The South African government pays a lot of lip service to small business, entrepreneurship, and job creation. If it really wants to foster a culture of entrepreneurship it needs to back its rhetoric with money.
That’s the word from Vusi Thembekwayo, CEO of MyGrowthFund Venture Capital, who was speaking at an online event organised by Synthesis titled “Born in Adversity: Start-up Stories”.
He said that on the one hand you have a state that says people need to go out and start businesses, but the very people with the temperament to take such risks also recognise there is no capital available for them to do so.
The same people that the government needs to start businesses are instead choosing to go into corporate jobs because that is what they are being incentivised to do.
“You can’t fix this through social engineering,” Thembekwayo said.
Government can’t simply write a policy stating that it wants 38,000 black female entrepreneurs between the ages of 16 and 35 and think it will magically happen, he said.
“It will not happen if you don’t change the incentive system.”
“Remember, at the end of the day the number is the outcome. The process is what’s more important, and what’s missing in South Africa is a strong process to support the ambitions.”
This means that the government must make capital available by getting credit rating agencies to give better credit, getting the banks to free up some of their capital requirements, and through state development finance institutions.
Born in adversity
To discuss the unique challenges faced by start-ups in South Africa, Synthesis assembled a formidable panel of experts.
Synthesis is a South African success story founded in 1997. It is a specialist technology company and managed services provider focusing on cloud, digital transformation, regulatory technology training payments data, machine learning, and artificial intelligence.
The panel was hosted by Synthesis Head of People and Marketing, author, columnist, and radio show host Howard Feldman and included Thembekwayo; Eldrid Jordaan, the founder and CEO of GovChat; Benji Meltzer, the CTO and co-founder of Aerobotics; Catherine Lückhoff, the co-founder and CEO of 20fifty; and Synthesis technology experts Drikus van de Walt and Dean Maier.
Jordaan and Lückhoff each told personal stories about the hard knocks they had taken while building and trying to sustain their businesses. Their stories resonated with fellow start-up founders in the audience.
“What Catherine is talking about is exactly where I’ve been for the past 15 months,” wrote Songezo Mhambi of Mdantsane Mobile, who was watching the presentations live.
“It’s the hardest period of a start-up’s life-cycle. I have found that a gentle personal persuasion [works well]: Build personal relationships with the first group of customers, the successful leads, and the ones not yet converted. I still look forward to the day I can actually earn a salary for the first time in over a year. But I still love what I do every day.”
South Africa mimicking the signs of a state that is in depression
Despite the challenges and the dire economic situation the country finds itself in, Thembekwayo believes that it is still a great time to build a business in South Africa.
“In South Africa, we went into this lockdown already in a recession. We’d had 3 successive quarters of economic decline. Our economy was finally downgraded by Moody’s to sub-investment grade,” he said.
“Even though our economists tell us we’re in recession the truth is that we’re actually mimicking all the signs of a state in depression.”
For the past three years, South Africa had an unemployment rate well over 27%. This climbed to 29% and has now gone over the 30% mark.
Additionally, global studies show that South Africa has one of the most unequal societies in the world if you look at the Gini coefficient.
Thembekwayo said when the United States was going through the Great Depression, the unemployment rate was just over 24%.
What this means for start-up founders and small business owners is that they must be more agile and more creative.
With the COVID-19 pandemic and the ensuing lockdown, many entrepreneurs are realising they were solving a problem that their customers no longer value, are no longer willing to pay for, or simply no longer exists.
“What we’re seeing in this time of crisis is that there are certain things human beings will always want, and those things tend to typically rank lower down on the hierarchy of needs: the basic needs, the basic goods,” he said.
One way Thembekwayo said businesses can be more agile is to consider their customers as a psychographic, rather than focusing on their demographics.
He said that thanks to the Internet, we no longer live in the age of demographics.
“Today in South Africa there is a young person growing up in Diepsloot wearing Timbaland shoes, listening to Jay-Z, who sounds exactly like a young person growing up in New York. And he’s never left Diepsloot,” Thembekwayo said.
“I think if you’re really trying to build a business there has never been a better time than now. I really do believe it, but I also do believe that you and I are going to have to fundamentally rethink how we’ve approached our businesses.”
Fix the incentives
Thembekwayo also offered several ideas for what the government and the private sector can do to address South Africa’s economic problems by investing in the small business sector.
“Human beings are carrot-and-stick creatures,” Thembekwayo said.
“We behave according to the incentive system. So, the only reason you’re seeing top talent not want to get into the realm of being a founder and business owner is that the risk-reward system doesn’t work.”
Where countries like the United States have a lot of venture capital available from a start-up’s very early stages, that is not the case in South Africa.
“There isn’t a lot of pre-seed activity, there is almost no seed activity, and then there’s some work in series A and series B,” he said.
“That discourages participation, particularly from black African people.”
South African pensioners are building the Chinese economy
While Thembekwayo did not let the private sector off the hook, he said that the state cannot expect private capital to build business for which the state is going to get the tax base.
“You’ve got to remember that capital and return have a supremely monogamous relationship. Capital will never cheat on return,” he said.
“If you have that kind of system in the environment that we’re in, the capital is going to flow to the traditional asset classes, it’s going to flow right into the listed stocks, it’s going to keep being absorbed by Naspers, out of South Africa, into China and then into Tencent.”
Thembekwayo argued that what is happening, in effect, is that South African pensioners are building the Chinese economy.
“Then we’re wondering why Chinese companies are coming into South Africa and all we’re doing is consuming their products,” he said.
“There’s a reason people like myself in the industry have been arguing for a relook at Regulation 28.”
Regulation 28, under the Pension Fund Act, limits the types of assets that retirement funds may invest in.
“Bring more money into the venture capital space, make more money available in private equity, make more money available at earlier stages [of a start-up],” said Thembekwayo.
“If we don’t do that, then at the very least stop pretending like we’re trying to.”
Development funds need to get to people with ideas
Another problem, Thembekwayo noted, is that the money the government does make available directly does not get to the right people.
Government has many millions of rand available in development finance institutions, but those funds are not being used wisely.
“There’s a disconnect between the people who have power and the people who have ideas,” said Thembekwayo.
“The people who have power, capital, and are controlling institutions of policy – they’re getting paid at the end of the month, whether there is a lockdown or not.”
But for the owners of businesses such as taxis, spaza shops, and taverns, and their livelihoods are tied directly to circumstances that do not affect those making the decisions.
Thembekwayo said he finds it frustrating that we still have a system where you must be connected to access capital rather than a system where the best ideas can win.
This situation must be fixed, or it is going to be a big problem for the whole of South Africa, he said.
Institutional investors sitting on the side-lines
Thembekwayo also took aim at institutional investors and CEOs for their lack of participation.
“They, in my mind, are just as guilty as the politicians who talk about the importance of entrepreneurship but don’t do anything more,” he said.
Institutional investors in South Africa have been completely sitting on the side-lines.
Thembekwayo said it annoys him that you have CEOs who earn very big salaries, who understand the social issues we face in South Africa but don’t back up their talk with money.
“You can’t fix a start-up problem and an employment problem without capital – and massive amounts of capital.”
Video: Born in Adversity: Start-up Stories
A recording of Synthesis’ “Born in Adversity: Start-up Stories” event is embedded below.