SA’s startups fail to gain traction
The country falls way behind others in the region but seed funding is not the only problem
Like most small businesses, Lebogang Mokubela’s venture was born of a risk taken to fill a perceived gap in the market. After graduating, he worked for five years in advertising and digital marketing for several corporate agencies until he opted to use what he had learnt to start his own company.
“I quit my job in 2014 and started Lemok Group as a township-based advertising agency providing custom solutions for small businesses in the township,” he says.
The gamble paid off. Based in Soshanguve near Pretoria, the company has since grown to include another subsidiary, Tatom, providing stationery and printing supplies to a growing clientele.
Besides bagging clients from surrounding areas, including the Gauteng Growth and Development Agency and Pretoria’s Van Tuka Lounge, Lemok has snagged international clients from Florida in the United States and Angola and is in talks with a partner in Nigeria.
But the success of Mokubela and Lemok Group is one that bucks the trend of small enterprises in South Africa. Statistics on the country’s entrepreneurship sector paint a bleak picture of starting and running a small business. At least seven in 10 are doomed to fail, which has clouded the risk appetite of wouldbe entrepreneurs.
According to the 2014 Global Entrepreneurship Monitor, just 37% of South Africans between the ages of 18 and 64 reported that they saw business opportunities and were capable of using them.
South Africa is placed lowest by this indicator, behind regional competitors, with 57%, 69% and 63% of young people in Botswana, Angola and Burkina Faso respectively reporting being optimistic about entrepreneurship.
Just one out of 10 South Africans between the ages of 18 and 65 has an intention to start a business in the next three years. This is far lower than in countries such as Botswana where the figure is six in 10.
But, despite the bleak confidence in the success rate of entrepreneurship, 70% of South Africans still believe that entrepreneurship is a good career choice that elevates one’s standing in society.
Small, medium and micro enterprises (SMMEs) are the lifeblood of any economy. The World Bank says formal SMMEs contribute up to 45% of total employment and up to 33% of national income in emerging economies. The number is much higher when micro-enterprises in the informal sector, often excluded in official figures, are included. For this reason, the government has developed several initiatives to help support small businesses. The latest is a R1.5-billion fund launched last month by the government in partnership with the private sector under the Presidential CEO Initiative.
The majority of the JSE’s top 40 index companies have reportedly backed the fund, which will operate as a listed venture capital fund. Investors will get a chance to invest in early-stage startups with the opportunity of trading their shares whenever they deem fit. This is expected to provide entrepreneurs with startup capital to get their companies off the ground.
But this is not the first funding initiative to entice risk-averse entrepreneurs. The Small Enterprise Finance Agency (Sefa) disbursed R1.3-billion in the past financial year alone to small businesses and co-operative societies.
This is 58% more than the R822million disbursed in the previous financial year and has increased the number of beneficiaries to 68 724 SMMEs and co-operatives.
But it is becoming increasingly evident that the availability of finance is not the only determinant to the success of South African startups.
Nonperforming loans in Sefa’s R975-million loan book doubled year on year and is now R322million, an amount that threatens the sustainability of the fund.
A study conducted by the Entre- preneurial Finance Lab (EFL) into the risk profile of the country’s small businesses gives a snapshot of the financial risk involved in funding startups.
The EFL, which classified borrowers in five tiers according to credit scoring, found that the lowest quintile was 230% more likely to nonperform than the top quintile.
The EFL says: “This means that, for every three nonperforming deals in the top quintile, there are seven nonperforming deals in the bottom quintile.”
Startups normally fall i n the bottom quintile, making it difficult for them to source loans. Mokubela’s seed capital for his business amounted to R3 500, sourced from what was left of his first failed business attempt. He is ineligible to apply for seed funds from organisations such as Sefa because of his credit scoring.
“When I launched the business, my car was repossessed because of [my] inability to make payments and this led to my blacklisting,” he says.
Mokubela says, although a lack of capital plays a big part in stemming the growth of many SMMEs, having a fundamental understanding of the product one is offering and of the market is more crucial.
According to the World Bank’s Ease of Doing Business Index, in 2016, South Africa slipped four places to position 73 out of 189 economies. But, more telling, is that the country had the lowest score in the indicators at the heart of starting businesses. South Africa was ranked 119 and 101 in enforcing contracts and registering property, respectively.
With the economy currently going through a slump, small and medium businesses are key to creating jobs and boosting productivity in the short term and reduce income inequality in the long term.
In addition to the establishment of entrepreneurship funds and grants, much work is required to build up the confidence of would-be entrepreneurs. This can be done by skills development initiatives and support networks to encourage young business owners take the risk.