2016, a tough year for South African startups

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2016 was a particularly tough year for the entrepreneurial landscape in South Africa, with trust and confidence in the economy eroded by political uncertainty.

This is according to Ben Bierman, managing director of risk finance firm Business Partners, who said SMEs are more vulnerable to uncertainty than other businesses. Therefore, it is not surprising that recent events, such as the insecurity of the finance minister position, had hindered entrepreneurial activity.

“For example, we have witnessed a number of approved investment transaction not going ahead due to the entrepreneur wanting to hold back on their expansion plans. Entrepreneurs are opting to rather make their business investment decision when there is more economic certainty,” said Bierman.

According to the South Africa 2015-2016 Global Entrepreneurship Monitor (GEM), released in early 2016, the country’s early stage entrepreneurial activity rate was reported at 9.2 per cent, just half that of the regional average for Africa.

“According to the monitor, the three greatest constraints hindering entrepreneurial activity in South Africa – since the country first participated in GEM in 2001 – includes government policy and bureaucracy, access to finance, and education and training,” said Bierman.

Over the course of 2016, the sequential impact of political and economic uncertainty has put pressure on SMEs’ customers, affecting the perceived level of entrepreneurial opportunities in the economy, he said.

“SMEs generally have three clusters of customers, namely government, corporate South Africa, and consumers – sometimes a mix of all three,” Bierman said.

“With consumers under increasing pressure in terms of disposable income, corporate South Africa sitting on approximately ZAR700 billion (US$50 billion) which they reportedly cannot invest due to policy uncertainty, and the government’s fiscal prudence under a large amount of pressure – the growth prospects of SMEs in general is being impacted, along with their continued survival and the attractiveness and entrepreneurial activity.”

He said it was important for the South African government to create an environment which is more conducive to SME formation and growth. According to the recent 2017 Global Entrepreneurship Index released by the Global Entrepreneurship Development Institute (GEDI) and Global Entrepreneurship Network, improving the conditions for entrepreneurship by 10 per cent could add US$22 trillion to global GDP, as institutions that support entrepreneurs also positively impact the economy as a whole.

Bierman said even though SMEs are a key driver of economic growth, simply planting a small business seed in the middle of an economy does not cause this.

“An economy needs other drivers for growth, such as government infrastructure spend or big corporate expansions. With the lack of such initiatives in the last year, local SMEs have suffered as a result,” he said.

Bierman is more optimistic about the economic climate in 2017, however.

“If one compares the current situation to more-or-less the same period last year, South Africa does seem to be in a better position. Commodity prices are at higher levels, GDP is growing albeit at very low rates, inflation appears to have stabilised a cycle and the current interest rate increase cycles seem on hold, all of which contribute to a better outlook for 2017,” he said.

The 2017 Global Entrepreneurship Index – which measures a country’s entrepreneurial ecosystem – saw South Africa improve its ranking by three positions to be ranked 52nd among the 132 countries analysed, making it the only Sub-Saharan country that ranked within the top 50 percent of the GEI countries.

“In order to continue supporting South Africa’s entrepreneurs, we need to collectively make a concerted effort to improve entrepreneurial perceptions and the attractiveness of entrepreneurship as a positive career-choice for graduates and skilled individuals. This can be done by improving access to finance and markets, and providing improved training and support for early-stage entrepreneurs,” said Bierman.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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