The real barriers to entrepreneurship in South Africa
With unemployment levels on the rise in South Africa, many young people face a bleak future. The more ambitious among them look to starting their own businesses as a way of keeping their heads above water. For others it’s a matter of being their own boss, while some find a particular passion or dream that they feel drawn to pursue.
Whatever the force that drives young entrepreneurs to get their ideas off the ground, the fact remains that there are many obstacles they will have to overcome before they can get their ventures off the ground. Here are some of them.
Many young entrepreneurs cite lack of funding as the primary problem they face in getting their businesses off the ground. Few of them realise that this lack of funding is actually a consequence of a far bigger concern – lack of a credible deal pipeline in their ventures.
Most young people who want to go into business have amazing ideas for products or services, but they struggle to come up with a longer-term lifespan projection for their ideas. They cannot plot their concepts’ economic viability. They fail to consider the implications of implementation, operational requirements, market receptivity, sustainability, scalability, impact and a host of other factors that investors look at before they will even consider a deal.
There is, in fact, plenty of money out there. Local and international investors alike are dying to find an innovative venture to put their money into. However, they simply do not have an appetite for investment where there is no credible deal pipeline.
In addition, the way lending institutions determine who gets funding is heavily biased against the young entrepreneur. Banks and organisations such as the National Empowerment Fund (NEF) and Industrial Development Corporation (IDC) consider individuals’ personal assets and financial management skills before even thinking about granting a loan. They scrutinise your bank accounts to see how you perform, if you’ve had debit orders bouncing etc. What are we funding here? Are we finding a person’s bank account or that person’s concept?
We need a mechanism for funding businesses that ignores a person’s financial status. Most young entrepreneurs are in their 20s. They don’t have assets to satisfy the criteria laid down by banks, or the NEF or IDC.
Where we do see young entrepreneurs succeeding, they have usually been funded by private individuals. But that puts the entrepreneur at a disadvantage. They end up taking deals that are not in their best interests because they are desperate to realise their ideas. In some instances they give up majority stakes in their businesses just to get them off the ground. It makes it very difficult for them.
Funding must be at risk, and if the lending institutions can’t take the risk, then it’s a problem. As long as funding is directly linked to a person’s financial status, not many young people will be able to succeed.
The problem is we live in a very risk-averse society. South African consumers, businesses and investors tend to be too cautious in everything we do. There is a sense of apprehension when it comes to consuming locally conceived and produced commodities. We need to support and embrace local industry and innovation.
Take Mark Shuttleworth’s Ubuntu operating system. As South Africans we should be supporting this product. Local businesses should be scrambling to install it. Yet we prefer to use Microsoft because it’s what we’re used to and it does a decent enough job.
The same holds true in many creative industries. Fashion designer David Tlale is a good example. It was only once he was recognised on international catwalks that his fashion started being taken seriously in South Africa.
As long as South African businesses and consumers remain risk-averse, confidence in local innovation will remain low and investment in small businesses is unlikely to grow.
Policy and regulation
There are certain elements of bureaucracy in South Africa that hampers an entrepreneur’s ability to move forward with his or her ideas. Take the Public Finance Management Act, for example. While it’s crucial function as a tool to guide and account for public spending cannot be refuted, it should be flexible enough to grant discretionary decision-making powers to leaders of the bodies that it regulates.
Any entrepreneur approaching a government department, agency or state-owned enterprise with an idea is usually stalled by process. It takes time to get all the necessary approvals in place – and in most instances, time is crucial when it comes to launching an innovative idea. It’s often more about how quickly you can get your idea to market than the brilliance of the idea itself.
If a leader can’t make quick, discretionary decisions, it creates massive bottlenecks. The processes that were designed to assist and protect entrepreneurs actually end up preventing their ideas from seeing the light of day.
The other option for entrepreneurs is to try and identify loopholes and take advantage of them. But this is a short-term solution that fixes the symptom rather than the cause.
Access to markets
Good ideas don’t only come out of urban areas. In fact, young people living in rural areas tend to be more innovative. Throughout Africa, communities in these areas live under extremely harsh circumstances. They need to come up with inventive solutions to make their lives a little bit easier. Most innovations that speak to Africa’s problems come out of the rural areas, and that trend looks set to continue.
The problem comes in the allocation of resources, most of which go into urban areas, because it’s easier and cheaper. Anyone from a rural village who comes up with a brilliant idea faces numerous obstacles getting to market. These include language barriers, lack of access to resources and information, and the oft-quoted matter of funding.
Take the district of Taung in North-West Province as an example. There are four or five communities in the district. The closest town is Vryburg, more than 70km away. Transport from Vryburg to Taung costs the same as a meal for a whole family. Most people can’t afford this sacrifice simply to attend a meeting, so they end up sitting with incredible ideas and no way to get them off the ground in a meaningful way.
Every now and then – usually close to election time – a politician might visit a district like Taung and come across a concept that’s been working well in the area. The politician might decide to offer assistance to the community and take the project on. Invariably, however, someone else would have caught on and commercialised it already, leaving its original inventor high and dry.
Consider that more than 45% of South Africans live in rural areas. Imagine the potential that could be realised through a more equitable distribution of resources.
What does it take to succeed?
Despite all the hoops that young people need to jump through, there are still many who manage to make a success of it. What these people have in common is strength of character, solid leadership abilities, a flawless understanding of their chosen markets and loads of energy and resilience.
My advice to young entrepreneurs usually goes something like this: “You probably won’t succeed the first time you try. Maybe not even the second time. Or even the third. But every time you fail, you learn – so keep on going. The only thing holding you back is yourself.”
Makinane is a winner of the entrepreneurial TV show ‘The Big Break Legacy’ and leader of youth programmes at the upcoming African Business Leadership Forum.