South Africa boasts the most developed startup ecosystem in Africa but, like in many new businesses around the world, many South African startups aren’t able to pass the three-year mark.
However, there are specific contextual constraints unique to the region. The reality is made harsher by the knock-on effects of the COVID-19 pandemic, although local experts have reported that the SMME sector maintained a good deal of stability in 2020.
We list some of the main challenges faced by small, medium and informal micro enterprises (SMMEs) in South Africa from the Small Enterprise Development Agency (SEDA).
1) Access to finance
Many first-time entrepreneurs in South Africa, and around the world, have never pitched their business idea to a group of funders, nor have they conducted market research, or produced a business plan.
Small business owners often don’t have the capital to fund their efforts and don’t have a strong enough credit rating to receive funding.
These issues are exacerbated by cycles of social injustice, and income inequality, as a result of South Africa’s history.
A huge portion of South African SMMEs are founded by the most underserved members of society. Of the 5.6 million SMMEs reported in the country in 2018, 3.3-million were categorised as “survivalist firms”.
Added to the mix is a culture of conservatism among many banks in South Africa. Banks and other lenders often resist lending to younger start-ups because they are perceived as a risky investment.
Small business owners need to be thoroughly prepared for conversations when approaching banks and have their documentation to be in order so that they can show their projected value using widely accepted methods.
2) Minimal innovation
Researchers agree: businesses that can innovate tend to grow more quickly than those that can’t.
However, in South Africa, many small businesses are set up by people looking to find an alternative to unemployment, not as a way to access more opportunities while they are already gainfully employed.
Without sufficient research and development, it can be difficult for entrepreneurs to determine whether new or existing ideas might work in the real world.
With that being said, between 2020 and 2021, select South African startups showed tremendous innovation that secured funding and real growth. Monitoring these success stories and keeping track of innovation are vital practices for any budding entrepreneur.
3) Infrastructure issues
Having reliable access to electricity, water, communication services, roads, and affordable, safe public transport is incredibly important for fostering business growth.
Many small business owners start their work in their homes and if they don’t have adequate utilities they cannot produce goods, conduct services, or communicate with potential clients and business partners.
They might also find it difficult to meet up with clients or business partners because they cannot find transport within their budget.
Some researchers also point out that for small businesses, infrastructure extends to business services such as accounting and legal services, which are also not always readily available to South African entrepreneurs. Finally starting to address this, the South African government is focusing on legislation to support SMMEs and offering educational resources.
4) Human resource challenges
Many small South African businesses find it difficult to find and afford skilled workers, especially in the fields of finance, accounting, and sales.
Small businesses are also particularly vulnerable to change in the market, which means that they sometimes cannot afford to keep workers around.
However, many of these small business owners are inexperienced in putting together an employment contract that protects the business in the event that their business is going through a difficult period and they are not able to afford to pay workers.
5) Limited professional network access
New entrepreneurs also don’t usually have access to the professional networks of more experienced business owners or business graduates.
This means they aren’t able to access mentorship, funding, more prosperous markets, and the many other benefits that connecting to leaders in the industry can bring about. The environment is typically hardest for women entrepreneurs, but a number of organisations and support networks for women in small business are emerging.
How to overcome these obstacles
GVI partners with Solution Space, a business incubator and innovation accelerator, set in one of Cape Town’s lower-income communities, where there are limited opportunities for local entrepreneurs.
The facility is a satellite campus of the triple-crowned UCT Graduate School of Business (GSB) and provides new business owners with a space to work as well as access to business students, lecturers, and thought leaders from around the world.
If you are a business student looking to join an internship program, simply send us an application. You could work together with entrepreneurs to help secure funding by working with them to set up a business plan and prepare their pitch to potential investors.
You could also provide guidance in conducting market research or setting up a human resource policy.
Intern’s accommodation, transport, food, and training are all included in the program. Opportunities are available for students specialising in management and administration, accounting and finance, marketing and sales, as well as human resources.
You’ll walk away being able to prove to future employers that you’ve worked on solving some truly challenging business problems. Secure your spot today.
Disclaimer: The images in this article were taken pre-COVID-19.