State of Entrepreneurship in South Africa - The enTrepreneurial Dialogues - SABLE Accelerator
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The Entrepreneurial Dialogues
State of Entrepreneurship
in South Africa
Presented by:
In association with the Gordon Institute of Business Science
The Entrepreneurial Dialogues Contents
The Entrepreneurial Dialogues
State of Entrepreneurship
in South Africa
Contents
Forewords
• Entrepreneurship is at the Heart of Our Business Too: Pg 02
Iris Dempsey
• Approach and Methodology: Pg 03
Adrian Gore & Malik Fal
The State of Entrepreneurship in South Africa Pg 04
Developing a Culture of Entrepreneurship Pg 10
in South Africa
Access to Capital Pg 14
Enterprise Development & Black Economic Pg 18
Empowerment
Incubators and Small & Medium Enterprise Pg 22
(SME) Support
Access to Skills Pg 26
Acknowledgements Pg 30
1
The Entrepreneurial Dialogues Forewords
Entrepreneurship is at the heart APPROACH AND METHODOLOGY
of our business too
E T
ntrepreneurship is vitally important In that vein, we take great pleasure in pre- his paper was a collective effort. It Because this exercise was intended to be It is our hope
to the economic and social devel- senting the first in a series of Entrepreneurial was written to reflect what was said collective, the Endeavor team sent a first
opment of South Africa. Through in- Dialogues focusing on the State of Entre- in actual debates of the first “State draft of the paper to key panelists and
that the first
novation, entrepreneurs create new, preneurship in South Africa. This pioneering of Entrepreneurship on South Af- experts for comment; the intention was to edition of this
competitive markets and businesses which report is unique in the fact that it represents rica” conference on 19 November 2009; it give these experts an opportunity to review
lead to job creation and have a multiplying the combined view of government, private is not a mouthpiece to broadcast the views the draft.
paper will
effect on the economy. Entrepreneurship sector and academia – extracted from a se- of Endeavor or FNB. In addition to the main achieve its
empowers citizens and is required for any ries of meaningful exchanges and debate. “State of Entrepreneurship” panel that initi- It is our hope that the first edition of this objective of
emerging market to move forward and suc- We aim to begin a new era of innovative ated the conference, five breakout sessions paper will achieve its objective of creating
cessfully integrate into the global economy. collaboration that will result in accelerated were held on the following topics: a useful collaborative platform for South creating a useful
growth and enablement of entrepreneurs, Africans who are interested in enhancing collaborative
The South African government has recog- delivering sustainable enterprises that • he Culture of Entrepreneurship
T the level of entrepreneurial activity in the
nised this contribution and therefore has have a positive impact on our lives and • Access to Capital country. We apologise in advance for any
platform
the goal of establishing South Africa as an communities. • Access to Skills shortcomings and hope to improve on this for South
entrepreneurial nation that rewards and • Incubators and Support Organisations effort next year.
recognises entrepreneurship. FNB Com- As a company with entrepreneurial spirit at • Enterprise Development and BEE
Africans who
mercial Banking supports this through our its heart, FNB Commercial is committed to are interested
FNB Commercial contribution and participation in enabling, empowering and educating South African Each session was recorded in audio and
Adrian Gore Malik Fal
Chairman, MD, in enhancing
is a proud growing and accelerating entrepreneurship entrepreneurs to take advantage of the busi- video, and Gordon Institute of Business
Endeavor SA Endeavor SA
in South Africa. ness opportunities present in our country. the level of
partner of Global Science (GIBS) students were assigned to
all breakout rooms with a mandate to take entrepreneurial
Entrepreneurship FNB Commercial is a proud partner of Glob- Iris Dempsey notes and assist the facilitators in making
activity in the
Week, a world- al Entrepreneurship Week, a world-wide ini- CEO, FNB Commercial Banking sure that each of the five discussions cov-
tiative hosted by Endeavor South Africa, a ered both “key issues” and “proposed solu- country.
wide initiative non-profit organisation that supports high tions” for the theme.
hosted by impact entrepreneurs in 11 emerging mar-
kets, including South Africa. Together, we In late January 2010, copies of the audio
Endeavor hope that ongoing activities around this recordings and of the GIBS students’ notes
South Africa, week will raise awareness about the poten- were forwarded to Endeavor South Africa
tial of entrepreneurship, and initiate further
a non-profit where staff members created the first draft of
interventions and debate on issues pertain- this paper. The Endeavor team read through
organisation ing to new venture creation. the GIBS students’ notes and listened to the
that supports audio recordings of each session. Drawing
from these materials, session by session,
high impact they organised the content into “key points
entrepreneurs of discussion” and “recommendations and
insights” sections for the paper.
in 11 emerging
markets,
including
South Africa.
2 3
The Entrepreneurial Dialogues The State of Entrepreneurship in SA
THE STATE OF OVERVIEW
The first annual conference on the “State of
ENTREPRENEURSHIP Entrepreneurship in South Africa” was held on
19 November 2009, at the FNB Conference Centre
IN SOUTH AFRICA in Sandton. This conference was part of a series
of activities within Global Entrepreneurship
Week (GEW), a Kauffman Foundation global
initiative that strives to foster national debates
on entrepreneurship around the world. In 2009, it
is estimated that three million people worldwide,
from 8 800 organisations, participated in 25 000
activities across 87 countries.
The headline panel of the FNB-Endeavor
conference on 19 November was a mixture of
policy makers, entrepreneurs, academics, and
funding providers. Their mandate was to drive a
general discussion on entrepreneurship in South
Africa with the underlying goal to set the tone for
the five subsequent breakout panels that were to
follow later in the day.
4 5
The Entrepreneurial Dialogues The State of Entrepreneurship in SA
KEY POINTS OF DISCUSSION the impact, growth, and possibilities it can thought to have been a major factor in the • Successful entrepreneurs In order to
offer the South African economy, or for the building of the world’s largest economy. are “disrupters” who like to do
• South Africa’s entrepreneurial impact it can have on unemployment and Many of today’s most impactful global things differently cope with
activity is improving but still lags other social tensions in the country. There corporates began as small entrepreneurial Entrepreneurship is a challenging life the trials and
behind has been an influx of people from other Af- ventures in America at about that time. In choice; in the words of Discovery’s Adrian
The most widely used measure of entrepre- rican countries into South Africa, many of South Africa, as in other emerging econo- Gore, “Becoming an entrepreneur is like
tribulations
neurship is the TEA (Total Entrepreneurial whom have become vibrant entrepreneurs; mies, these potentially transformative en- jumping out of an airplane with silk worms that pave the
Activity) or ‘early stage entrepreneurial activ- will this phenomenon create role models trepreneurial entities must be identified instead of a parachute and hoping that they
entrepreneurial
ity’ Index. It measures entrepreneurial activ- that will inspire the majority of South Afri- and nurtured now. are over-achievers!” In order to cope with
ity by looking at the percentage of the active cans to appreciate the role entrepreneur- the trials and tribulations that pave the en- journey,
population, people between 25 and 64, who ship can have in their own lives and in the • Aspirant and existing trepreneurial journey, entrepreneurs must entrepreneurs
are entrepreneurs in any given country. communities they live in? entrepreneurs face huge challenges have an innate frustration at normality and
and frustrations in South Africa a strong belief that they can offer beneficial must have
South Africa’s TEA in 2008 stood at 7,8%, Many stakeholders from different elements The country’s financial and operating en- products and services to their fellow men. an innate
which is greater than it was in 2006 (5%) of society are attempting to foster greater vironment is not supportive of entrepre- This is not for everyone and in order to suc-
but still lower than India-Brazil (11,5% – entrepreneurship in South Africa. Partner- neurs, particularly in terms of regulations, ceed, entrepreneurs must understand and
frustration at
12%), Colombia (24,5%), Mexico (13,1%) ships like the FNB-Endeavor partnership policies and access to capital. The banking leverage whatever special form of capital normality and
and even the United States1 (10,8%). How- offer support, government bodies like the system remains the main source of capital they can bring to the table; be it a special
a strong belief
ever in 2009, following the economic crisis, Department of Trade & Industry and the to start and grow businesses, whereas in relationship with a person, access to a criti-
The most the level of early-stage entrepreneurial ac- Small Enterprise Development Agency other emerging countries, different financial cal piece of information, or a unique knowl- that they can
competitive
tivity in South Africa dropped again to just (SEDA) as well as private participants like structures play this support role. Financial edge and experience that gives them a leg offer beneficial
over 5%. Within South Africa, sharp differ- the Rupert family and others offer fund- services groups like First Rand that have an up in the pursuit of a specific opportunity.
nations are ences remain within demographic groups ing, academic institutions like University entrepreneurial tradition and have spurred What matters in the long run is what they products and
those that
with Indians and Whites having the most of Cape Town, Gordon Institute of Busi- successful entrepreneurial ventures like do with that capital and how they transform services to their
entrepreneurs (1,6:1 and 1,7:1 respectively ness Science and the University of Wit- Discovery and Outsurance, are trying to it into a vibrant business. South African en-
have the compared to the general population), while watersrand offer skills. They all contribute make a difference in this regard, but these trepreneurs, unfortunately, tend to suffer
fellow men.
Blacks and Coloureds have fewer entrepre- towards this critical cause. However, these efforts in isolation might not be sufficient to from the “me too” mentality and a propen-
highest level of fragmented approaches do not appear make a meaningful difference. sity to imitate rather than innovate.
neurs (0,9:1 and 1,2:1 respectively com-
entrepreneurial pared to the general population). to be producing acceptable results and
activity. Small greater effort should be put into trying to • Entrepreneurial skills are • Entrepreneurs who focus solely
This situation is considered to be particu- combine the various support structures. severely lacking on making money do not end up
and medium larly alarming in a context where South Af- Emphasis needs to be placed on high- Both formal (primary to tertiary education) building GREAT businesses
size businesses rica’s Gini coefficient, its national gap be- impact, high-growth entrepreneurs who and informal (home and social networks) People start businesses for different rea-
tween rich and poor, has actually become can use these resources effectively and educational structures do not impart entre- sons; some to make money, others be-
tend to be one of the highest in the world (South Africa become role models. preneurial skills in South Africa. If Malcolm cause they feel that they have something
the greatest is at a Gini index of 57,8 compared to Bra- Gladwell’s premise that it takes 10 000 different to offer, many because they do not
zil’s 57). Finding ways to stimulate entrepre- • Entrepreneurial activity drives hours (five to six years) of practice to mas- like the controls in corporate environments.
creators of jobs economic growth and job creation ter anything holds true, then much more Whatever their reasons, South African en-
neurship in South Africa has become one of
and collectively, the country’s Gordian knots2, and a critical The most competitive nations are those needs to be done to nurture entrepreneur- trepreneurship icon Raymond Ackerman,
the greatest goal in order to consolidate the democratic that have the highest level of entrepreneur- ial skills in young people. This is why FNB paraphrased by facilitator Alec Hogg, ar-
gains achieved since 1994. ial activity. Small and medium size busi- Commercial is already involved in a series gues: “Money should not be the main moti-
creators of nesses tend to be the greatest creators of of pilot entrepreneurial programmes within vating factor in starting a business. People
wealth in •R
espect and recognition for the jobs and collectively, the greatest creators the school and university environments. should go into business to work on some-
contribution of entrepreneurs is of wealth in emerging economies. In 1790, Other stakeholders must also get involved thing they enjoy and the money will follow.”
emerging not sufficient in South Africa 90% of the United States population was and find innovative and effective ways to On the other hand, there is a notion that
economies. Entrepreneurship is not yet recognised for self-employed, a fact that is commonly address this challenge. people who have been extremely success-
6 7
The Entrepreneurial Dialogues The State of Entrepreneurship in SA
points out that a large portion of the Ernst RECOMMENDATIONS Some of
& Young annual entrepreneurship com- & INSIGHTS
petition finalists started with less than a the reasons
R1 000 investment. •W idespread “consumer” mentality, espe- mentioned in the
cially in the black community needs to give
One key aspect to consider, based on the way to “productive” mentality.
study for the gap
experience of institutions like SEDA, is •M ain success factor in entrepreneurship between men
whether the individuals who need funding is the ‘psyche’, meaning the passion and
and women in
have identified and are pursuing a genuine drive, of the entrepreneur.
need, or are merely trying to imitate an al- • Entrepreneurship is critical for South entrepreneurship
ready saturated business idea. In the words Africa’s future. In the short-term, the regu- are women’s
of Charles Wyeth from SEDA, “Our Tshwane lation and bureaucracy attached to starting
branch happens to be just across the road businesses must be reduced. In the long- propensities to:
from a CIPRO branch. At that branch, out term, only broad educational reforms, at want to spend
of the 50 people we see every day, 40 are all levels, will change South Africa’s entre-
people who have just come out of CIPRO to preneurial activity.
more time with
It is important register a business and immediately come • Government is getting even more in- their families,
to us asking for money and asking us what volved in entrepreneurship development
to note that want to avoid
business sector they should get into! To us, (e.g. Khula direct initiative). It must do it
the rewards these people are not entrepreneurs.” in ‘smart’ ways while confronting some the stress of
of business
of the dysfunctional practices that are employing too
• Most female entrepreneurs in ‘clouting’ entrepreneurship in South
success should South Africa seem to be lifestyle and Africa; tender-preneurship, entitle-neur- many people,
be shared
not high-impact entrepreneurs ship, funding without effective ongoing have less
The assumption is that men entrepreneurs skills support strategies.
among the can focus on their businesses more than
education, and
founding staff women entrepreneurs who tend to have OTHER ASPECTS experience
multiple commitments to balance in their TO CONSIDER
who took part more difficulty
lives. In addition, Dr Mike Herrington refers
in the risk to a study that shows that South Africa’s • Entrepreneurial activity drives accessing
associated with
ful in business were never solely motivated • Aspirant entrepreneurs in the men:women ratio of entrepreneurs is 1,6:1 economic growth and job creation capital due to
by money but by passion. Warren Buffett townships battle to get started as opposed to 1:1 for countries like Peru Small business growth has been linked to
a new venture; a who is the second richest man in the world SABEF 3’s 30 000 members are a truly rep- and Chile. economic growth, the creation of employ- marriage contract
culture of
and founder of the tenth largest company resentative sample of this tension. In the ment, and the alleviation of poverty. Further- formulations.
on the NYSE, still lives in the same house words of Lebo Gunguluza, “Our members Some of the reasons mentioned in the more, the Global Entrepreneurship Monitor
co-ownership and drives the same car he had 45 years are broke! We see many of them everyday study for the gap between men and wom- report has conclusively shown that the level
ago. So his original plan was clearly not who come to us frustrated at not even get- en in entrepreneurship are women’s pro- of early-stage entrepreneurial activity is
in the early about money although he ended up making ting an opportunity to invest in a R2 000 pensities to: want to spend more time with directly related to per capita income.
stages is a lots of it. Finally, it is important to note that video camera so that they can start a wed- their families, want to avoid the stress of
critical success the rewards of business success should ding video-filming business.” Sometimes employing too many people, have less
be shared among the founding staff who people just need a modest amount of sup- education, and experience more difficulty
factor that is not took part in the risk associated with a new port to get started and there is urgency accessing capital due to marriage contract
NOTES
1. Data from UCT’s GEM reports; The general assumption is that
always practised venture; a culture of co-ownership in the in addressing such needs. At the same formulations. It was noted that if South developed markets are supposed to have lower TEA’s than emerging
markets as a result of having a larger number of established
early stages is a critical success factor that time, many successful businesses were Africa could bring its women:men entre- companies.
by South African is not always practised by South African started on the premise of a very good idea preneurship ratio to 1:1, the national TEA 2. A Gordian knot is derived from ancient Greek history in reference to
very complex problems and situations.
entrepreneurs. entrepreneurs. and very little money. Dr Mike Herrington would significantly improve. 3. South African Black Entrepreneurs Forum.
8 9
The Entrepreneurial Dialogues Developing a Culture of Entrepreneurship in SA
KEY POINTS OF DISCUSSION • The Infinity of wealth Every country,
An important component of peoples’ desire
• Low tolerance for entrepreneurial for free enterprise is determined by whether including South
failure they view, consciously or unconsciously, Africa, has a
South African society does not appear to wealth as being finite or infinite. People who
support entrepreneurs who have failed. view wealth as finite, as a zero sum game,
core group,
People disassociate themselves from tend to focus more on transactional, clien- or base, of
them, banks shut them down and the tele-based career choices. For them the path
high-impact
press demonises them. This culture, as to wealth is about connecting with the right
can be expected, is not conducive to fos- crowd, gaining access to a share of a fixed entrepreneurs.
tering greater entrepreneurial activity and pie, seeing the world as a static dichotomy How a country
should thus be confronted. In other parts of ‘haves’ and ‘have nots’ and ensuring that
of the world, like Silicon Valley for exam- they are among those who have. When peo- supports,
ple, entrepreneurial failure is a badge of ple view wealth as infinite, they search for celebrates,
honour that is actually sought after by the opportunities and ways to make a difference
financing community. Silicon Valley venture for themselves and for the world. Their de-
and develops
capitalists take pride in supporting people sire to innovate and create wealth from new that ‘base’
who have learnt from their mistakes. In ideas becomes stronger and they no longer
determines
the words of typical Silicon Valley Venture spend their energy on trying to gain access
Capitalists, “When we look at a funding to finite riches; a diamond mining conces- its culture of
application, a very important factor for sion, a BEE deal, or a marriage into one of entrepreneurship
us is whether the entrepreneur has failed their town’s wealthy families. Both types of
before because the greatest learnings on mental models (on whether wealth is finite and ultimately,
how to run a business come from having or infinite) exist in South Africa, but the one the future of its
DEVELOPING OVERVIEW
Culture matters when it comes to entrepreneurship.
failed before!” based on the infinity of wealth needs to be
economy.
proactively fostered.
A CULTURE OF This panel explores the cultural status in South • South Africa has an
ENTREPRENEURSHIP African entrepreneurship. It further explores entrepreneurial ‘base’ of high- • Pre-existing values, foreign
impact entrepreneurs experiences and a home grown
objectives and aspirations to potentially change
IN SOUTH AFRICA the current culture of entrepreneurship in South
Every country, including South Africa, has
a core group, or base, of high-impact en-
culture of entrepreneurship
Culture is a very difficult thing to change; it
Africa. It proposes tangible solutions to the cultural trepreneurs. How a country supports, cel- is something that is embedded in peoples’
ebrates, and develops that ‘base’ deter- psyches and behaviours. As South Africans
challenges South Africa faces with regard to its
mines its culture of entrepreneurship and seek to develop a culture of entrepreneur-
level of entrepreneurial activity. ultimately, the future of its economy. In ship, they need to build on pre-existing val-
South Africa there is a country-wide inten- ues and behaviours rather than try to emu-
tion and effort to support entrepreneurship, late foreign habits and beliefs regardless
which is apparent, among other things, of what the local norms are. For example
through the Black Economic Empower- the western culture of entrepreneurship
ment (BEE) policies and other similar types based on the “rock star” worship of entre-
of initiatives. However, despite such efforts preneurs may not be well-suited for South
entrepreneurship is not as “activated” as Africa where communal values are more the
it should be and bringing attention to the norm. Having entrepreneurial role models is
country’s ‘base’ of high-impact entrepre- important, but instead of looking at indi-
neurs is a great starting point to address vidual role models, South Africans should
this problem. realise that great companies are the making
10 11
The Entrepreneurial Dialogues Developing a Culture of Entrepreneurship in SA
of a collective, and not of an individual role of entrepreneurship the greater the danger but many other factors have also contrib- OTHER ASPECTS Part of the
model. Through that, young South Africans will be that the painfully-gained South Afri- uted to that increase. TO CONSIDER
will hopefully learn to work with others in can democracy will fail. historical legacy
creating entrepreneurial ventures. RECOMMENDATIONS • South Africa’s entrepreneurial of this country
• South Africa’s sub-optimal & INSIGHTS ‘base’ of high-impact entrepreneurs
• Corporate careers are still more transport infrastructure impairs the It is questionable whether the South Af-
is that to this day,
desirable in South African Society culture of entrepreneurship •T he entrepreneurship-limited values that rican government’s efforts to support an estimated
South African society still, by and large, Part of the historical legacy of this country currently prevail in South Africa can and entrepreneurship have worked. These
10 million
honours maths and science academic is that to this day, an estimated 10 million must be ‘unlearned.’ government policies might have merely
achievement and corporate careers. So- South Africans still do not have access to • South Africa can learn from the experience transferred wealth from one minority group South Africans
cial science academics and entrepreneur- transportation and are thus confined in their of other countries to foster its own culture to another. still do not
ial careers are not considered to be the physical movements. This reality is a major of entrepreneurship: celebrating role mod-
“golden path” and as such do not always impediment to entrepreneurship. Mobility els, promoting an effective venture capital • Attitudes and language towards have access
attract the best and the brightest. Such val- increases peoples’ exposure to new con- and private equity community, providing wealth and towards the wealthy to transportation
ues and behaviours need to be confronted cepts and ideas; in turn, exposure to new structures for entrepreneurial education Some of the derogatory terms towards the
and changed at homes, in schools, and at concepts and ideas drives one’s sense of and skills-support. However, local norms wealthy such as ‘filthy rich’ are not spe-
and are thus
universities. They restrain entrepreneurial experimentation and innovation. As more must also be taken into account. cifically South African; they are used else- confined in
activity and entrench stereotypes about the and more South Africans travel within and • Foster a culture of entrepreneurship in where in English-speaking countries.
Social science their physical
kinds of backgrounds entrepreneurs should outside South Africa and get exposed to homes, schools and universities.
academics and or should not have. The reality, of course, is new concepts and ideas, entrepreneurial • Include entrepreneurship in science-relat- Therefore the assumption that South Afri- movements.
entrepreneurial
very different from the perception. activity should increase. In fact, between ed fields of study. cans have a more, or less, positive attitude This reality
2006 and 2008, the growth in South Af- • Recessions provide business opportunities; towards wealth and towards the wealthy is
careers are • Attitudes and language towards rica’s TEA index from 5% to 7,8% suggests policies must be formulated to encourage not correct if based on this particular cul- is a major
not considered
wealth and towards the wealthy that entrepreneurial activity has increased, and support would-be entrepreneurs. tural trait. impediment to
Common South African manners of speech
to be the such as ‘filthy rich’ or ‘stinking rich’ denote
entrepreneurship.
a sense of resentment towards the rich.
“golden path” They somehow attach a negative energy to
and as such the pursuit of wealth, and to those whose
do not always self-declared purpose in life may appear to
be the pursuit of wealth. Some have ar-
attract the gued that South Africans have been deeply
best and the affected by years of conservative Christian
values that exalt austerity, self-sacrifice,
brightest. and even poverty as important factors of
Such values salvation. Others say that what has been
done can be undone through leadership
and behaviours and national debates about how South Af-
need to be ricans should define success. Whichever
confronted way these discussions go, entrepreneur-
ship and the journey towards greater en-
and changed trepreneurial activity should be separated
at homes, in from such existential issues. Entrepreneur-
ship is the answer to many social ills South
schools, and at Africa faces right now, and the longer it
universities. takes to imbed a wider and deeper culture
12 13
The Entrepreneurial Dialogues Access to Capital
KEY POINTS OF DISCUSSION • Oversupply of entrepreneurs The issue is
in highly saturated markets and
The key points of discussion detail the vari- industries not so much a
ous problems and obstacles that are as- Funding agencies are often approached by lack of access
sociated with access to capital in South entrepreneurs operating in highly saturated
Africa. There is an underlying theme of an markets that are not easy to differentiate;
to capital but
existing ‘perception gap’ in these findings. these types of businesses are less attrac- the stringent
tive. The issue is not that the entrepreneur
and lengthy
• Discrepancies in matching or his business is not viable enough, but
between funding mandates and rather that under such market circumstanc- process required
entrepreneurs’ eligibility es it is more difficult for entrepreneurs to to access
The fit between the capital providers’ cri- present unique business models and op-
teria and the businesses that are seeking portunities. This problem is mainly attribut- funding. This is
capital is often problematic. In many cases, able to a lack of confidence in returns from exacerbated by
large disparities exist between the eco- such markets due to their saturation levels.
nomic and financial status of the business
the general lack
seeking capital and the requirements of the • Lack of awareness and of awareness
various financing options that are made preparedness amongst
about the
available by different funding groups. entrepreneurs
The issue is not so much a lack of access procedures and
Entrepreneurs tend to submit applications to capital but the stringent and lengthy the courses of
that are inconsistent with the funder’s man- process required to access funding. This
date. Venture capital funding is expensive; is exacerbated by the general lack of action involved
as a result, venture capitalists are gener- awareness about the procedures and the in gaining
ACCESS TO CAPITAL OVERVIEW
ally not willing to assume too much risk. courses of action involved in gaining eq-
equity funding,
There is a general perception amongst In South Africa entrepreneurs tend to seek uity funding, which leaves entrepreneurs
entrepreneurs that access to capital is a major sums of funding without the required busi- under-prepared and under-researched. which leaves
ness size and sophistication as collateral The application process tends to be bu-
inhibitor to entrepreneurial growth and activity. entrepreneurs
to back up their applications. Applications reaucratic and heavily laden with protocol
The general misconception is that this is a of this nature often do not comply with the and red tape as funders endeavour to gain under-prepared
result of scarcity of funds available to funding funder’s mandate. Furthermore, entrepre- confidence and assurance when granting and under-
institutions. A recent Global Entrepreneurship neurs often fail to source funding from al- funding to entrepreneurs.
ternative sources such as smaller scale eq- researched.
Monitor study revealed that South Africa is no
uity investors who will not take as high an • Expectation management amongst
worse or better off than any other country in equity stake as a larger venture capitalist. entrepreneurs
terms of the availability of capital. This section A case study given is the Venture Capital Expectation management presents a chal-
aims to identify and catalogue many of the arm of the Industrial Development Corpora- lenge to the funding process because many
tion (IDC), where many businesses seeking entrepreneurs expect the process of get-
factors that may determine the availability of funding tend to apply for under R1 million ting funding to be quick and easy. Such
capital to entrepreneurs. Although one may which is below the IDC’s mandate of equity expectations are unrealistic. Unprepared
still be in doubt as to where the drawback lies, funding range of R1 million to R15 million. applicants often end up frustrated and dis-
Note that the reluctance of venture capital- appointed with the process. This is not to
funding is available in abundance in South
ists like the IDC to fund under R1 million promote pessimism about the process but
Africa and the issue of scarcity is more a myth is due to a lack of security and collateral to encourage preparedness, pragmatism
than a reality. and the sheer volume of applications that and practicality when considering funding
fall under their mandate range. instruments.
14 15
The Entrepreneurial Dialogues Access to Capital
• Over-emphasis on capital as the is a matter of skill and aptitude. • Greater understanding by funders good projects. To address one of the bigger Funders need to
key enabler to entrepreneurial and involvement in target industries problems faced in the issue of access to
success RECOMMENDATIONS Different funding agencies need to under- capital (which is the general lack of infor- communicate, in
There is a general lack of understanding of & INSIGHTS stand what drives the industries they in- mation available to entrepreneurs), there is simpler terms,
the entrepreneurial process. Many entre- vest in. Based on that knowledge, fund- a pressing need for an increase in commu-
preneurs are under the illusion that capital • Proactivity amongst entrepreneurs ing providers should offer instruments that nication between the different funding ve-
what their funding
is the most critical catalyst for business First and foremost, an entrepreneur needs are tailored to specific industries. These hicles and their prospective clients. This will requirements are.
success. Between 2008 and 2009, there to be meticulous and proactive. Venture instruments should also extend support require effort from both parties.
Entrepreneurs
has been a 40% decrease in the amount capital firms encourage entrepreneurs to services to entrepreneurs at different lev-
of entrepreneurial activity in South Africa. formalise market strategies and business els and skill sets. For instance, the nature Funders need to communicate, in simpler need to
This is partly attributable to the effects of plans and to conduct comprehensive re- of funding requirements in the construc- terms, what their funding requirements are. understand these
the global economic downturn and the fact search when formalising these plans. There tion industry will be very different from Entrepreneurs need to understand these re-
that there was less investment capital avail- is a wealth of information at the fingertips of those in the retail industry. There is a need quirements more clearly in order to prepare requirements
able. However, the lower level of entrepre- all entrepreneurs. They should use the in- to take a more direct approach to address themselves and produce business plans more clearly in
neurial activity could have been attributable ternet and mass media to gain a complete the perception gaps between funders and that address the needs of funding provid-
to other factors. It is true that capital is es- understanding of the dynamics of the mar- the entrepreneurial community. This could ers. This will help to close the prevailing
order to prepare
Different funding sential and plays a key role in the ability of ket within which their business operates. be achieved by engaging with selected perception gap within the entrepreneurial themselves
a business to progress; however, capital is groups of entrepreneurs who can provide community about availability of capital and
agencies need and produce
not the only catalyst for success. The en- It is also important to investigate alternative feedback on their experiences in trying to access to funding. The onus falls on both
to understand trepreneur plays the most important role. forms of funding that may be available, and access capital. parties to make these efforts. business plans
what drives
In theory, there is an array of factors that use the information gathered effectively. that address the
dictate the conditions and circumstances They should take time and implement nec- • Improved communication • Greater financial education at
the industries under which a business should thrive. But, essary changes to the operations of their between funding institutions and grassroots level needs of funding
they invest in.
in reality, it is the ability of the entrepreneur business to ensure that they are ready and entrepreneurs In the long-run, part of the responsibility for providers.
to identify these factors and take appropri- eligible to meet the mandate of a prospec- Capital is available in South Africa and en- providing financial education at grass roots
Based on that ate courses of action that ultimately leads tive funder. Information is essential in mak- trepreneurs need to discard the rather mis- levels and reducing financial illiteracy in
to the success of the business. In short, it ing the right critical decisions. guided belief that there is no money to fund South Africa lies with the government and
knowledge, other relevant parties. This will boost the
funding sophistication and capacity of prospective
providers should entrepreneurs in the future.
offer instruments OTHER ASPECTS
that are tailored TO CONSIDER
to specific • Expectation management amongst
industries. These entrepreneurs
Too often business plans are completed by
instruments service providers who have no knowledge
should also of the business involved. The problem fac-
extend support ing financiers is that the entrepreneurs
themselves do not always understand their
services to own projects nor do they understand the
entrepreneurs at business plans completed by third parties.
This is one of the main reasons why po-
different levels tential funders are unwilling to fund such
and skill sets. applicants.
16 17The Entrepreneurial Dialogues Enterprise Development & BEE
E
nterprise development (ED) requires possible avenue for funding and even less There is an
South African corporates to spend aware of the procedures and requirements
3% of their annual profits on support involved in securing ED funding. under-supply of
for black owned enterprises. This suitably qualified
can be done either directly or by pledg- • Ineffective incentives for
ing funds to ED agencies that work with corporates to embrace ED
and skilled black
eligible companies. There is an estimated There is a perceived lack of interest in ED entrepreneurs.
R12 billion in potential funding available for in the corporate sector for a number of rea-
These potentially
black businesses. Enterprise development sons. Firstly, ED is positioned as a social
has great potential to increase job creation objective rather than a commercial exercise more attractive
and bring more black entrepreneurs and that could be rewarding for both entre- entrepreneurs
businesses into the mainstream economy. preneurs and the corporates who provide
The reality is that it is a long way from funding. The social positioning currently are often in
achieving its intended aims for reasons presented to corporates does not seem corporate
that will be covered in this section. This to resonate well. As a social objective, ED
section assesses the challenges of ED as goes against the principle of maximising
jobs, with
an instrument for fostering black economic profits and there is no buy-in from top man- attractive salary
empowerment. It highlights the challenges agement as ED tends to be viewed as a
packages, lured
different stakeholders face with ED. It also burden.
suggests possible solutions that will im- by corporates
prove ED and ultimately increase job cre- The task of managing ED is often assigned who have to
ation in South Africa. to the Human Resource or Finance depart-
ments, which do not always have the tech- satisfy the ‘skills’
KEY POINTS OF DISCUSSION nical knowledge required to administer ED section of the
ENTERPRISE OVERVIEW
The Broad Based Black Economic Empowerment
funds appropriately.
BEE Codes.
• Confusion about the purpose of
DEVELOPMENT & Act (B-BBEE) was passed into law in 2007, as an ED within the B-BBEE regulation The current mindset of management is to
BLACK ECONOMIC amendment to the Black Economic Empowerment context get as many points as possible, with mini-
Enterprise development is generally mis- mum effort, time, and resources put into
Act of 2003. This resulted in additional codes,
EMPOWERMENT such as Enterprise Development (Code 600), being
understood because it is a relatively new
legislation. In addition, the general lack of
ensuring that ED funds are appropriately
disbursed.
included in the scorecard. The main objective of understanding and uptake is partly attrib-
this code is to support and grow emerging black uted to negative perceptions of BEE. The • Majority of applicants lack the
positive aspects of the BEE codes are of- skills to realise the promise of ED
owned business. Enterprise Development currently ten clouded by perceptions of corruption, One view states that there is a mismatch be-
makes up 15% of the overall B-BBEE scorecard. misappropriation of tenders, and nepotism. tween the types of entrepreneurs who meet
Previously, awarding of tenders was based the requirements for ED and those who are
on company ownership and procurement, applying for ED funding. ED funders are
which opened up avenues for ‘showboat- approached by entrepreneurs who often
ing’ and other corrupt practices. These lack the skills and experience to best use
malpractices have lead to pessimism and the resources. There is an under-supply of
confusion about BEE and B-BBEE. suitably qualified and skilled black entre-
preneurs. These potentially more attractive
On the other hand, there has been insuf- entrepreneurs are often in corporate jobs,
ficient communication about ED for en- with attractive salary packages, lured by
trepreneurs. Many are unaware that it is a corporates who have to satisfy the ‘skills’
18 19The Entrepreneurial Dialogues Enterprise Development & BEE
section of the BEE Codes. By and large, studies conducted in the US and the EU tion to agencies that understand the legisla- for black entrepreneurs and providing the Enterprise
the availability of funding is not the primary have shown that ED can be successful. tion and can invest in the right enterprises. right incentives for corporates, ED could be
constraint; the difficulty is finding compe- For example, Investments in a company’s an important tool to fast-track economic development has
tent entrepreneurs and good enterprises. value chain improve competitiveness, cost There is however, a risk that in the long- development in South Africa. been embodied
efficiency and quality – which all ultimately run, outsourcing this function will mean that
• Enterprise development’s sole improve profitability. Corporates could have ED will become increasingly separate from OTHER ASPECTS
in various
focus on funding is insufficient a lot to gain by applying this approach to core business operations. But, in the short- TO CONSIDER business models
On the other hand, there is a fundamental their ED funding. term, outsourcing provides a good option
When ED is around the
view that ED does not cater for the major- for many corporates which don’t yet fully • Imperfections notwithstanding;
positioned to ity of existing black entrepreneurs who lack When ED is positioned to resolve a social understand ED. BEE Codes should be revised world, including
resolve a social
business skills. Over and above funding, problem, it is inefficient and unsuccessful; infrequently and with great caution micro-finance,
these entrepreneurs need support and a grave unintended consequence is that it • Reform the B-BBEE Codes While our current regulatory framework may
problem, it is business training. Without skills develop- makes entrepreneurs over-dependent on Although Enterprise Development and Pre- not be ideal, regulatory stability creates the venture capital,
inefficient and
ment, the likelihood of these entrepreneurs corporate ‘handouts’. When South African ferred Procurement constitute 35% of the context within which innovation and prog- private equity,
creating competitive and sustainable busi- corporates see the commercial rewards of BEE scorecard, many corporates and gov- ress can take place. Frequently, changes in
unsuccessful; a nesses is slim. a successful ED programme, top manage- ernment tender processes still mostly focus regulations prevent successful models from
and commercial
grave unintended ment will be more willing to include it in their on ‘company ownership’. So far, to a large reaching maturity, demonstrating effective- lending (each
RECOMMENDATIONS business planning, budgeting and other extent, most corporates are compliant with ness, and being replicated. It is therefore
consequence having models
& INSIGHTS business processes. the ‘ownership’ requirements of the score- destructive for BEE and socio-economic
is that it makes card. The B-BBEE codes therefore need development to revise the codes more fre- that include
entrepreneurs
• Enterprise development incentives • Outsourcing as an option for ED to evolve towards putting more emphasis quently than every five to ten years, particu- strong technical
for corporates function on ED. One suggestion is that government larly in areas such as ED, which are long-
over-dependent It is imperative for corporates to under- Enterprise development is a technical pro- should put less emphasis on the ‘ownership’ term. Codes should be revised infrequently, assistance).
on corporate
stand that ED can be much more than just cess that requires specialised skills. Corpo- and ‘employment’ sections of B-BBEE and and with great caution. These models
a social investment. It can be a profitable rates do not always have these technical place higher allocations of points to ED. This
‘handouts’. When exercise that can add significant value to skills in-house. A short-term solution would will make the desire to invest in ED more fi- • Implementation of ED must not be
are effective
South African the business. Interesting business case be for corporates to outsource the ED func- nancially attractive to corporates. They could treated lightly, or it will simply fail when driven by
be eligible to bid for tenders based on their Enterprise development has been embod-
corporates see real businesses
level of ED compliance rather than their level ied in various business models around the
the commercial of ownership. Incentives of this nature would world, including micro-finance, venture with appropriate
rewards of a
make more ‘business sense’ to companies, capital, private equity, and commercial skills, experience
as well as reduce corruption in the tender- lending (each having models that include
successful ED ing process. Above all, rejigging the codes strong technical assistance). These mod- and dedicated
programme, top
could provide the commercial case that is els are effective when driven by real busi- capacity.
needed for companies to be more actively nesses with appropriate skills, experience
management will supportive of ED. and dedicated capacity. For example,
SASOL will need to spend >R1 billion on
be more willing
Furthermore, ED has the potential to give a ED by 2015. A R1 billion fund would take
to include it in much-needed boost to job creation. Cur- 10 years to invest if staffed by at least 20 in-
their business rently, it is not being used to its full poten- vestment professionals, earning on average
tial due to a lack of communication, a lack between R800 000 and R1 million each. ED
planning, of skilled entrepreneurs, and a lack of in- programmes which do not gear up to select
budgeting and centives for corporate South Africa to truly the right enterprises to support and struc-
adopt the concept. With suitable interven- ture the relationship for success, and sup-
other business tions such as improving communication and port the enterprises over time, will simply
processes. education on ED, creating the right support squander valuable resources.
20 21The Entrepreneurial Dialogues Incubators & Sme Support
I
ncubators have been in existence since The guidelines it has to deliver on are very In assessing
the 1950s, but it is only in the 2000s that specific:
for-profit incubators started to emerge. 1. Ensuring growth the success
Within the for-profit incubator environ- 2. Creating better equity in the economy of incubators,
ment, even specialised incubators known 3. Supporting employment creation
as “accelerators” have emerged, focusing
the key criteria
primarily on the IT industry. There are 7 000 On the criteria of growth, equity and em- for survival
incubators around the globe. Classically, in ployment, SEDA’s 27 incubators are phe-
rates need to
a tough economy, when the unemployment nomenally successful as a vehicle for
rate rises, more people turn to necessity- supporting small enterprise development. be analysed.
driven entrepreneurship and incubators are However, the drawback, in South Africa as Generally small
well positioned to assist them. in other emerging countries, is that incuba-
tion is expensive. It is expensive because businesses or
KEY POINTS OF DISCUSSION good incubation deploys large amounts of start-ups fail at
resources to support few truly promising
The important aspects of incubation are inno- entrepreneurs.
a rate of about
vation and knowledge, particularly in today’s nine in ten in the
knowledge-based economy. In this context, In addition, an intensive selection process
first two years
knowledge refers to the experience, data, needs to take place to determine which
technology, networks, and transfer of ac- entrepreneurs or businesses should be al- of operation.
cumulated information that flows to the en- lowed to receive incubator services. Within the 27
trepreneur. Innovation is about new ways of
increasing resource yields and efficiencies. In assessing the success of incubators, SEDA incubators,
the key criteria for survival rates need to the survival rates
INCUBATORS AND OVERVIEW
• Effectiveness of incubators is a be analysed. Generally small businesses or
are in the region
Business incubators assist emerging companies
SMALL & MEDIUM
matter of perspective start-ups fail at a rate of about nine in ten
survive and grow during the start-up period, when The broad question of whether incuba- in the first two years of operation. Within of 84% to 97%
ENTERPRISE (SME) they are most vulnerable. This assistance comes tion works depends on one’s perspective.
If you see incubation as a need to provide
the 27 SEDA incubators, the survival rates
are in the region of 84% to 97% in the first
in the first
in the form of mentoring, networking, funding two years
SUPPORT and access to physical facilities. The incubation
some form of support to early stage busi-
nesses and encourage entrepreneurship,
two years of operation depending on which
incubator it is. Post-graduation from the in- of operation
process improves the survival rate of start-up then South African incubators are providing cubator, the numbers do come down but
some benefits to the community. If you see they are still in excess of 70%. depending
companies by assisting them to become financially
incubators as enablers for the creation of on which
viable, usually within two to three years. Incubation hundreds of South African ‘Googles’, then In terms of wealth creation, the 200 com-
also creates a synergistic environment where incubation in South Africa is not working. panies incubated by SEDA generated a
incubator it is.
entrepreneurs can share learning, create working total turnover in excess of R129 million,
Effective incubation requires the selection with about 10 000 jobs created in 2008.
partnerships and act as enablers to access
of the right entrepreneurs through process- These numbers were achieved largely due
markets and resources. es that target high-impact1 businesses and to SEDA’s networking and lobbying in sup-
high-impact entrepreneurs. port of the incubated companies to secure
government business.
• The Small Enterprise Development
Agency (SEDA) case study The one area where SEDA is failing is in Ini-
SEDA is an agency supported by South tial Public Offerings (IPOs). In the past six
Africa’s Department of Trade & Industry. years, SEDA has not had one IPO, whereas
22 23The Entrepreneurial Dialogues Incubators & Sme Support
Maxum, an incubator at the Innovation Hub learning, mentoring, executive coaching, attached to tertiary institutions that subsi- entrepreneurial skills training at the tertiary In South Africa,
supported by the Department of Science & functional support, networking and sales dise the cost of the senior skilled personnel. level to elevate the quality of entrepreneurs
Technology, has had two. This is an indica- opportunities entrepreneurs need. How- In South Africa, when incubation services that come into incubators. when incubation
tion of the type of companies that are se- ever, the driver of success for incubators is are offered to SMEs with a limited ability to services are
lected by these respective incubators. the capacity to help entrepreneurs gain ac- pay, the government should get involved • Access to skilled mentors and
cess to peer-to-peer learning communities. and find ways to subsidise these costs for coaches
offered to SMEs
SEDA has a broad public mandate and Good incubation is also about fostering eligible SMEs. However, if the incubation Gaining access to more skilled mentors with a limited
therefore cannot be too selective about communities of like-minded entrepreneurs. is being offered to high-potential, high- and coaches for entrepreneurs would
ability to pay,
the companies it supports. Maxum, on growth SMEs, these SMEs should have greatly enhance the ability of incubators to
the other hand, has a much more specific From a functional standpoint, the real val- greater ability to pay, which, in turn, will become more impactful. However the cost the government
selection process; it targets high-growth, ue of incubators lies in entrepreneurs hav- improve the sustainability of the incubator. of skilled mentors and coaches is currently should get
high-potential businesses with a high level ing access to specialised services such There is no doubt that with the assistance prohibitive; thus limiting the accessibility
of technology usage. Given South Africa’s as legal and financial at the early stages of government funding, incubators can be- that entrepreneurs have to them. involved and find
historical context, the outcome of Maxum’s of their businesses when they cannot af- come more effective in delivering services ways to subsidise
selection criteria is often that the companies ford to acquire those services directly. to SMEs without the pressure of having to • Programmes to address the
selected are primarily white-owned compa- Another important value-add of incuba- worry about their own financial viability. lack of self confidence amongst
these costs for
nies with a higher level of skill and expertise tion is the mentoring and coaching where entrepreneurs eligible SMEs.
than the SEDA-incubated businesses. entrepreneurs have access to people who RECOMMENDATIONS Entrepreneurs should ideally be people
However, if the
can act as sounding boards, look at their & INSIGHTS with very strong self confidence. However,
• Access and visibility of incubators businesses critically and offer invaluable many people in South Africa lack the self incubation is
– targeted communications advice. Incubators are geared to assist in • Greater understanding of the confidence and faith in their own skills and being offered to
In South Africa, incubators have not had the elimination of key barriers to entry that service offering of incubators ability to thrive as entrepreneurs. This is a
high-potential,
From a the desired accessibility, prominence or entrepreneurs face. Entrepreneurs need to have a very clear product of South African history and culture
openness to young entrepreneurs. They understanding of what their business re- which needs to be addressed through pro- high-growth
functional could be playing a more active role to help • Required skills within incubators quires before seeking incubation sup- grammes or interventions.
SMEs, these
standpoint, the entrepreneurs overcome the business chal- to serve small businesses; high port. Part of the entrepreneurial process
lenges they face. skills are expensive is about being resourceful in seeking the OTHER ASPECTS SMEs should
real value of One of the challenges that incubators face most appropriate solutions to specific TO CONSIDER
have greater
incubators lies The visibility of incubators to entrepreneurs- is attracting technically skilled employees problems. As incubation ultimately results
ability to pay,
in entrepreneurs at-large remains an issue. Communicating who can best assist the entrepreneurs. in the creation of a business partnership, it •A
ccording to GEM research worldwide,
as a medium for incubators is expensive and Small businesses tend to have multiple is absolutely vital for entrepreneurs to do necessity entrepreneurs employ, on av- which, in turn,
having access thus prohibitive. Another challenge is that problems at any given time, with many the necessary research into the various in- erage, less than one person whereas
will improve the
to specialised incubation is not appropriate for all types of pressing issues to deal with simultaneously. cubation options available. new opportunity entrepreneurs tend to
business; therefore it needs to be commu- Handling such complexity requires highly employ between four and five people. sustainability of
services such nicated in a targeted manner. An incubator qualified people. Thus, incubators must • The role of the education system The global norm is hence for funders of
the incubator.
as legal and has the capacity to efficiently service 40 to have sufficient financial resources to employ in preparing entrepreneurs for incubators to prefer assisting opportu-
60 businesses a year, which means that it qualified and highly skilled employees. It is incubation nity entrepreneurs who are more likely to
financial at the has to be highly focused in terms of how it imperative for incubators to be financially One of the challenges of South Africa’s create employment.
early stages of reaches the desired target market. In South viable and able to employ highly qualified education system is the poor quality of
NOTES
their businesses Africa, the majority of incubators operate employees who can provide entrepreneurs entrepreneurial skills training at schools. 1. High impact refers to entrepreneurs and businesses that have the
in specific sectors such as, ICT, Stainless with very scarce skills. There may be two ways to address this highest potential for wealth and job creation.
when they Steel, and Biotechnology. problem. One is to expose tertiary stu-
cannot afford to A key measure of success is the incuba- dents to existing incubators in their com-
• Service offering of incubators – tor’s own growth which demonstrates its munities, thereby making them aware that
acquire those peer support and experts ability to deliver value to SMEs. In the Unit- help is available should they decide to
services directly. Incubators provide the basic infrastructure, ed States and Britain, most incubators are start a business. The other is to provide
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