South Africa’s startups may be the silver lining to an otherwise gloomy economy, but there are nowhere near enough of them. Moreover, the country is falling behind the rest of the continent when it comes to tapping entrepreneurial potential.
That’s according to the Global Entrepreneurship Monitor (GEM) 2015 Global Report, which shows that while 73% of adults in South Africa see entrepreneurship as a good career choice and around 45% of the working-age population feel they have the ability to start a business, just 9.2% go on to do so.
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In 2015, 62 economies around the world participated in the study including eight African economies (Botswana; Burkino Faso; Cameroon; Egypt; Morocco; Senegal; South Africa; and Tunisia).
Given that they are seldom mentioned among the continent’s key startup hubs, it’s interesting to note that, according to the report, the top performing African economies with regards to entrepreneurship are Botswana and Senegal. Both of these exhibit an upward trend year-on-year in terms of the number of adults starting new business 33% and 38.6% respectively (measured as Total Early-Stage Entrepreneurial Activity or TEA by GEM). While not the worst performer, South Africa’s TEA rates continue to be lacklustre at just 9.2%.
Botswana and Senegal also have one of the highest stated rates of entrepreneurial intentions with over 60% of adults in those countries reporting that they intend to start a business over the next three years. The global average for this across all 60 participating economies in 2015 was 21%. South Africa scores just 10.9%.
According to GEM, high intentions to start a business are generally consistent with high opportunity and capability perceptions — meaning that people are optimistic that they have the skills to start a business and believe that there are good opportunities to do so. They also have a low fear of failure. In Senegal and Botswana fear of failure rates are less than 20% while in South Africa they are at 30.9%.
But despite the variation in TEA rates, entrepreneurial intention rates and fear of failure rates, the GEM data show a persistent imbalance between the rate of early-stage entrepreneurship in all of these countries and more established businesses. While Botswana has one of the highest TEA rates in the sample, established business ownership is less than 15% of the TEA level. South Africa’s established business ownership rate is at 3.4% making it one of the lowest out of all economies in the sample.
According to Mike Herrington, executive director of GEM, this should be cause for concern about business sustainability.
“Whether these numbers are due to societal values, individual attributes and /or components of the entrepreneurship ecosystem – policy makers need to understand what is causing this so it can be addressed,” he says.
It is important that economies foster more established businesses because generally it is such businesses that create much-needed jobs and fuel economic growth and development, Herrington explains.
Over 80% of entrepreneurs in factor — and efficiency-driven economies project adding one or more jobs to their economies, besides employing themselves, making them a potent economic force.
“Understanding what inhibits and what enhances entrepreneurship in various contexts has never been more important, as many economies are struggling – especially those in developing countries, and unemployment is increasing,” said GEM Executive Director and report author Mike Herrington. “The Global Entrepreneurship Monitor allows us to gain additional perspective on entrepreneurial activity, and to look at best practices that are helping to promote small and medium enterprise development.”
GEM data show that one of the key factors contributing to business discontinuance across all economies is a lack of profitability. About one third of business exits cite lack of profitability as a factor. Factor- and efficiency-driven economies including South Africa, Botswana and Senegal – as well as in other African countries such as Tunisia, and Morocco – additionally identify a lack of finance as a major reason for leaving a business. Together with, a lack of profits or finance explains half or more of the exits in these African economies.
According to Herrington, key areas that policy makers need to address, especially in Africa include enriching the availability and variety of funding sources via appropriate regulatory frameworks that enable new funding schemes to prosper, as the United States has done with crowdfunding, continue with the reform of regulatory systems to make it ever-easier to start and run a business, and expand infrastructure, especially IT infrastructure, and education.
“In South Africa, there seems to be a growing optimism around entrepreneurship, but we are not seeing this translate into numbers of new and established businesses. It is critical that we get the enabling framework for entrepreneurship right in that country to allow untapped entrepreneurial potential to emerge,” he concludes.
