Is South Africa really the entrepreneurial gateway into Africa?

sa flag 650

The short answer is: it depends. It depends on whether you are an investor or an entrepreneur. And here’s why.

Investors, get there early!

On the surface, South Africa doesn’t seem to pose the most enticing investment case. Here is a comparison of the country’s GDP growth rate compared to some of its peers on the continent.

Africa 2012 GDP

South Africa, although it is the continent’s largest economy (for now), is also its slowest, and taken at face value that’s not something investors find particularly attractive.

But (and it’s quite an important but) –- the savvy investor does not invest in South Africa point-blank. The savvy investor invests into companies, and that’s a whole different story. South African companies are arguably some of the best placed in the world to take advantage of the astounding growth prospects presented by the rest of the continent, and they have clearly realised this too. Check out what percentage of each of the following companies’ revenues are derived from Africa ex-South Africa:

africa ex-sa revenue exposure

And these figures are set to grow as many of these companies are just beginning to roll out their Africa strategies. Note also how diversified the sectors are. We have companies in banking, retail, telecom, beverages, mining, pharmaceuticals and logistics all expanding into Africa. They’ve identified the opportunity, and so should investors.

But unlike these companies, investors don’t have to navigate the precarious ‘waters’ of Africa. They can get indirect exposure by investing in strong, established South African companies who have the experience, the security and the capital to venture north. What’s more, they can do so through the highly liquid and regulated Johannesburg Stock Exchange.

Entrepreneurs, easy does it…

Unfortunately for you guys it’s not as straight forward. Unlike the large, listed companies described above, startups and young private companies lack both the security and access to funds available to the public sector. But that’s not to say that establishing a strong-hold in South Africa is a bad strategy. By establishing a stable and profitable base in South Africa, startups may find they can afford to take more risk and dip their toes into the potentially more lucrative (but riskier) greater African continent.

There are several reasons for why South Africa may be a good starting point. For one, it’s the most business friendly according to the Ease of Doing Business Index (where 1 = most business friendly and 189 = least business friendly). The index includes metrics which measure the ease of “starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.” I’ve used the same countries in the GDP comparison above to demonstrate. As you can see, South Africa scores best.

African countries ease of doing business

Another reason to start off in South Africa is that, in terms of pitching to investors, it’s perceived as a less volatile and more regulated environment than the rest of Africa, which means investors may be more inclined to put their money there. Once you have proved your worth in South Africa, said investors would probably feel more comfortable following you further afield into the rest of the continent.

The downside of starting off in South Africa is that it is a more saturated market than the rest of the continent, which means it may be more difficult to identify a niche that needs filling or an underserved consumer that needs satisfying. For the brave entrepreneur with a unique vision, venturing directly into the African lion’s den may be the best way to penetrate a niche market first: and for that I wish you best of luck and salute you.

But the gates they are a closin’

As the rest of the African continent catches up to South Africa in terms of infrastructure, regulation, liquidity and business friendliness, the opportunity to use South Africa as a stepping stone will begin to wane. But for those who use the advantages it offers correctly, it may just give you the boost you need to get a head start before your competitors inevitably start to crowd in. Don’t be the last one to jump on the north-bound band wagon.

Lenoy Barkai


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