How to strengthen and support entrepreneurs

There is enormous potential for entrepreneurship to contribute to economic development and greater inclusion in South Africa. The environment entrepreneurs find themselves in determines the opportunities and challenges they encounter, and ultimately their success. To effectively enable emerging entrepreneurs, Stellenbosch Business School research fellow Angus Bowmaker-Falconer argues, key actors need to better understand the prevailing ecosystem and challenges entrepreneurs face to determine the required mix of support they can provide.¹

Entrepreneurship matters

South Africa urgently needs a more dynamic, employment-intensive, and innovation-led economic growth trajectory, even more so given the impact of the Covid-19 pandemic. A greater focus on entrepreneurship (policy
and institutions) is required to stimulate the development of more successful enterprises and to formalise many aspects of the South African economy.

Entrepreneurial ecosystems

Start-ups need to be embedded in effective and supportive entrepreneurial ecosystems for them to thrive.^{5, 6} These ecosystems emerge from the interaction between start-ups, established businesses, investors, incubators, policymakers and other actors in a confined geographical region.⁷ Successful entrepreneurial ecosystems offer resources, knowledge, exchange opportunities, talent and mentors – all of which enable entrepreneurs to establish and grow their businesses.

Entrepreneurship is not the same in different places, even within countries. Initiatives and policies that work in one area may not work in another.⁸ The unique social, economic, political and cultural structures and processes associated with a particular place significantly influence entrepreneurial activity.⁹ It is therefore important to identify the strengths and weaknesses in a specific place or region.

Figure 1 shows an integrated entrepreneurial ecosystem model.¹⁰ It emphasises that start-ups are not isolated entities and that the ecosystem brings together a complex set of relationships between agents and factors that
constitute the conditions for successful entrepreneurial activity

Figure 1: Integrated entrepreneurial ecosystem model

South Africa’s entrepreneurial landscape

Although South Africa has the most industrialised economy in Africa and is a continental leader in most sectors,
it remains a difficult place to be an entrepreneur. Over the past decade, the economy has consistently underperformed and growth forecasts for 2022 and beyond are poor, and too low given the immense socioeconomic challenges facing the country. South Africa needs more robust and inclusive growth, powered by higher levels of public and private-sector investment.¹¹

Findings from the Global EntrepreneurshiP Monitor South Africa 2021/2022 Report (GEM report) provide important insight into the entrepreneurial landscape and help to reveal factors requiring greater support and
intervention.

The GEM is a large international research project that carries out annual survey-based research on entrepreneurship trends around the world. Its robust methodology enables the rate and nature of entrepreneurship development to be monitored directly across and within economies. The 2020/2021 global
report covers 50 economies, including South Africa.

Figure 2 summarises individual and societal attitudes and values about entrepreneurship, and rates of entrepreneurial activity in South Africa. Figure 3 shows the context and framework conditions that determine how difficult or easy it is to be an entrepreneur.

Figure 2: Entrepreneurship indicators at a glance

Figure 3: Entrepreneurial framework conditions

The GEM research showed increased early-stage entrepreneurial activity and rising entrepreneurship rates among women and young people. Early-stage entrepreneurial activity, the percentage of adults who were starting or running a new business, rose to 17.5% in 2021 (2019: 10.8%). Those owning or managing an established business, in operation for at least 3.5 years, grew to 5.2% (2019: 3.5%).

Although South Africa ranked 45th out of 50 countries in the GEM NECI, a measure of the favourability of the environment for entrepreneurship and new business creation, the uptick in the established business rate is particularly encouraging given the generally high failure rate of start-ups. Having survived the start-up phase, these businesses now have a real possibility of contributing to the country’s economy.

There were mixed signals around the confidence of entrepreneurs, specifically fear of failure, business exits
and the adoption of digital technology. This suggests that to truly unlock the potential of entrepreneurs there is still much to be done to strengthen the enabling environment, and to improve the ease of doing business.

Other key findings

• The business discontinuance rate increased to 13.9% (2019: 4.9%). Key reasons for business closure were the impact of the Covid-19 pandemic, businesses being unprofitable and problems accessing finance. Bureaucracy and struggles with red tape remain a problem.
• South Africans’ attitudes to entrepreneurship have been improving since 2003, with more than 80% viewing entrepreneurship as a good career choice (2017: 69.4%) and one with high status.
• The foundation for future entrepreneurship activity looks healthy with 57.9% of respondents believing the country offers good entrepreneurship opportunities (although down from 60.4% in 2019, but still well above the GEM global average of 54.8%). No less than 69.7% believed they had the knowledge, skills and experience to be entrepreneurs.
• More than half (53%) of those who see good opportunities, however, would not start a new business due to fear of failure.
• While rapid adoption of digital technologies is a global trend, only half (52%) of those in the start-up stage in South Africa planned to use digital technology to sell their goods and services – the lowest rate among
  developing economies.
• While entrepreneurship is seen as an engine of job creation, South African entrepreneurs are not optimistic in this regard – 41.6% anticipated creating no new jobs, almost double the 22.6% recorded in 2019; while those anticipating creating between one and five new jobs declined from 46.8% in 2019 to 27.9% in 2021. On a positive note, 30% expected to create more than six new jobs, compared to 27.9% in 2019.

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Fostering entrepreneurial ecosystem support

Taking an ecosystem approach to analysing the GEM findings, seven support priority areas were identified.¹² These are outlined below.

1. Entrepreneurship education

• The limitations and challenges of the education system are well known. Alignment of education to the Fourth Industrial Revolution (4IR) and the digital economy remains a major challenge.
• Strengthening the national culture of entrepreneurship starts at school level.
• Quality school education establishes foundation skills such as reading, writing and computation. It is also essential for the development of cognition and critical thinking skills, self-sufficiency, personal initiative and dealing with complexity.
• Entrepreneurship as a school subject was trialled in 2021 but will not be implemented for now. It should be featured at school level, preferably as part of the core curriculum, or as a prominent extracurricular subject.
• Post-school entrepreneurship education (colleges and universities) is already embedded, particularly at business schools, but it could also be offered as a course across faculties at the undergraduate level. The same approach is proposed for technical vocations and artisan trades.
• Greater interaction with industry sectors, for both school and post-school stages of education, provides good practice for learning, alignment and network participation.

3. Entrepreneurship support programmes

The government acknowledges the importance of entrepreneurship and small business development in achieving sustainable, inclusive economic growth. Executing its policy and providing financial and other support timeously and effectively remain a challenge. The private and academic sectors also have a significant role to play in supporting and developing small, medium and micro enterprises.

• There is arguably a ‘critical mass’ of entrepreneurial support initiatives and services in the country. The challenge is a lack of coordination, collaboration and standards.
• The GEM findings highlight the need for greater awareness about government programmes among the youth (aged 15 to 24) and in provinces outside of Gauteng, the Western Cape, and KwaZulu-Natal.
• Government-led entrepreneurial support is well funded, and it would be in the public interest to know the amounts invested and their impact.
• The draft National Integrated Small Enterprise Development (NISED) Masterplan was released for public comment in April 2022. It provides an integrating framework for small enterprise development, and to coordinate and guide programmes supporting them. Its objectives are to increase the participation of small enterprises in the formal economy, eliminate red tape and promote the ease of doing business. This is a welcome development that will require significant resources and support from all role-players.
• Incubators provide support for very early-stage start-ups, while accelerators target businesses with high growth potential that already have a minimum viable product and require capital for growth. Access to both is competitive and new entrepreneurs need to be properly prepared and understand what is required (explicit entry criteria and expected levels of progress for entry).

3. Entrepreneurship heterogeneity and data

Globally, start-ups and established small businesses constitute a very heterogeneous population, with differences influenced by an economy’s size, market structures, institutions and regulations, and the prevailing business environment.

The formality of entrepreneurship is also diverse, especially in developing countries with robust informal economies. The informal economy is integral to the overall economy and comprises enterprises that are often not formally registered, tax compliant, or protected.

• More accurate and variable data (and definitions) on entrepreneurial formation is needed.
• A better-informed understanding of entrepreneurship will facilitate more appropriate policy and regulations, minimum compliance requirements, labour market relaxations, impact-driven support programmes and initiatives, incentives, access to finance and the much-discussed (and mostly unchanged) ease of doing business in South Africa

4. Access to finance and financing innovation

• Government support remains critical for new enterprise financing, directly but preferably in partnership with the private sector. Private-sector funding is likely to remain more risk-averse in early-stage entrepreneurship and focus on funding enterprise growth.
• Funding is a universal challenge for entrepreneurs. Growth requires funding, but start-ups often ask for money too early or for the wrong application.
• Government loan guarantees and blended finance, although not implemented with much success to date, have been successful elsewhere and should continue, but implemented and managed differently.
• Digital financial services have created convenience and greater accessibility and improved the ease of applying for funding.
• Digital marketplaces that connect financial service providers with entrepreneurs are on the rise and will hopefully open up greater access to finance.
• Qualifying criteria for business loans do not appear to have changed. Banks could think more creatively about collateral, credit ratings and risk by, for example, including criteria like how long small businesses have traded for and feedback from their customers, suppliers and creditors.
• Advice and funding are increasingly packaged together, but the question remains whether advisers fully appreciate the needs of entrepreneurs.
• Specific incentives (tax and other) need to be introduced for early-stage funding of innovative high-growth start-ups. This will help to attract private investment at scale.
• More can be done to help entrepreneurs understand funder investment strategies and decisions. Funders are particularly interested in people and talent, purpose, track record and propensity for innovation.

5. Market access for entrepreneurs

Open, efficient markets and healthy competition are good for economic inclusion, innovation in products and services, and realistic and fair pricing. Market dominance in key sectors remains a structural impediment to market openness.

• Established businesses and government need to further open their supply chains and procurement to emerging firms. There are good examples of this already, but this could be ramped up. This will require trust and supplier development support.
• Direct incentives for big business are unlikely to work and the solution for inclusion is more likely to come through purposeful dialogue among ecosystem actors who see the upside value for all in strengthening regional economies.
• Open innovation is another way to involve growing enterprises in market participation. Increasingly, corporations understand that they can leverage the wider ecosystem for knowledge and expertise to stimulate internal innovation or for market intelligence.
• Open innovation strategies require clear goals and networks of start-up contributors or partners. These are complex arrangements but have exciting potential.

6. Support for women entrepreneurs

Access to finance and markets for women-owned businesses remains a challenge globally. Citigroup estimates that gender parity among entrepreneurs would add between $1.6 trillion and $2.3 trillion to global gross domestic product (GDP), potentially creating up to 433 million jobs worldwide.¹³

• Promoting the growth of women-owned businesses can play a key role in the pandemic recovery, especially in emerging economies where women entrepreneurs were disproportionately affected by the crisis.
•  The benefits of having more enterprises created by women would also spill over into local communities.¹⁴
• Lack of access to finance is among the biggest obstacles women entrepreneurs face. In 2019, just 2.8% of global venture capital funding went to women-led businesses. There are four considerations to ensure that women are not overlooked in policies and programmes:
• Focus on supporting high-growth woman entrepreneurs with the potential to innovate, create jobs and deliver solutions to their markets
• Address policy constraints and support programmes for women entrepreneurs
• Back woman business owners in maledominated sectors
• Encourage more woman investors and women in financing generally, as they are more likely to invest in women entrepreneurs.¹⁵

7. Digital transformation

While rapid adoption of digital technologies is a global trend, in South Africa overall only half (52%) of those in the start-up stage planned to use digital technology to sell their goods and services, the lowest rate among developing economies. Digital transformation at scale, combined with new business models, have the potential to drive inclusive innovation and new entrepreneurial opportunities in Africa (including South Africa).

Realising this potential will depend on enablers such as providing radio spectrum, connectivity and internet access for all, adequate and reliable power supply, and the adoption of renewals.¹⁶ Realising this potential will depend on enablers such as:

• Addressing the limited talent pool to support the implementation of digital technologies emanating partly from poor science, technology, engineering and mathematics (STEM) education.
• Diversifying away from reliance on bank financing and developing creative incentives for angel investors, venture capital, fintech marketplaces and corporate funding.
• Offering better publicised support programmes, agile policy support, reforms in R&D tax incentives, exchange control, and intellectual property and labour flexibility to support digital entrepreneurs.

Conclusion

Numerous challenges and obstacles remain in the South African entrepreneurial ecosystem. It is the greater interconnectedness between policymakers, institutions, financiers, entrepreneurs themselves and other role-players, that will ultimately create the conditions necessary for entrepreneurship success. Most importantly, the economy needs to grow sustainably on a meaningful positive trajectory.

Source: Trialogue Business in Society Handbook 2022 (25th edition)