The South African entrepreneurial landscape according to Ernst & Young

South Africa is a country of extremes when it comes to entrepreneurship, says Ernst & Young. The company reaches this conclusion inside its 2013 G20 Entrepreneurship Barometer report which surveyed 1500 entrepreneurs in countries that include South Africa, Brazil, India, Russia and China as well as more developed nations such as the US, Japan and the UK.

The report is important because it allows each country to benchmark its support for entrepreneurs — a segment that is responsible for 75% of all jobs in China and rose to 67% of all jobs in the European Union in 2012.

The report looks at five metrics: access to funding, entrepreneurship culture, tax and regulation, education and training, and coordinated support. When the report was released in August this year, South Africa ranked in the second quartile.

While it may appear at first glance that South Africa is a second tier country when it comes to support for startups, consider the company South Africa keeps in the second group: France, Germany, Japan and member states of the European Union. The report only groups the United States, Canada, South Korea and the United Kingdom into the first quartile.

While it’s encouraging for an emerging market like South Africa to be included so near the top, it is painted as an ecosystem of contrasts. On the one hand the country is said to harbour some serious challenges surrounding its entrepreneurial culture and education, while it ranks closer to the top for funding access as well as tax and regulatory issues.

Here follows a condensed version of the in-depth profile on South Africa.

Access to funding

Despite the availability of funding — South Africa is seen as having a “highly mature” financial sector — the funds are not made easily available and the capital is often too expensive. The consensus is that ease of access to bank, angel and IPO-based investing, is getting worse.

The South African entrepreneurs surveyed said that public aid and Government lending was the number one factor that could make the biggest long-term difference to startups in the country.

On the positive side, there seems to be an improvement in microfinance, which is readily embraced, as well as an uptick in the availability of government funding.

Despite slowing down, South Africa also has a comparatively high rate of mergers and acquisitions.

Entrepreneurship culture

In contrast to other emerging economies, 70% of survey respondents reckon that South Africa’s culture supports entrepreneurship.

However, the study theorises that this view is in light of “media attention on entrepreneurs and entrepreneurship being seen as a strong career choice, rather than academic, corporate or institutional strengths.”

Alarmingly, South Africa’s culture of praising innovation has taken a dive between 2008 and 2011 — patent applications fell by 24%. The report says the country needs more scientific and engineering articles published, as well as more spending and people focused on research and development. Failing that, we’re not likely to see innovation lead startups with commercial prospects coming out of research incubators.

Tax and regulation

It’s easier to start a business in South Africa than in other emerging economies — think Brazil, India, China and Russia.

Despite difficulties and red tape it is relatively easy, quick and cheap to start a business, and the time spent on taxes is thought to be in line with mature economies.

The biggest problem for South African ventures and the entrepreneurial environment in general, come when young businesses move past the startup phase.

The report points out that the cost of firing workers is a notable detractor, and calls on labour-law reform.

“Out of the 144 countries tracked by the World Economic Forum, South Africa is 143rd on hiring and firing practices, 140th for flexibility of wage determination and last on the measure of cooperation in labor-employer relations,” notes the report.

For this reason startups often opt to remain small to stay under the radar.

Education and training

Did you know that South Africa spends more on education than most of the other G20 countries? Despite this, tertiary enrolment remains low which translates into a skill shortage for advanced ventures — think tech startups. The report calls on widespread education reform in the country to mitigate findings by the World Economic Forum that South Africa’s inadequately educated workforce is the single most problematic factor for doing business in the country.

For a start, reform is urged at a basic level: teacher training, administration and infrastructure. It’s widely known fact that South Africa’s government reports that 80% of all state schools are classed as “failing.” The stronger independent schools have grown by 75% in the past decade, but they are too expensive for the majority of South Africa’s youth.

In contrast to countries such as India, Russia, Turkey and Indonesia where respondents were indicating increased access to educators, South Africa’s situation is said to have deteriorated in the past three years, underling the value of informal learning.

In addition to basic training, the country also needs more specialised focus on entrepreneurial and business education.

As highlighted in the Omidyar report, South Africa and other sub-Saharan African countries in general, need to do more to promote entrepreneurship as a career path. One way of doing that would be to promote entrepreneurial success stories. Another involves boosting informal learning and training schemes. 62% of those surveyed in South Africa believe that there has been improvements on this front thanks to corporate engagement with startups.

Coordinated support

The report indicates a perception of improvement related to support structures such as incubators, mentorship programmes, industry-specific training programs, entrepreneurial workshops and corporate engagement with startups.

South Africa is however, encouraged to do more about network-related elements such as clubs, associations, chambers of commerce and small business administration.

Ending on a positive note, South Africa’s tailored support for female entrepreneurs is said to have improved.

Image by Meraj Chhaya