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Taking black start-ups into the black

A white 20-something is more likely to be able to tap friends and family for R20,000 to R100,000 for start-up capital than a black entrepreneur.

Black South Africans need to develop a culture of supporting early-stage start-up businesses and they need to start co-ordinating their efforts, if they want to produce the next generation of South African entrepreneurs.

This was the main conclusion from a MyStartupSA event held in Sandton recently.

One of the reasons I love attending MyStartupSA events is that the audience is very different from the traditional white, technology entrepreneurship networking scene. The audience is typically older and less grandiose and pretentious. It is less Silicon Valley, more street-hustler.

While many white entrepreneurs turn their noses up at the word “tender” and immediately think of corruption, for many black entrepreneurs, this is the primary way to break into the South African business scene. One of the most telling comments on the night was from an entrepreneur who pointed out that government had tightened up the tender process significantly in 2013 and was making it quite difficult for newer entrepreneurs, with shorter track record, to do business with government.

MyStartupSA founder and MSG-Afrika chief investment officer Andile Khumalo, made the comment that one of the big challenges that the black start-up scene faces is they lack any real depth and investment culture in the “FF” (Friends and Family) category.

While it is a broad generalisation, Khumalo made the observation that because of the skewed economic history of the country, a white 20-something was far more likely to be able to tap friends and family for R20,000 to R100,000 in early stage start-up capital and the appetite for risk is more likely to be there.

In contrast, many black South Africans are only now coming into first generation wealth and are more conservative with their funds.

Khumalo pointed out that this had been identified at a pan-African fundraising conference he had attended in 2013 and was a regular issue which was not being tackled. South Africa was one of the few countries who scored very weakly in this space, particularly amongst the black populace and it was holding back entrepreneurship.

With the JSE having delivered such stellar returns over the last 2 decades, there has never been a reason to think differently or focus on increasing the flow of capital to early stage investments.

But with markets expected to deliver more muted returns over the next decade, one needs to take a look at recent research from Barclays Wealth as part of their Wealth Insights series.

In South Africa, 40% of high-net worth individuals surveyed had made their wealth through traditional savings methods while an incredible 68% had made their wealth through the sale of a business. In contrast, the US had seen 68% of wealth accumulated through traditional savings while 21% came from the sale of businesses.

Most importantly, the Barclays report surveyed clients through the duration of the financial crisis.  In developed markets, 45% of entrepreneurs said their wealth has increased over this period, compared with only 33% of non-entrepreneurs. In emerging markets, the corresponding figures are 41% for entrepreneurs and 30% for non-entrepreneurs.

Khumalo’s conclusion was important: The small pool of black South African entrepreneurs who have been fortunate enough to accumulate wealth over the last 20 years have a responsibility to start co-ordinating efforts to support the next generation, particularly in the start-up phase of business.  

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