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Fools, family, friends and entrepreneurship

Entrepreneurship’s greatest challenge is access to risky, patient, seed capital.

No doubt you have heard entrepreneurs cite ‘lack of funding’ as the key deterrent to their growth. They often site the conservative nature of banks, the complex red tape of development funding institutions and the ‘impossible to break’ tight circles of venture capitalists (VC). I have even heard of the South African VC market being referred to as ‘The Stellenbosch Old Boys Club’ because of the perception that wealthy families fund those (or the children of those) who are in their social circles.

What does research say about this and what are the realistic solutions to this funding problem?

I recently read an article that quoted Amith Pau, a director at Adriane Capital and Entrepreneur Country (See Business Report here), which launched a network providing Cape Town-based entrepreneurs with access to clients in new markets, mentorship and finance. Pau is quoted as having said that ‘the biggest issue facing entrepreneurs is not access to finance but access to customers’.

Presumably the logic is that if entrepreneurs can be supported in gaining access to global markets and bigger customers, they would generate the cash flows necessary to not only keep them in business, but also to expand and transform into bigger businesses. Whilst the theory may hold for businesses which have mastered their product or service, and are looking for growth, this is not where the need is greatest. Many of our people are still stuck at the bottom end of the entrepreneurship ladder. I argue that the greatest challenge facing entrepreneurship in our country is access to risky, patient, seed capital for the countless, mainly young people, who aspire to start their own businesses.

To better understand the state of entrepreneurship in Africa, the Omidyar Network launched the Accelerating Entrepreneurship in Africa Initiative in 2012. The research project set out to identify the challenges facing African entrepreneurs and pinpoint the most trenchant barriers that inhibit high-impact entrepreneurship. The research commenced with a survey of 582 entrepreneurs in six Sub-Saharan African countries: Ethiopia, Ghana, Kenya, Nigeria, South Africa and Tanzania.

The greatest challenge found to be facing entrepreneurs across Africa was unsurprisingly financing. The research revealed various reasons for this, with entrepreneurs saying lenders do not avail enough capital in the market for entrepreneurship, while financiers claimed entrepreneurs presented far too many un-fundable projects.

What I found to be the most interesting outcome of the research was that the main sources of capital for small and growing enterprises were retained earnings (profit made from previous trades), credit cards, loan associations (or clubs) and investments from family and friends. The research shows that as much as 45% of the entrepreneurs report that they used family loans to finance their business, with the balance coming from more traditional sources.

Source: Omidyar Network Accelerating Entrepreneurship in Africa 2012E

For most South Africans who need to raise seed capital, the “friends & family” option is essentially a non-starter. Thanks to various socio-economic factors, caused mainly by the systematically unjust apartheid regime, many of our people have not had access to “friends & family” who earn enough to finance them with what is often a few thousands of rands to get started with their small business idea.

However this picture is changing very, very rapidly. More and more black South Africans are getting better educated, better skilled and commanding professional positions that have seen substantial growth in earnings. All of this means there is a growing pool of black people, coming from very poor backgrounds now earning a steady, ‘above average’ income. There is scope for these professionals to invest in entrepreneurs with unique business ideas that solve real customer problems, with matrices that are measurable and business models that are sustainable.

I think the time is ripe for ‘less yada-yada, and more ching-ching’ – or in non-advertising speak: less talk about the problem and some creativity in solving it.

I suggest the solution lies in a reliable model, then platform and later ecosystem to raise early stage venture capital. I am not referring to a regurgitation of the ‘billion dollar’ VC models we read about from the developed markets. I am talking about a mechanism that is simple, easy to understand, easy to access and most of all, reliable. One that is aimed at addressing some of the peculiarities that come with being Africans and how we tend do this.

Many employed professionals have very little or no interest in being entrepreneurs themselves. They do however appreciate the compelling financial opportunity offered by investing in a great idea at its infancy and help realise it into a viable business. Many are bankers, accountants, engineers and attorneys who can bring much needed mentorship and support to the entrepreneurs they invest in. All of them are technologically savvy, therefore allowing for the model infrastructure to run online and/or on mobile platforms. While risk is at its highest at this early stage of any business, these investors may be motivated by more than just financial return – there is the unmeasurable value in the comfort and satisfaction that their funds are contributing to growing the economy and alleviating poverty. In short, many want to help the entrepreneur – they just don’t know how.

So I challenge you Mr & Ms Entrepreneur. You say your biggest problem is raising capital. Research says you are most likely to find this capital in “friends & family”. I challenge you to put together 20 professionals you personally know in your area. They don’t have to be your best friends or your immediate family. Just people you know well enough to call and ask to attend a meeting. Arrange for you and two other entrepreneurs you believe have great businesses that deserve funding. The three of you present your businesses and your funding requirements to these prospective investors.

You never know, you may just walk out with some new, more cash-flush “friends & family”.

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