Barriers to entrepreneurship: Are they surmountable? (Part One)

The definition of an entrepreneur, essentially a person who organises and manages any enterprise, esp. a business, usually with considerable initiative and risk, is a much bandied about term and used simultaneously to describe a broad range of activities – from the spaza shop to the medium-sized family enterprise.

But SMME’s and - really, the “ME’s” - created 80% of jobs in SA’s private sector over the last five years. However, as has recently been demonstrated by the Global Entrepreneurship Monitor, South Africa is at roughly 1/3 the rate of entrepreneurship of China and Indonesia. We therefore need a dramatic increase in the number and distribution of High Impact Entrepreneurs (“HIE’s”) to drive a meaningful reduction in SA’s poverty and raise our collective standard of living.

These High Impact Entrepreneurs have specific characteristics. They are opportunity entrepreneurs, having identified a new niche, a new business practice or a unique customer segment that is untapped by current competitors. They employ tens, if not hundreds or thousands of people at better-than-subsistence wages, often with healthcare benefits, training programs and advancement opportunities.

Perhaps most importantly, however, these HIE’s have identified an opportunity where they create significant wealth for themselves, their shareholders and their stakeholders. That last bit may be an anathema for the SACP and our more militant left, but if there is a better way to drive job creation, then I am all ears, having seen nationalised industries, governments and large corporates fail to create long term, sustainable jobs around the world.

If it is so obvious then (go with me here, even if you are not yet fully in agreement), why have we not seen an explosion in entrepreneurship, and High Impact Entrepreneurship in particular, in South Africa?

There are a number of cultural attitudes and structural issues that make entrepreneurship more difficult - but not out of the question - in SA. These include - but unfortunately are not limited to – the unintended consequences of BEE, the real skills shortage, the nascent “culture of entrepreneurship,” government red tape and restrictions on the sale of intellectual property. While collectively these challenges do create real barriers to developing an entrepreneurial culture in countries like Singapore, the U.S. or increasingly Tanzania, they are individually – and therefore collectively – surmountable. Our discussion will have two parts; first, the cultural impediments to High Impact Entrepreneurship and second, the structural impediments.

Cultural impediments to entrepreneurship
In the potential cultural impediments to High Impact Entrepreneurship, take Black Economic Empowerment for the purposes of discussion. I will not suggest that addressing the injustices of the past is not worthy, when done in systematic, just and consistent manner. I leave that debate to other parties. Look at our new “Big Five” (of BEE magnates). Though I readily admit that Patrice Motsepe of African Rainbow Minerals, for example, is a legitimate entrepreneur, I would debate the merits of his application to become a High Impact Entrepreneur. He has bought into existing companies, serving existing customers in existing ways. He and his associates at ARM may be able to change each of those elements over time, but changing the racial profile of the shareholding does not High Impact opportunity entrepreneurship make.

The equity element of BEE is also a barrier for talented PDI entrants to enter the ranks of entrepreneurs. The BEE equity game has many of the makings of a gold rush (newly identified but ultimately limited resources, new “technologies” for extracting them and looming consolidation of the major players). No wonder that bright black business people are rushing to grab picks and shovels (great connections, nice cars and single malts?) and head for the hills (Sandton, Table Mountain or the tailings piles of Rustenberg).

But equity, directorships and control are only elements of the BEE pillars. Perhaps the most important pillar for the creation of a black middle class (with a duly representative proportion of entrepreneurs) is affirmative action and its ability to lessen professional risk for bright PDI South Africans. If I were a newly minted black CA, I would not have to think very hard if I was going to take the secure cash and the BMW from FNB, for example, versus risking it all and a potential black listing as a result of failure as an entrepreneur.

Yet these previously disadvantaged professionals will wake up to an environment in five to ten years when the content of your character will be significantly more important than the colour of your skin, to borrow a phrase. Then, many PDI’s with skills will see that the path to the top is full of other, capable people of colour. Then what? The more lucrative (read “high profile”) BEE equity deals will be done – and not a few revealed to be profit generating machines for the banks, in direct contrast with the new owners. The opportunity for those who are sick of working for The Man (black and white) will mainly be to taking their own bat to the crease.

However, not all bright PDI South Africans will have a chance to make a decision between lucrative large corporate offers and sweet BEE deals. If you don’t have the right school pedigree and not enough 70’s or better on your results, your opportunities will be more limited. But that is not the end of the line.

Large Corporate South Africa is desperate for high potential if not yet highly polished black South Africans to meet their enterprise development and procurement needs. But it will take an appetite for some risk, drive, luck and passion to make a small business work in this field. It is far from impossible as Corporate SA is setting up a myriad of individual and collective efforts to find, support and develop SMME’s. And if you are that “C” student (or worse), don’t despair. After all, how many “A” students are working for their more ambitious and determined – but less qualified – brothers and sisters?

For these ambitious “C” students, there is one final obstacle to seizing a real entrepreneurial opportunity. Unfortunately, the need for job security is one of the few remaining symptoms we can put firmly at the feet of the pernicious legacy of Apartheid.

The cultural importance of job security
The importance of having the security of a job is more important than actualising their full potential for many black South Africans. How do I know this? Because, over and over, people of colour are telling me this directly. Also, I see too many bright, economically successful PDI’s unwilling to leave the comfort of Large Corporate South Africa – even for more money with a smaller firm – because the expectations of family and culture. These pressures presumably demand the stability of job with iconic firms like the Big Four banks, the big industrial players or the large mining companies.

However, in tough times, these significant institutions get an increase in their stock price – pleasing senior management and shareholders – when they announce job cuts. How secure, then, will these jobs be when the next economic downturn inevitably rears its ugly head?

In this discussion, we have examined some of the culture barriers to creating High Impact Entrepreneurship in South Africa. Most importantly, these elements have two conflicting and often competing outcomes. BEE and BBBEE are a reality in South Africa and have important places in creating a black middle class in our country. But we have to remember that real innovation and employment creation come from HIE’s that take new risks in new markets, with new customers and unique value propositions. That means we have to establish and nurture the ecosystem for these entrepreneurs of all backgrounds.

In next week’s installment, we will look at some of the structural impediments to this ecosystem and solutions to getting beyond them.

By Greg Durst