if you are not ready to grant your staff remote days or turn your office into a single shared space, it’s vital that your business is aware of these trends so you can keep up with the rapidly changing future workplace.

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Business Landscape

How Investors Can Take Advantage Of The Rand’s Currency Trading Rates

Negative sentiment is likely to be pervasive with the SA economy, and it will take more than a new figurehead in government to right the wrongs of a mismanaged economy.

Harald Merckel

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The USD/ZAR currency pair is trading in the 13.65 range heading into mid-December 2017. Over the past year, the 52-week low was 12.3126, and the 52-week high was 14.5742. As one of the more volatile currencies in the trading spectrum, the ZAR is closely associated with the political shenanigans taking place in South Africa.

The year to date return for the currency pair is -0.50%, after having started 2017 at 13.7351. Much of the activity taking place with the ZAR is speculative. Futures contracts are largely responsible for the whipsaw movements in prices.

Wilkins Finance strategists stress the importance of credit ratings agencies on currencies:

‘Whenever credit ratings agencies such as Moody’s and Fitch downgrade their assessments of the South African economy, this has a negative impact on the ZAR. The impact is not always predictable however – towards the end of November 2017, the USD/ZAR had appreciated after the recent ratings downgrade of the economy.’

Moody’s Investors Service downgraded South Africa’s economy to a rating of Baa3. This is the lowest rating level for Moody’s. Further ratings will be announced in February next year. Fitch has already downgraded the foreign currency and local currency to BB +, but has offered a stable Outlook for the ZAR.

Related: The Business Of Anxiety In Business: Giving Heroes Permission To Feel Vulnerable

That S&P also downgraded the South African economy to sub-investment grade is an important decision, and one that will have negative ramifications for the South African bonds market. Now, the Barclays Global Bond Index will no longer feature South African bonds. That South Africa’s bond market will be excluded from the World Government Bond Index will also be a bugbear to any hopes of the ZAR appreciating.

Interest Rates in the South African Economy

The South African interest rate is highly attractive to foreign investors, given that the UK, US, Canada, Japan, and European bank rates are at historic lows. There is little to be gained by investing cash in fixed-interest-bearing securities in these economies. The current interest rate in South Africa is 6.75% (as at November 23, 2017). The interest rate has dropped to expand economic activity in the country.

Overall, South Africa’s inflation rate for the year is expected to remain at 5.3% dropping to 5.2% in 2018 and rising to 5.5% by 2019. Global investors remain concerned about the risk/reward environment in South Africa. The country has experienced significant capital outflows in recent years, driven in large part by uncertainty regarding future prospects. The USD/ZAR was trading at 14.60 in late November, and current ZAR strength is being attributed to USD weakness.

Related: Offshore Business Opportunities Abound For South African ‘Oldpreneurs’

Factors on Both Sides of the Atlantic

One of the major economic events affecting exchange rates will be the reconciliation of the House and Senate bills on US tax legislation. Any major overhaul of the US tax code will invariably result in a dramatically boosted USD, and a weakened ZAR. For traders, it appears to be short-term call options on the local currency and long-term call options on the USD.

It is evident that currency traders are hedging against the ZAR over the long-term. The fundamentals of the economy are structurally unstable. The power grid infrastructure, water supply problems, and political instability at the highest echelons are but a few of the many problems plaguing South African growth prospects.

However, the ZAR will draw strength from the election of a credible leader, and this will be particularly noteworthy with Cyril Ramaphosa’s appointment. Overall, negative sentiment is likely to be pervasive with the SA economy, and it will take more than a new figurehead in government to right the wrongs of a mismanaged economy.

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