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South Africa: Advancing or Inhibiting Entrepreneurs

Is South Africa an ideal environment for entrepreneurs? What conditions do our risk-takers operate in when measured against the rest of the world? A global report on the factors that enhance and inhibit the creation of new businesses – which are, of course, the very things that can make or break an economy – seeks to answer these profound questions.

Kevin Bloom

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Advance or Inhibit entrepreneurs

You don’t have to be a business genius – or an avid reader of this magazine – to understand that there’s a very tight correlation between the level of entrepreneurship in a country and its rate of economic growth. And you don’t have to be an economics major to understand that “real” progress is measured by productivity rates and income per capita, which (if they’re both on the up) tend to pull countries out of an extractive growth phase, through an intensive manufacturing phase, and finally to a phase where the service sector predominates. Still, just in case you’ve been too busy watching your bottom-line to focus on the macro-economic implications of your start-up enterprise, here’s a bird’s-eye-view recap of the situation:

Entrepreneurs drive innovation. In developing or advanced markets, they are the people who get rid of inefficiencies by attacking the big in cumbents and forcing them into shape. In fact, high-impact entrepreneurs – those that have the ambition and drive to build pioneering, fast-changing businesses – are the ones that generate the majority of GDP growth, job creation and wealth in an economy. In other words, without entrepreneurs (literally, those who “undertake” risk) the world might still be back in the dark ages.

This is why in 1997 a multinational project called the Global Entrepreneurship Monitor (GEM) was launched to study the phenomenon. As the first and largest worldwide initiative of its kind, the aim of GEM is to fully comprehend the various factors that enhance or inhibit entrepreneurship, so that countries –or, more specifically, bureaucrats – will be in little doubt as to what policies are the most enabling.

Importantly,the primary purpose of GEM is not to quantitatively compare the number of new businesses across different countries, although it does this quite comprehensively too. It is rather, as the 2008 report states, “about measuring entrepreneurial spirit and entrepreneurial activity through different phases of the entrepreneurial process.”

South Africa has been part of this “attitude-based” initiative since 2001, under the auspices of the UCT Centre for Innovation and Entrepreneurship at the UCT Graduate School ofBusiness. It’s an expensive exercise, costing in the region of R1,3 million annually, but is believed by many to be worth the outlay. In the 2008 GEMreport, South Africais one of 43 countries measured.

How do we fare? The short answer: not great.

Overall, South Africa ranks 23rd in early-stage entrepreneurial activity, which admittedly doesn’t seem too bad when considered in the context of the following measurement: 7,8%of South African respondents – the population sample falls between the ages of 18 and 64, and covers both rural and urban areas – are in the process of starting a business. Unfortunately, although the 7,8% figure does denote a substantial increase for the country over the last few years, it is bad when held up against the average for all lower- and middle-income economies measured: 13,2%.

So what gives? Before this question can be adequately answered, it’s necessary to delve deeper into the framework that the GEM compilers use to ensure that they compare apples with apples.

Countries that participate in the GEM survey are placed into one of three categories: factor-driven economies, efficiency-driven economies and innovation-driven economies. For the sake of simplicity, it can be said that the first category is concerned mainly with countries where there is a large agricultural sector and an extractive industry based around natural resources; the second category is concerned with countries where large-scale industrialisation has led to niching and economies of scale; and the final category is concerned with countries where an expanding service sector caters for an affluent population and innovative entrepreneurial firms are the chief drivers of growth.

It’s no surprise, of course, that in the latter category you’ll find the likes of the United States, Japan, France and the United Kingdom. Some what surprising, however, is that India is measured as a factor-driven economy, against Angola, Bolivia and Iran, while South Africa is considered an efficiency-driven economy, alongside Brazil, Turkey and Russia.

Mike Herrington, lead GEM researcher and director of the UCT Centre for Innovationand Entrepreneurship, is himself struck by the anomaly. “It is, I think, because a large percentage of the Indian population is factor-driven,” he says.“It’s an amazing one, I know. Many reporters have asked me about it. But then I’d also say that South Africa is somewhere between factor and efficiency.”

Given Herrington’s assessment here, one can’t help but think that maybe, for the sake of appearances, it would have been better for us in the lower category –because, as already indicated, we are significantly below the average of efficiency-driven economies in certain key measurements, and lower than many factor-driven nations in others.

In the “new firms” measurement, for example, where countries are compared on the basis of the percentage of businesses that are older than three months, we are 38 out of 43. And in the established business category (older than 3½ years) weare even lower: 41 out of 43.

“What this indicates,” says Herrington, “is that we require a large number of start-ups to get us through. We have a high failure rate, so we need some sortof policy intervention that supports and nurtures companies through the start-up phase.”

A simple drill-down into some of the attitude-based measurements of the 2008 GEM report adds yet more weight to Herrington’s call.

For starters, 60% of South African respondents answered “yes” when asked if they saw a “good opportunity for starting a business in the next six months” – as against 40% for Egypt and 58% for India. Brazil, a country that South Africans often look to as a benchmark, came in at 44%.

But in the same set of questions, only 31% of South Africans said they had the “required knowledge and skills to start a business” – against 44% for Angola, 53% for Egypt, 45% for India and 49% for Brazil. Also, a paltry 13% of South Africans said they “expected to start a business in the next three years”, significantly lower than Angola’s 27%, Egypt’s 35%, India’s33% and Brazil’s 26%.

“What’s more,” says Herrington, “the report shows that we have comparatively poor management skills. This is because of a lack of adequate training and education, which could be attributed to apartheid. But entrepreneurship is not taught in our schools today. They say it was introduced as part of the syllabus in 2005, but that’s not entirely true. It’s not taught at all in the poorer areas.”

Exacerbating the situation is the fact that two of the key organisations established to support entrepreneurial initiatives in South Africa have so far met with very little success.

The Umsobomvu Youth Fund has been fraught with problems from the get-go, while Herrington hopes that government’s other major project, the Small EnterpriseDevelopment Agency (SEDA), an arm of the DTI, will buck the trend. “SEDA are restructuring. With new management, I think they’ll do a good job. I’ve met thenew bunch. Of course they still need to prove themselves, but I think they’ll do better than the last group.”

And then there are the other things that Herrington thinks are worth being cautiously upbeat about. Early-stage entrepreneurship, for instance, has increased dramatically over the last two years. Although our above mentioned figure of 7,8% is well below the factor-driven and efficiency-driven average, it is still 50% up on our 2006 figure – which came in back then at 5,5%. “This rise,” Herrington suggests, “is fairly important when we take into account the fact that our start-up businesses have a very low survival rate.”

Added to this is the favourable mix in South Africa of necessity-driven versus opportunity-driven entrepreneurship, the former of which is a wholly subsistence-based impetus to starting a business (no good jobs are to be had, so the only way to feed and clothe one’s family is to “hustle”) and the latter of which actually creates jobs and wealth by finding and exploiting market gaps.

Since 2004, in fact, the level of opportunity-driven entrepreneurship in South Africa has been rising steadily. “We’re surprised that necessity-driven entrepreneurship in South Africa has been decreasing since 2004,” Herrington observes, “because in Angola and Uganda it has been increasing.”

Soare these signs that South Africa is actually acquiring the hallmarks of an innovation-driven economy, even if the progress is so slow as to be imperceptible? Perhaps. What’s still uncertain is whether we now have agovernment that will lead us with intent. President Jacob Zuma may have stated in his recent State of the Nation address that he will soon be slicing the red tape that faces every new business owner, but then– as Herrington snidely point out – that’s a promise Thabo Mbeki made more thana few times.

Ultimately, it’s not just South Africa’s entrepreneurs who’re waiting with bated breath.

Kevin Bloom, an award-winning South African journalist, is currently a writing fellow at the Wits Institute of Social and Economic Research (WISER). His first book, Ways of Staying, a narrative non-fiction journey through selected concerns of contemporary South African life, was released by Picador Africa in May 2009.

Business Landscape

How Schindlers Attorneys Became Involved In The Landmark Cannabis Case

Everything you accomplish accumulates and eventually comes back to assist you further along in your career. This is how a final year LLB assignment became the basis for a Constitutional Court case.

Nicole Crampton

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Schindlers Attorneys are the law firm that were involved in the landmark Constitutional Court judgement on cannabis use within a private space. Paul-Michael Keichel, Partner at Schindlers Attorneys shares how they came to be the foremost legal experts on cannabis and how they became involved in the Constitutional Court case:

How the journey began

“In 2005, my first year at Rhodes University, whilst studying for Intro to Law, it occurred to me that there were strong constitutional points that could be raised to objectively justify the decriminalisation of cannabis in South Africa,” explains Paul-Michael Keichel.

“In my final year LLB, 2009, I took Constitutional Litigation as an elective (largely motivated by the creation of a timetable clash, which meant that I’d not have to sit another semester of lectures for a module that I had failed the previous year). This provided me with the opportunity to write an assignment titled “A Critical Analysis of Prince and an Objective Justification for the Decriminalisation of Marijuana in South Africa”, in which I composed my argument (based on the right to equality in our Constitution).”

Related: 7 Top Lessons You Can Learn From The US Cannabis Market

The start of the partnership

“Fast forward to 2013 and the Dagga Couple find themselves at Schindlers (where I am a first-year associate) to register their NPC, “Fields of Green for All”. The attorney handling the registration (who I’d also bored with my argument) suggests to the Dagga Couple that they speak to me. It turns out that they already knew of me, because my assignment had (unbeknownst to me) done the rounds on the underground cannabis networks. We get chatting and I rope-in my brother, Maurice Crespi, the managing partner of Schindlers,” explains Keichel.

“We are the only firm out of many approached by the Couple who are willing to take on their trial action against 7 state departments and Doctors for Life to push for a declaration of constitutional invalidity of the laws prohibiting cannabis use/possession/dealing in South Africa. We decide to run the challenge for them pro bono.”

The Cape ruling that started it all

“Prince and Acton et al have their matter heard in the Cape, which resulted in the 2017 Judgment. We run a portion of our trial (including expert evidence from international scientists and doctors – the best in field), but it is rendered part-heard. We then heard that Prince and Acton et al’s matter will be heard by the Constitutional Court in November 2017 and we decide, with the Dagga Couple, to intervene in that matter, upon which it is confirmed that my 2009 assignment forms the on-record basis of a major chunk of Prince and Acton et al’s arguments in support of legalisation.”

“Our involvement in the Constitutional Court was such that we provided clear legal argument and authority to support and expand upon what Prince and Acton et al were trying to say to the Court. Ultimately, much of what we submitted has found its way into the judgment of the Constitutional Court.”

Related: 10 Cannabis Business Opportunities You Can Start From Home

How a final assignment became the foundation for a Constitutional Court case

“So, an idea (bolstered by wanting to create a timetable clash) resulted in an assignment, which provided certain credibility and impetus to cannabis activists. Two of these activists ended up being our clients, which, despite being handled pro bono, has brought Schindlers immeasurable positive publicity, and which, ultimately, contributed to the decriminalisation (and potential future legalisation and commercialisation) of cannabis in our country.”

“Schindlers now has a dedicated “Medicinal and Recreational Cannabis Law” department, through which we will continue to make submissions to parliament, apply for licenses on behalf of our clients, support those who have been arrested and charged.”

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Business Landscape

6 Ways To Win A Better Deal

Be proactive not reactive by working through these six critical elements of your strategy.

Andrew Bahlmann

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By far, the majority of our clients start the journey of selling their business by working on a very reactive basis. Most business owners going to market say they just want to ‘see what happens’.  But this means you are starting the process on the back foot.

This approach automatically takes the control of the business sale out of your hands and puts it into the hands of the market. Keeping control is a critical element in selling your business for maximum value.

Letting the market tell you what they think about your business and what they want from you means that straight away the acquirers set the hoops that you need to jump through.

They tell you what they want. Any engagement is on their terms.

You have not defined terms or standards to use as a yardstick for what the market is saying. So you are much more likely to find yourself boxed into a corner, forced into the role of price taker rather than price maker.

Taking the time to define your ‘go to market’ strategy is a critical factor in achieving success for yourself, what you want for your business and how the market aligns to this.

Be proactive not reactive by working through these six critical elements of your strategy:

1. Define your non-negotiables

We all have certain non-negotiables in our lives and you must think through those that you want to apply to the sale of your business.

Spend quality time working out what your personal and business non-negotiables are. Then make sure that they feature prominently in your deal strategy. Examples could be:

  • I am prepared to stay on for only 18 months after the sale conclusion.
  • My staff need to be looked after as they have been with me for 20 years and are like family.
  • I want to sell 100% of my shareholding on Day 1.
  • I am not prepared to warrant future profits.

When you start out on the selling journey, this list will probably be a lot longer. Usually, it will reduce as you travel further and further down this road but you may even add new non-negotiables once you climb into the trenches and take control of the process.

Don’t be shy about presenting your list of non-negotiables to prospective buyers. They will certainly be putting forward their own list as well.

Related: Savvy Business Sale Spells New Life

2. How ready and committed are you to sell your business?

Selling your business is one of the biggest decisions that you will take in your life. It is an emotional rollercoaster. You will face more questions than answers as you progress down this road. Nobody can ever be 100% ready but you can help yourself prepare as much as possible by asking yourself the following questions:

  • Do I know what my business is worth?
  • Is my business ready for acquirers to see?
  • Am I ready to let go of my business?
  • Can my business run without me?
  • What makes my business attractive and enticing to an acquirer?
  • Do I have the time and skills to embark on selling my business myself?

As you work through these questions, a whole host of other questions will probably occur to you. Be decisive, objective and critical in asking and answering all these questions.

3. Put a plan together

Like any other business or strategy implementation, selling your business is a project. All projects need a plan of the objectives, timing, resources and risks required to succeed.

Selling your business is by far one of the most important projects that you will ever drive and also one with the least room for error. Your planning cannot control the biggest variable of all – how the market will react to your business. But being as well prepared as possible will help you cope with this.

4.  The market wants a serious seller

The way that your business and personal brands show up in the exit process is critical. Buying or selling a business is a very time-consuming process, with both seller and acquirer committing quantities of effort, energy and resources.

The market therefore wants to deal with a committed and serious seller. Any business owner just dipping his/her toe into the water to see what happens will frustrate them and potentially damage future transactions if that toe is removed from that water.

Related: When Is The Right Time To Sell Your Business?

5. Be ready for the experts

You are brilliant at running your own business, which is why you are considering selling it for maximum value. The acquirers on the other side of the table are, of course, also experts at what they do and how they do it.

Expect them to speak a different corporate language, exude negotiation and transaction skills and have mastered the ability to control the transaction. If you do not have a strategy or blueprint to default to when the heat gets too high, you will lose your way and could be blindsided into the wrong transaction.

6. Bring it all together

Work through the various steps identified above and craft your deal strategy. Let this framework be your compass during the transaction.

Always lean on it when there are too many variables being thrown at you. Having your strategy is the first step. Sticking to it will be your biggest test when the pressure is on.

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Business Landscape

Hooked On Ethics

The business that puts ethics at the forefront of its culture is the one that will shine in a landscape littered with dishonest behaviour.

Howard Feldman

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There is significant research into how the work environment influences ethical behaviour. Study after study has shown how the ethical values upheld by management filter down to all employees, affecting behaviour and business practice. The biggest influence on a person’s ethics is their environment. In South Africa, the after effects of the recent political regime continue to shake both country and citizen. Corruption has seeped into almost every part of the government and in some of the country’s most prominent private organisations.

The old saying that the ‘fish rots from the head’ has never been truer, nor more obvious.

The ethical dilemma

The reality is that the government’s flagrant disregard for ethics saw corruption become a part of everyday life. This makes almost everyone ask themselves questions like – why should I pay X utility bill? Why should I pay my TV license? The money is being clearly used fraudulently. Sure, it is the law, but leadership has proven that ethical behaviour isn’t rewarded or recognised.

But it is. The value of building an ethical business and upholding a culture that promotes honesty and integrity cannot be understated.

Related: Developing Your Business’s Ethics Policy

Here are five reasons why…

  1. Those who skirt the edges of ethics almost always get caught.  There has been a steady shift in the country’s moral compass as leadership has taken a far stronger stance on rooting out corruption and already some of the country’s biggest names have been found guilty. KPMG, McKinsey, Bell Pottinger and SAP have all had their names tarnished by the scandals that have rocked the country.
  2. Employees are more engaged and better behaved. A weak ethical culture filters down from the top, influencing behaviour and attitudes. If employees feel that they can get away with bad behaviour that benefits them, or if they feel that their environment encourages this, then they will.
  3. A strong ethical influence will dictate how employees treat customers and one another. If your company enforces and rewards honesty and integrity, then these will be the qualities that clients will perceive. Their lack may also see you lose market share and your reputation.
  4. Like attracts like. If you create a culture that rewards employees that work all hours, deliver the goods and commit themselves then you will attract more people with these qualities. The same applies in reverse – reward bad behaviour and the results will rapidly speak for themselves.
  5. Your business reputation. Trust can’t be bought. It is hard won and easily lost. If you lose your reputation then it is very unlikely you will win it back and it will follow you for the rest of your life. The same applies to your staff. If their behaviour is questionable it could damage your company. Make sure you set the rules of what is or is not tolerated by your company culture and consider investing into ethics courses that allow your teams to stay ahead of the curve.

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