South African Entrepreneurship

This Brief examines the South African environment in which entrepreneurship is initiated.

Introduction

An instinct is an innate guide of behaviour that occurs in response to specific stimuli. In entrepreneurship this would mean an innate guide of behaviour that a person exhibits in response to specific stimuli from the environment. Is there an instinct that triggers in an entrepreneur the recognition of an opportunity? This brief will look to examine the environment surrounding entrepreneurship in South Africa and whether there are stimuli for it.

A good starting point is to benchmark a country’s support for entrepreneurs. Five aspects can be used in this regard:

  • access to funding;
  • entrepreneurship culture;
  • tax and regulation;
  • education and training; and
  • coordinated support.


Access to funding
While South Africa possesses a highly developed financial sector, it is true to say that the cost of capital is high and that this may lead to the belief that there is insufficient capital to assist entrepreneurs. However this is not the case, as financiers argue that many of the new ventures are simply not fundable. Financiers note a lack of fundable business plans, pointing to issues ranging from the quality and feasibility of the business idea, to the commitment of the entrepreneur and his or her team.

There are several sources of funding and the percentage to which they are used is varied. These sources are personal and family loans (45%), private equity (19%), bank debt (18%), government funding (5%), venture capital (5%), angel seed (4%) and other (4%). [1] Other funding sources include corporate funding, lease / receivables financing or stock options.

In South Africa there is a claim that new businesses are funded using multiple credit cards because most banks are hesitant to offer a loan to businesses but are willing to increase limits on the entrepreneur’s credit cards.[2]

Entrepreneurship culture
Society fails to encourage students to recognise their entrepreneurial potential, as society often values and respects professionals over entrepreneurs.

Nevertheless, the Monitor Survey suggests that entrepreneurship as a career has achieved acceptance and legitimacy. However entrepreneurship is defined by necessity, as a means of survival or a last resort, not the pursuit of opportunity or aspiration.[3] Efforts should be made to change this mindset from necessity to opportunity.

The perception of a successful ‘business person’ rests on affluence and lifestyle rather than business acumen and entrepreneurial flair. This drives the mindset of young people embarking on entrepreneurial ventures, who often enter an industry without enough knowledge of the industry and therefore cannot innovate or compete effectively.

The fear of failure is a challenge as it hinders risk taking in business ventures. Some argue that nurturing a trait of “bouncing back” is needed in conjunction with entrepreneurship.

Tax and regulation
One of the biggest impeding factors on early-stage entrepreneurial activity is government policy in terms of the process for starting a new business.[4] Where registration of a business is concerned, even though the process has improved somewhat, delays are still common which are at times lethal to a new business attempting to move past the start-up phase.

The Budget speech 2014 had two recommendations of the Judge Davis Tax Committee which will ease the compliance burden of small businesses:

  • The turnover tax regime will be amended to further reduce the tax burden on micro-enterprises;
  • Consideration is being given to replacing the graduated tax structure for small business corporations with a refundable tax compliance credit.[5]

To enhance entrepreneurship:

  • amendments to the tax laws will be made;
  • the rules related to access to foreign capital will be eased to enhance support;
  • a proposed tax relief to organisations involved in small enterprise development; and
  • grants received by small and medium sized enterprises will be tax exempt, regardless of the source of funds.[6]


Education and training
There is a need for experienced managerial talent to complement technical talent. Startups lose out to well-established corporate firms because they have the means and security to hire those specialising in management.[7]

There is an inadequate focus within schools (and indeed at tertiary levels) on the practical skills required to start, manage or work in entrepreneurial ventures. Because of the limited opportunities for hands-on learning and managing small projects, students are not afforded clear paths for cultivating competencies related to practical thinking and creative problem-solving which are needed to successfully build and manage a business. This results in potential entrepreneurs rather looking to join the corporate workforce.

Coordinated support
The laws that govern business competition are perceived to contain a bias towards those firms which are already well established as they are better equipped to handle the heavy burdens of non-compliance.[8] This bias is particularly felt with South African entrepreneurs who view the requirements of the Labour Relations Act, Consumer Protection Act, and National Credit Act 73 as onerous and time-consuming.

The report proposes that policy accelerators should offer incentives to entrepreneurs to enter and develop key sectors that are currently underserved as well as to develop more nuanced legislation that differentiates between big business and SME segments.[9]

Legislation should also reduce the excessive costs, time and bureaucracy associated with regulatory compliance to encourage startups to enter the regulated environment. Reforms should aim to continue to reduce red tape and create a more enabling environment for new businesses.

South Africa is encouraged to do more about network-related elements such as clubs, associations, chambers of commerce and small business administration. Ending on a positive note, South Africa’s tailored support for female entrepreneurs is said to have improved.

Why does entrepreneurship matter?

Entrepreneurship forms the basis of job creation in the NDP. The budget speech showed that this is being taken into account. It acknowledged that a growth rate of at least 5% per year is required for the rapid progress in creating jobs and reducing poverty. South Africa’s economy has continued to grow despite the economic crisis of 2008/9. But this year growth has been slower than projected a year ago and is to come in at 2.7%. We need urgently to foster an entrepreneurial environment to help create employment and enhance our growth rate.

 

References

[1] Accelerating Entrepreneurship in Africa report (2013) compiled by the Omidyar Network
[2] Ibid
[3] Ibid
[4] Global Entrepreneurship Monitoring  report 2013
[5] Budget Speech 2014
[6] Ibid
[7] Accelerating Entrepreneurship in Africa report (2013)
[8] Ibid
[9] Ibid

 

Eythan Morris
HSF Researcher
eythan@hsf.org.za