Entrepreneurial Snapshot: South Africa

In a new series of posts — Entrepreneurial Snapshot — I’d like to give a brief overview of the six countries surveyed in Omidyar Network’s Accelerating Entrepreneurship in Africa report: South Africa, Tanzania, Kenya, Nigeria, Ghana and Ethiopia. Most of the information in these posts will come directly from the report, so think of them as a summary, or abridged country profile.

The report is the compiled information gathered from 582 surveyed entrepreneurs across the six countries, combined with 72 in-depth interviews. When I mention how something is ‘viewed’ or ‘perceived’ in these posts, I am referring to the entrepreneurs who took part in the project.

Each post will give an overview of the country’s entrepreneurial landscape, followed by its key challenges and strengths, with Ventureburn proposed solutions along the way. To kicks things off: South Africa.

Overview

South Africa accounts for 20% of Africa’s US$1.9 trillion GDP. It is Africa’s economic powerhouse.

Country Highlights:

• abundant supply of natural resources
• modern infrastructure
• efficient distribution of goods to major urban areas
• well-developed formal sector
• sophisticated legal, communications, energy and transport sectors
• financial sector on par with global peers
• high industry concentration
• most sectors dominated by a few large firms

Despite its developed economic infrastructure, South Africa has a severe income disparity amongst the population. 50% of the populace lives below the poverty line with limited prospects of finding employment. The country has high unemployment rates too, due to a misalignment of the skills required by the economy, and those possessed by the populace.

The government has identified entrepreneurship as an essential cog in the machine to advance economic development and to nurture job creation, yet its impact has been limited to date. Early stage entrepreneurial rates are about one-third lower than comparable low to middle income countries.

Key Challenges

Legislation:

Complicated legislation combined with harsh penalties for non-compliance is a noticeable constraint for new entrepreneurial ventures. The impact of government regulations on new businesses is viewed as generally worse in South Africa than in other African countries. Particularly the Consumer Protection Act, Labour Relations Act and National Credit Act are viewed as onerous and time-consuming.

It is also viewed that the costs of compliance are too high, and thus favour larger, more established firms. A study by the Strategic Business Partnerships showed that the average cost of compliance for a small business owner was estimated to be approximately 8.3% of turnover compared to 0.2% for big businesses.

Government initiatives have been put in place to allow for more nuanced legislation that is helpful to small and new businesses. For example, The National Small Business Advisory Council was established in 2006 with the mandate to advise the Department of Trade and Industry on how to address this new legislation. However, capacity constraints have prevented the council from delivering against the mandate.

VB Solution: Perform an analysis, hopefully done on a government level, to determine the potential sources of income that can be derived from SMEs. From there we can see how stimulating the sector will improve the economy, and how it will affect job creation. Then the government can reassess the allocation of resources to a council like the Small Business Advisory in the hopes to increase capacity and stimulate policies.

Limited skills for entrepreneurial ventures:

There is a perception that the schooling system, at almost all levels, does not devote enough time to teaching entrepreneurial courses. This translates to graduates not being equipped to manage new ventures. It is perceived that the schooling system does not provide enough critical thinking or problem-solving skills that are essential to success as an entrepreneur. It is viewed that the system prepares students to rather seek employment in large corporations. (Skilled candidates are often gobbled up by larger firms because of their ‘brand recognition’ and more attractive benefits.)

VB Solution: Create compulsory entrepreneurial modules for both primary and high school. Consider opening Entrepreneurial-focused schools (think incubation programme for children) that teach students essential SME skills such as business management, but also prepares them to be tech-savvy with skills like programming. Modernise education in the technology sector so it can be more far reaching, for example courses taught over mobile phones. Formulate programmes or initiatives where students can shadow entrepreneurs in a mentor or buddy system, while giving the entrepreneur benefits for participating.

Infrastructure

Despite being arguably the most developed country in Africa in terms of infrastructure, there is a negative perception towards it. Only 32% of survey respondents felt that physical infrastructure supports new and growing firms. Electricity and internet are the main drivers behind this perception where high tariffs are viewed to dent business profits.

VB Solution: Privatisation? Invite competition into the electricity and telecommunications arena. More realistically, companies need to find innovative ways to operate their logistics more efficiently, things like coworking or alternative sources of energy, can help reduce running costs.

Key Strengths

Financial sector as an enabler for entrepreneurs

The sophisticated financial markets gives South African entrepreneurs an array of options – Angel, VC, bank loan etc. – for financing their businesses by comparison to the rest of Africa. South African Entrepreneurs are also a lot more comfortable with alternative financing such as stock options and mergers than their counterparts, not only in Africa but the rest of the world too.

However, South African private financing networks are still very small, specifically VC. Entrepreneurs still do not possess the knowledge of how to leverage their company when seeking out financing. Strong pitches and cohesive business plans are still in the few.

Growing culture of entrepreneurship

Entrepreneurship is being viewed as a legitimate career option in South Africa. Despite this though, there remains a certain level of risk aversion and fear of failure. However those surveyed indicated that those who do take the plunge to start entrepreneurial ventures, and fail, are not afraid to try again.

South Africa’s Entrepreneurial Landscape

The report shows that compared to the rest of the continent South Africa has a more developed formal economy and related services but, interestingly, local entrepreneurs and service providers hold a more negative view than African counterparts across many components.

I would argue that this negative perception comes from the fact that South African entrepreneurs like to look to developed countries as points of comparison, because those are viewed as the end point of the entrepreneurial journey. However we need to recognise that what works in one country does not always work in another. To look at developed countries as end points is limiting ourselves, because we can build something better, we can forge our own landscape.