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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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1 Comment

1 Comment

  1. Carl Muller

    Aug 1, 2011 at 21:13

    We have the only achievement motivation programme accredited at Services Seta (or any Seta).
    Do you know how difficult it is to market it.
    People asked me, what is that. Do you do motivational training?
    There is a big difference between the two.
    Achievement is the biggest characteristic of an entrepreneur…

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Business Landscape

How SMPs Can Support Businesses Looking To Internationalise

Key findings from a new global research report from ACCA suggest Small and Medium Sized Accounting Practices (SMPs) recognise many of the key challenges and opportunities that internationalising SMEs face in today’s global economy. This provides them with an excellent platform towards providing additional value-added support to clients.

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Much has been written in recent years about how SMPs are experiencing a growing number of commercial challenges that are disrupting the client services they have traditionally relied upon for revenue.

Equally, many have argued that more SMPs need to consider whether diversification into new advisory services could be the key towards the sector’s future success. However, such change can be difficult when talent flows in the sector are uncertain and competition is fierce.

Whilst not appropriate for everyone, ACCA was therefore interested to explore whether international trade is one area where SMPs’ unique experience and expertise might lead to the development of new service provision.

Our findings suggest that many SMPs are equipped with an excellent platform towards providing additional value-added support to clients. However, despite SMPs stating that most of their clients had been involved in some form of international activity over the last three years, their current provision of relevant support remains highly focused around a small number of limited areas.

The new report, Growing Globally – How SMPs can support international ambitions, also revealed the following about internationalisation and the relevant advice landscape for SMEs. 

Although the research was global, specific findings from five key markets have also been extracted and presented. These markets are Ireland, Malaysia, Nigeria, Singapore and the UK. They were selected on the basis of their representation of markets in various stages of economic development, and their global and regional importance to international trade.

SME internationalisation today

  • Just under half (45%) of SMEs said the main benefit of internationalisation was access to new customers in foreign markets. Increased profitability (35%), faster business growth (33%) and access to new business networks (30%) followed.
  • Both SMEs and SMPs considered ease of doing business and high growth potential as the most important factors when choosing an export destination. Geography was seen as less important, which may be a result of new technologies reducing its significance as a perceived barrier.
  • Both SMEs and SMPs recognised foreign regulations as the most significant barrier to internationalisation. For SMEs, the second most important was competition (27%) though for SMPs it was foreign customs duties.
  • In terms of the future, SMEs’ international ambitions are focused on building the capacity of their business (45%), building networks in foreign markets (45%) and introducing or developing more products and services to market (44%).

Related: Technology In Accounting – Race For Relevance

The advice landscape

  • A wide breadth of professional advice and support is used by internationalising SMEs, who tend to reach out to different sources as they move along their internationalisation journeys. Government or relevant public agencies (39%) are the most widely used source of professional advice, closely followed by lawyers (35%) and then banks (33%).
  • Accountants are most likely to be used by SMEs when looking for support on international tax, regulatory compliance, foreign exchange and accessing external finance.
  • Only 9% of SMPs said they had no clients who had been involved in any international trade activities over the last 3 years. Importing and exporting activities were the most common, as was participating in broader international supply chain networks.
  • SMPs mainly rely on internal and informal resources when advising clients about internationalisation. However, this gradually shifts towards a reliance on more external and formalised resources as practices grow in employee size.
  • Just under half (47%) were not members of any networking organisation, potentially missing out on valuable resources that could enable the development of more effective forms of international support.

Using these findings, ACCA conducted a series of interviews and roundtables with SMPs and SMEs globally. The subsequent insights were used to develop recommendations on how practices can look to develop their international advisory provision.

  • Specialisation is key – For those developing their international advisory provision, it is vital to first identify an area of the market where you believe your practice has the opportunity to effectively develop its expertise, resources and intelligence to best suit the needs of your clients. SMEs’ demands for international advice vary according to sector and size of business. Building a market focus is more likely to make any future expansion of international support more achievable and successful.
  • Adopt a strategic mindset – Identifying where you could best add value in terms of international support requires SMPs to think strategically and embark on initial planning and research. The best place to start is with existing clients rather than prospective ones, as they provide a readily accessible (and more approachable) evidence base to explore where demand is likely to be greatest. Making efforts to understand your clients’ internationalisation needs can then help you shape your wider international advisory offering.
  • Expand your international network – Networks are integral for the development of new professional advisory services but particularly with regards to internationalisation. This is because global value chains often necessitate close and efficient coordination of activities between businesses. SMPs should therefore aspire to become the central referral point for clients looking to find the most appropriate source of professional advice.
  • Invest in professional development – Practices must have highly skilled staff with the appropriate intellectual knowledge for clients to recognise the value in the services offered. Creating a structured programme of learning activities for staff around international trade could be useful for SMPs looking to upscale their international advisory provision. This could involve introducing formal learning activities across more technical areas of international trade (such as tax, compliance and foreign exchange) as well as working with other firms to develop knowledge networks where staff can learn, collaborate and access good practice.

Related: Investing In Value Creation Tools Can Help Your Business Grow

As SMEs continue to seek new ways of engaging in international trade, partly brought about by developments in technology, practices are being presented with opportunities to develop and widen their international advisory provision.

For some SMPs providing additional support to clients involved in international markets will not be feasible or practical. Nonetheless it is important for all practices to continue recognising the changing realities of how SMEs are operating globally.

The key challenge in taking advantage of such opportunities is centred on the risks that inevitably come with the business model optimisation required to provide new and relevant client services.

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Business Landscape

Unlocking Optimism

South African entrepreneurs have one singular advantage that makes them stand out and succeed – optimism.

Howard Feldman

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Game drives. There is a remarkable similarity between the South African on a game drive and the South African entrepreneur. In both cases you’re driving through new territory on the lookout for that ultimate sighting or an opportunity. It’s the endless optimistic belief that around the next corner, after that last stretch of long, hot road, will be that crocodile eating that leopard that’s chasing a caracal. It’s an optimism that’s permeated the very fabric of our culture, our business personalities and the way we face adversity.

South Africans live with adversity every day. We face challenges and issues that our entrepreneurial counterparts in Europe or American don’t even realise exist. Adversity sits on every street corner, hangs out at every robot and reminds us of its presence whenever we stop and look around.

Yet the entrepreneur can take these complexities and harness them to be better at business and more positive in the face of failure. Here are five ways to re-examine what the world has on offer with the eye of the optimistic entrepreneur…

1. The tremendous challenges in our socio-economic and political landscape, from poor sanitation to the unemployment situation, can inspire us to do more and better the world we live in.

Today, many of the most impressive entrepreneurs on the African continent are those who stood up from within adversity and used it to create opportunity. From organisations that ensure children have sanitary pads so they can attend school to non-profit businesses that use the blind to detect breast cancer, optimistic belief in the future is the beating heart of entrepreneurial endeavour.

Related: 6 Of The Most Profitable Small Businesses In South Africa

2. Anyone can succeed

There are people standing at robots across South Africa who are using them as a shop corner, using the captive car audience to sell products and make enough money to get by. Some create works of art, some dance to an invisible beat, and some stand out in their ingenuity. There is a robot in South Africa today where a man stands selling life insurance. That’s the optimistic entrepreneur.

3. We are constantly surprising ourselves

South Africa’s transition from apartheid surprised the world. There wasn’t a bloody revolution, there was a peaceful shift. It was, and still is, imperfect, but it happened with far less brutality than many imagined. The same applied to the World Cup – the stories of doom were ready to be told, but the event was an incredible success. South Africans are capable of surprising themselves and this unexpected brilliance shines through in our ideas and our ventures.

4. Sometimes you just have to laugh

The corruption, the political manhandling, the rage, the insanity on the drive to work, the rising cost of living – the pressures of living in a volatile country take their toll, but South Africans manage to find the humour hidden in the hardness. The adverts that poke fun at the insanity, the ability to laugh at mistakes – this nation’s sense of humour is a very powerful quality that allows the South African entrepreneur to stand up and face each day with a fresh sense of purpose.

Related: 27 Of The Richest People In South Africa

5. We bounce back

The one quality that every entrepreneur needs is resilience. Businesses fail, ideas crash, customers leave and bad times arrive, but through it all self-belief and the ability to see something positive in what’s happened will ensure that lessons are learned and new paths taken. It is perhaps one of the hardest things that any entrepreneur has to learn and yet in South Africa, with its ongoing failure to provide that crocodile-leopard-caracal viewing, has imbued its entrepreneurs with the enviable qualities of patient resilience.

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Business Landscape

Depressed Economy Leading To Business Bust-ups

Palmer looks at the most common causes of business bust-ups and how to avoid them.

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News that our GDP had shrunk by 2.2% in the first quarter of the year, coupled with downward revisions of growth forecasts, are casting a pall on the investment climate. Deals are not only drying up, but there has been an increase in business partnerships bearing the brunt of the economic pressure.

After the initial flush of economic goodwill post the inauguration of President Ramaphosa, we’ve seen a flurry of business owners looking for finance to buy out their business partners.

We have had a number of attorneys and accountants refer dissatisfied partners to us who are looking to exit partnerships. When the economy slows – as we have seen over the last few months – many partnerships begin to show signs of stress. All too often partnerships are seen as tools of necessity and those who rush into these deals without properly exploring the common values between parties will not fare well when things get tough.

What many don’t understand is that undoing a partnership is not as simple as they may think and will come with legal and other costs over and above the finance to buy a partner out.

Related: Government Funding And Grants For Small Businesses

The most common causes of business bust-ups (and how to avoid them) are the following:

1. Misaligned expectations

This occurs when potentials partners don’t share a common vision of where they want to go, how they want to get there and what each wants from the deal.

Misaligned expectations of a business venture will result in disagreements sooner rather than later as they impact every strategic (and even some operational) decisions. It is worth considering a mediated session between partners before the deal is even drafted.

2. Effort Resentment

Another problem creeps in when one partner feels like they are tasked with doing all the work. Resentment around how much effort is put into the success of a venture is not something to be taken lightly – irrespective of it being based on perception or fact. Most contracts will be clear on the value of the equity each partner has, but many ignore the value of sweat equity and how that will be measured and factored into the deal structure.

3. The Golden Rule

Many partnerships are based on one individual who puts in the lion’s share of the capital and another who is committed to doing the day-today work. Effort resentment extends beyond the deal negotiation. When a contract between partners is drafted it reflects a future which is not yet known. As the venture progresses, reality will set in and the division of labour agreed at the outset may not match day-to-day business in year three or four.

It is sometimes useful to draft partnership agreements as you would a lease. Give it a three- or five-year timeframe, with clear deliverables and then, at the end of the period, reassess the partnership and allow for renewals or re-negotiation. Having a sunset clause in your partnership agreement removes the soul-crushing feeling that you are trapped in an unhappy relationship with no chance of escape.

Related: How South African Small Business Owners Can Overcome Economic Uncertainty

4. Honour amongst thieves

Although seldom encountered, there are some partnerships which fall apart because someone is doing something blatantly untoward. Finding out your partner had their hand in the till can be devastating but in tough financial times, such as we are currently experiencing, some people will resort to desperate measures.

5. Absentee landlords

In many cases, a partner may have committed capital to a venture and even agreed to joint expectations. But other work commitments (or a lack of interest) means they disappear from operations for extended periods. No-one wants to work with people who are uninterested in the future of your company. However, the truth of the matter is any breakup has associated costs. Unwinding a partnership can cost more than setting it up and this should be considered before going down that road. Many investors are involved in multiple ventures with the same partners and exiting one deal may result in prejudicing the future of others.

While no-one can predict how long the economic slump may last, minimising the potential for partnerships falling apart requires a meeting of minds. This means agreeing to a common set of values and ethics which will govern how the business is run.

Partners need to agree on how they see the world if they hope to make a success of the business relationship. Thereafter, they should explicitly voice their expectations of how the venture will work, what they want out of it, and how they see their role in achieving that result. In some instances business partners have been together longer than they have been with their spouse. It makes sense to treat the relationship with the same care. More particularly, healthy partnerships will attract more investment and will be a key decision factor when it comes to raising future funding.

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