With the government’s primary objective to create five million jobs by 2020, Small and Medium-Sized Enterprises (SMEs) and Entrepreneurship have been identified as the ideal job creators in the economy.
Currently they employ 60% of the country’s labour force; in other economies this is as high as 90% (Germany, China, United Kingdom and Brazil).
However the reality is that approximately 80% of start-ups fail within the first two years of existence. Reasons as to why these businesses fail vary from lack of capital, lack of business skills and a worsening economy.
Approximately 80% of start-ups fail within the first two years of existence. Reasons as to why these businesses fail vary from lack of capital, lack of business skills and a worsening economy.
Donald Makhafola speaks to Head of Enterprise Development at Absa, Sisa Ntshona, about the reasons behind why most businesses fail.
Why do most entrepreneurs fail in the first few years?
The primary reason why businesses fail is because of a lack of Business Know-How, the lack of the skills required to run and effectively manage the business. Ironically, they don’t fail because of technical reasons e.g. a plumber is excellent at their skill or trade, the problem comes in running the business.
They have to be the Financial Director, Human Resources Director, Quality Director and Marketing Director of their businesses. So, it’s the skills to run and manage a business that fall short.
It has been said there is not enough of an entrepreneurial culture in South Africa, is this a fair judgement?
Historically, going into business has generally not been as a matter of choice, it was rather as a matter of consequences. Hence, we have seen what we term “reluctant entrepreneurs”. In the United States, up to 50% of all the people that work would have started a business sometime in their career.
Also entrepreneurship has not been promoted as a career choice even at school level, the recipe has been you go and find a job instead of creating one. It needs to be part of the curriculum; we also need to crucially improve the maths literacy rate in the country as we currently have the lowest maths literacy rate on the continent. This doesn’t bode well for the creation of businesses.
What, in your opinion, is a major hindrance to entrepreneurs getting assistance from financial institutions?
The majority of loan applications we receive are of a low standard, they are generic and don’t display any form of innovation or differentiation. All businesses that exist effectively need to address a problem or a gap in the market. What may have worked previously may not necessarily work in the future.
A business that does not have a client or customers (access to markets) is not a business at all, irrespective of how much funding it has (capitalised). So, the first hindrance is the quality or fundamentals of the business idea or concept.
Secondly, as a rule “Profit is the Reward for Risk”, you have to have something to lose so that the funders get comfort that there is a vested interest from the entrepreneur. The challenge then becomes what/how much that contribution becomes.
It would seem these businesses are doomed to fail before they have even started operating, how can it be rectified?
One of my favourite quotes is that “Money never starts an idea: it’s the idea that starts the money” by Brahma Kumaris. In every crisis there is opportunity, most entrepreneurial ventures come from solving a problem. If you are faced with a problem, craft a solution and sell that solution to others.
South Africa has the lowest math literacy rate on the continent and if you can’t do arithmetic, how will you run a business in a knowledge economy? Financial literacy among South Africans is also very low. We need to look at the source of the problem and fix it. We cannot undermine the role of education.
Are there successful examples that we as a country could learn from?
The best time to plant a tree was 20 years ago. The second best time is now. Aside from 20 years ago, the best time to start a business is now. The education system is critical and has a direct impact on the quality of entrepreneurs the country produces. There is a positive correlation between the quality of a country’s education system and its prosperity.
Is there enough funding available for start-ups?
Ironically, there is no shortage of money/business funding in South Africa – there is a ‘tsunami’ of funding out there! No one has ever been turned away because there is no money in the ‘vault’.
You have the commercial banks, the national Developmental Agencies (NEF, IDC, Khula), the Provincial Agencies (GEP, ECDC, Ithala, Limdev, MEGA, to name a few). In my view, funding is not the problem, it’s the opportunities and the people (jockeys) identifying and driving those opportunities.
Do you believe development agencies are fulfilling their mandate?
There is generally confusion or lack of clarity about what developmental agencies should be doing, they are essentially addressing a market failure or gap but are starting to look like banks with their lending criteria and requirements. It’s also a mystery as to how their performance is evaluated or measured.
What would your advice be to aspiring entrepreneurs?
Most entrepreneurial ventures come from solving a problem. If you are faced with a problem, craft a solution and sell that solution to others. Offer something of value and you will be relevant.
Be different and adjust to the changing market in order to stay in business; capitalise on what your competitors are not doing to win the market. You can either beat your competitors with service or with an excellent interpersonal approach with customers, ensuring they will always come back to you.
How are you at ABSA working to assist entrepreneurs?
ABSA has created a unit called Enterprise Development. This unit is dedicated to promoting and developing entrepreneurship. This is done through three key areas of focus by providing:-
We have realised that we cannot be a ‘spectator’ anymore and have decided to be part of solution by creating an ‘enabling environment’ for entrepreneurs. We go “Beyond Banking” to deliver market solutions that will assist to develop SMEs and ultimately assist with job creation.