South Africa has produced a long line of top business people, exemplified by the flair and opportunism of its mining magnates, the long-term dedication of its retail barons and the shrewd innovation of its banking tycoons.
In recent years the entrepreneurial prowess of information-technology guru Mark Shuttleworth stands above reproach. After scooping billions of rands from the perfectly timed sale of his internet security business, Shuttleworth, who made news as the first African in space, has been giving back to his home country through numerous small-business development initiatives.
The country’s entrepreneurial spirit is on the rise. As the economic recovery gathers momentum, the unemployed are using their skills to create their own employment opportunities. Small businesses are at the centre of the country’s economic renaissance and, provided they are nurtured, will drive employment and growth higher.
The challenge is to find appropriate financing and mentorship programmes to convert ‘blinkered” employees into empowered employers. Finding capital to back an untested idea can be tough.
‘Local banks prefer not to fund an entrepreneur until the business has a three-year track record, unless the entrepreneur can provide security in the form of property, an insurance policy or other investments,” says Frances Wright, managing director of Trinitas Consulting.
Some banks have created innovative solutions for start-up businesses in recent times, but much more needs to be done. Meanwhile, entrepreneurs who are spurned by the country’s ‘big four” banks have no choice but to consider alternative funding.
One popular method is the tongue-in-cheek ‘triple f” finance model — friends, family and fools! Another — frowned upon by financial advisers — is to use pensionfund benefits when changing jobs. But entrepreneurs who cannot raise funds through these conventional channels have to approach government institutions, venture capitalists or business angels to secure much-needed risk capital.
Venture capital is appropriate for innovative start-up businesses that have been trading for less than 12 months. ‘Funding is provided by individuals or companies with a vested interest — whether financial, developmental or philanthropic — in the successful advancement of entrepreneurial opportunities in a particular region,” says Here Be Dragons (HBD), a venture-capital company wholly owned and funded by Shuttleworth.
The venture capitalist is rewarded for risk by receiving shares in the entrepreneurial venture and typically looks for a return of between 10% and 30% on his or her investment a year. Angel investors are high-net-worth individuals who provide venture capital to start-ups with innovative, marketable and patentable new technologies.
The government, through initiatives such as the Industrial Development Corporation and Umsovumbu, which are backed by the department of trade and industry, and several private institutions are also active in this space. Gavin Friedman, who works at small-business incubator Raizcorp, is critical of investors who use finance as an excuse to fold their businesses or give up on their ideas.
‘There’s more money chasing good ideas than there are good ideas chasing money,” he says. ‘Often the scarcity of funding is used as an excuse by the entrepreneur for not getting out into the market-place and generating income.”
He says there is enough venture capital in the country — and more than enough venture capitalists and business angels to spread it around — but he questions whether the American and European models are working in a South African context.
Venture capitalists apply different models depending on the country they operate in. In developed economies they rely extensively on the entrepreneur’s experience when assessing an opportunity, replacing financial security with trust in the individual’s abilities.
But ‘the domestic entrepreneurial ecosystem is not structurally set up to identify and nurture entrepreneurs”, he says. An effective venture-capital model will greatly enhance entrepreneurial contributions to employment and growth.
Studies have shown that companies that receive venture-capital funding outperform their non-funded peers. Over seven years beginning in 1997, European venture-capital-backed companies achieved 30.5% a year of improvements in employment.
In the US $456-billion of venture capital has been pumped into 27 000 companies. By 2008 these companies employed more than 12-million people — a massive 11% of private-sector employment — with annual revenues totalling $2.9-trillion.
Despite these impressive numbers only 1 179 US-based start-ups and 594 Europe-based start-ups received seed capital from venture capitalists in 2008. The benefits to an economy of an appropriately structured venture-capital model are clear for all to see and South African entrepreneurs come cheap.
According to the 2009 Global Entrepreneurship Monitor, South African entrepreneurs need less start-up capital (as a percentage of GDP) than respondents in 53 other countries included in the survey.
The report also confirms Friedman’s assessment of the venture-capital situation. South Africa boasts the secondhighest venture investment as a percentage of GDP, at 0.44%. The concern is whether this capital is finding its way to the right business sectors. In 2008 52% of South African private- equity investment was pumped into infrastructure, mining, natural resources and retail.
There are many factors critical for small-business success. Funding ranks near the top of the list, as does planning and budgeting, effective regulation and the elimination of uncompetitive labour practices.
Wright’s research in the field identifies 88 variables, many of which cannot be controlled by the entrepreneur. ‘Entrepreneurs must focus on what brings money into their business, usually through their core skills,” she says.
A common mistake is for the business owner to become bogged down with non-core issues, including high staff turnover, quality issues, low asset turnover, missed deadlines and the likes.
‘A crisis point is usually reached when a small business grows to 12 staff members,” says Wright. ‘In the absence of process and policy the entrepreneur risks losing both quality of life and the business.”