The Role of Information in Enabling Entrepreneurship
Dr Mike Herrington
In the forthcoming decade South Africa faces many challenges both from a political and financial point of view. The US financial crisis of 2007/2008 was considered by many economists to be the worst economic crisis since the Great Depression of the 1930s. It was followed by a significant global downturn which later started its upturn in sub-Saharan Africa and other emerging economies. However, the African Economic Outlook 2014 notes that South Africa lags behind the rest of the region and is now no longer the leading economy in Africa having fallen second to Nigeria and likely to soon falls behind other countries such as Uganda and Ghana.
Statistics in the Poverty Trends Report show that over 10.2 million people in South Africa live below the food line. In addition, the country’s levels of inequality are amongst the highest in the world with the GINI coefficient for South Africa at 0.65 based upon expenditure. One of South Africa’s most pernicious problems is its high level of unemployment and underemployment with the official rate bat just over 27% being the highest in sub-Saharan Africa and one of the highest in the world. However, official unemployment rates are often understated, as they do not take into account discouraged work seekers, which could put the rate as high as 45%. The corporate sector is not creating jobs and although the government increased its levels of staffing by over 200 000 people in the last few years it is clear that South Africa can no longer depend solely on large organisations or the government to create new jobs. The emphasis has now shifted towards small and medium enterprises for job creation and hence South Africa must move away from the concept of seeking employment to one of creating employment for oneself and for others.
The critical situation with respect to the unemployment challenge and of more concern is the huge unemployment among the youth of South Africa, which is as high as 65% and at unprecended levels of 80% in some regions of the country. This situation has been aptly described as a “ticking time bomb”.
Entrepreneurship has never been more important that it is now. It is widely considered to be the key driver of sustainable economic growth through job creation, innovation and its welfare effect. It is seen as one of the key areas that can unlock the growth potential in South Africa in order to address the real concerns of poverty and inequality. The government and all concerned should see as their priority the creation of a climate that encourages entrepreneurship and SMME development as it is this sector which will be the saving grace for the future economic and social welfare of the country. The recent introduction of the new Ministry of Small Business Development under the direction of Lindiwe Zulu seems to be a step in the right direction but the jury is still out as to whether it will be effective or not.
Unfortunately South Africa’s levels of early-stage entrepreneurial activity remains the lowest on the sub-continent being almost a quarter that of other countries such as Nigeria, Ghana, Uganda, Angola and Botswana to name just a few and well below that of other developing economies in South America and Asia. Over the past 15 years reports from the Global Entrepreneurship Monitor (GEM) have attributed this to many factors such as the poor quality and levels of education, an onerous regulatory environment, high rates of crime, lack of access to funding and to markets and a lack of good business development support. By addressing these inhibiting factors it will go a long way to increasing the levels of entrepreneurship especially opportunity entrepreneurship which creates jobs as against necessity or survivalist entrepreneurship. It should always be remembered that it is not the function of government to create jobs but rather to create an environment that will facilitate and enhance entrepreneurship.
One of the major “complaints” of potential and budding entrepreneurs is the apparent lack of access to funding yet research done by GEM clearly shows that South Africa is “awash” with money and is in fact not worse or no better off than most countries around the world with respect to the availability to funds. The problem arises from the fact that entrepreneurs and funding institutions are divergent in their thinking and actions. The majority of entrepreneurs do not know how to write a feasible, realistic and understandable business plan that will satisfy the lending requirements of the funders. Many plans are not thought through, the products or services offered show no tangible benefits and do not differentiate themselves from what already exists in the market. This leads to pricing problems, which ultimately lead to the demise of the enterprise. No sensible or responsible institution would give money to a business that has a high risk of failing. The lack-of-access-to-funding problem also rests with the financial institutions, as they tend to assess business based upon availability of assets or suitable collateral and not so much upon the entrepreneur.
It is clear that new funding models need to be introduced, possibly backed by government, which enables entrepreneurs to seek capital without the stringent requirements required by commercial banks and venture capitalists. Possibly a public/private partnership fund should be established to provide low cost funding for nascent, new and established entrepreneurs. However, this money should not be given to the entrepreneurs but to a third party who supplies the materials or assets. This prevents money being wasted on things that are not really required for the business. There are a number of government or quasi-government institutions that have been set up to provide funding but research by GEM and other organisations have clearly shown that they are not well known by the general public and when they are approached the assistance given is generally of little value.
Research has shown that the main cause for business failure, especially in the early stages, is a result of poor management and a lack of both business and financial skills. Providing good business support will dramatically reduce the probability of business failure and help guide the entrepreneur through the first few hazardous years of the business. However, this support must come from experienced business people who have the practical experience to provide sound advice and not come from individuals who have never run a business themselves. Several years ago the author conducted a survey with the mentors of a government institution and discovered that over 90% on those giving advice had never had the experience of operating a business in the retail of manufacturing sectors yet the advice they were giving was for those entrepreneurs in these sectors. Business Partners has a mentoring programme but they only use highly trained and experienced mentors who are experts in their field. This works and the model should be copied by government.
Statistics in the Poverty Trends Report show that over 10.2 million people in South Africa live below the food line. In addition, the country’s levels of inequality are amongst the highest in the world with the GINI coefficient for South Africa at 0.65 based upon expenditure. One of South Africa’s most pernicious problems is its high level of unemployment and underemployment with the official rate bat just over 27% being the highest in sub-Saharan Africa and one of the highest in the world. However, official unemployment rates are often understated, as they do not take into account discouraged work seekers, which could put the rate as high as 45%. The corporate sector is not creating jobs and although the government increased its levels of staffing by over 200 000 people in the last few years it is clear that South Africa can no longer depend solely on large organisations or the government to create new jobs. The emphasis has now shifted towards small and medium enterprises for job creation and hence South Africa must move away from the concept of seeking employment to one of creating employment for oneself and for others.
The critical situation with respect to the unemployment challenge and of more concern is the huge unemployment among the youth of South Africa, which is as high as 65% and at unprecended levels of 80% in some regions of the country. This situation has been aptly described as a “ticking time bomb”.
Entrepreneurship has never been more important that it is now. It is widely considered to be the key driver of sustainable economic growth through job creation, innovation and its welfare effect. It is seen as one of the key areas that can unlock the growth potential in South Africa in order to address the real concerns of poverty and inequality. The government and all concerned should see as their priority the creation of a climate that encourages entrepreneurship and SMME development as it is this sector which will be the saving grace for the future economic and social welfare of the country. The recent introduction of the new Ministry of Small Business Development under the direction of Lindiwe Zulu seems to be a step in the right direction but the jury is still out as to whether it will be effective or not.
Unfortunately South Africa’s levels of early-stage entrepreneurial activity remains the lowest on the sub-continent being almost a quarter that of other countries such as Nigeria, Ghana, Uganda, Angola and Botswana to name just a few and well below that of other developing economies in South America and Asia. Over the past 15 years reports from the Global Entrepreneurship Monitor (GEM) have attributed this to many factors such as the poor quality and levels of education, an onerous regulatory environment, high rates of crime, lack of access to funding and to markets and a lack of good business development support. By addressing these inhibiting factors it will go a long way to increasing the levels of entrepreneurship especially opportunity entrepreneurship which creates jobs as against necessity or survivalist entrepreneurship. It should always be remembered that it is not the function of government to create jobs but rather to create an environment that will facilitate and enhance entrepreneurship.
One of the major “complaints” of potential and budding entrepreneurs is the apparent lack of access to funding yet research done by GEM clearly shows that South Africa is “awash” with money and is in fact not worse or no better off than most countries around the world with respect to the availability to funds. The problem arises from the fact that entrepreneurs and funding institutions are divergent in their thinking and actions. The majority of entrepreneurs do not know how to write a feasible, realistic and understandable business plan that will satisfy the lending requirements of the funders. Many plans are not thought through, the products or services offered show no tangible benefits and do not differentiate themselves from what already exists in the market. This leads to pricing problems, which ultimately lead to the demise of the enterprise. No sensible or responsible institution would give money to a business that has a high risk of failing. The lack-of-access-to-funding problem also rests with the financial institutions, as they tend to assess business based upon availability of assets or suitable collateral and not so much upon the entrepreneur.
It is clear that new funding models need to be introduced, possibly backed by government, which enables entrepreneurs to seek capital without the stringent requirements required by commercial banks and venture capitalists. Possibly a public/private partnership fund should be established to provide low cost funding for nascent, new and established entrepreneurs. However, this money should not be given to the entrepreneurs but to a third party who supplies the materials or assets. This prevents money being wasted on things that are not really required for the business. There are a number of government or quasi-government institutions that have been set up to provide funding but research by GEM and other organisations have clearly shown that they are not well known by the general public and when they are approached the assistance given is generally of little value.
Research has shown that the main cause for business failure, especially in the early stages, is a result of poor management and a lack of both business and financial skills. Providing good business support will dramatically reduce the probability of business failure and help guide the entrepreneur through the first few hazardous years of the business. However, this support must come from experienced business people who have the practical experience to provide sound advice and not come from individuals who have never run a business themselves. Several years ago the author conducted a survey with the mentors of a government institution and discovered that over 90% on those giving advice had never had the experience of operating a business in the retail of manufacturing sectors yet the advice they were giving was for those entrepreneurs in these sectors. Business Partners has a mentoring programme but they only use highly trained and experienced mentors who are experts in their field. This works and the model should be copied by government.
Dr Mike Herrington (MBA, PHD)
Mike Herrington is the Executive Director of the Global Entrepreneurship Monitor (GEM) which is part of the Global Entrepreneurship Research Association (GERA) an organization operating is over 100 countries covering all geographic regions at all levels of economic development. He is also the Team Leader for GEM South Africa and is currently based at the Faculty of Commerce at the University of Cape Town. During his career Mike has held various senior management roles, including General Manager and Managing Director at various companies, and has successfully founded, built up and sold two companies. Based on his entrepreneurial experiences, he was asked to join the Graduate School of Business School in 2001 where he founded the Centre for Innovation & Entrepreneurship.
Mike lives his passion for entrepreneurship by continuing to be active in the new venture creation and SMME space in South Africa.
Mike Herrington is the Executive Director of the Global Entrepreneurship Monitor (GEM) which is part of the Global Entrepreneurship Research Association (GERA) an organization operating is over 100 countries covering all geographic regions at all levels of economic development. He is also the Team Leader for GEM South Africa and is currently based at the Faculty of Commerce at the University of Cape Town. During his career Mike has held various senior management roles, including General Manager and Managing Director at various companies, and has successfully founded, built up and sold two companies. Based on his entrepreneurial experiences, he was asked to join the Graduate School of Business School in 2001 where he founded the Centre for Innovation & Entrepreneurship.
Mike lives his passion for entrepreneurship by continuing to be active in the new venture creation and SMME space in South Africa.