70% of SA startups say they require funding to grow their businesses

Seventy per cent of South African startups say they require funding in order to grow their businesses, with 83 per cent of startups self-funded and only three per cent saying they fund their businesses from vehicles formally established to support them.

The lack of available funding – 41 per cent of startups said it was their most needed area of support ahead of marketing and business planning – was laid bare in the results of a survey run by South African entrepreneurship school Seed Academy.

Disrupt Africa reported in January on the launch of the survey, aimed at obtaining a picture of the country’s startup sector and the challenges it faces. It seemed to have a snowball effect, with the following months seeing similar surveys launched by Silicon Cape and SiMODiSA, Deloitte, and PwC and Microsoft BizSpark.

The Seed Academy survey found that, in spite of concerns over the availability of funding, the 900 startup entrepreneurs surveyed were generally positive and motivated to develop their businesses.

Forty-two per cent of entrepreneurs are very optimistic about their business outlook for the next 12 months, while 29 per cent are “somewhat optimistic”. After financial support, the next most required areas of support were in marketing (25 per cent) and business planning (25 per cent), while finding customers, a lack of guidance and entrepreneurs’ tendencies to wear too many hats were also mentioned.

“These challenges confirm that entrepreneurial development should be aimed at providing business education, helping to create a network, offering tangible guidance to find customers and of course, preparation to raise funds at the most appropriate time for the business,” said Donna Rachelson, director of Seed Academy.

Rachelson said the fact only a small percentage of entrepreneurs fund their businesses from the vehicles formally established to support raises questions regarding the accessibility and effectiveness of funding programmes.

The report called on South Africa to identify ways of enhancing the angel network, possibly through tax incentives to encourage early stage investments and the establishment of online angel investing platforms to connect investors and entrepreneurs.

It also noted that Development Finance Institutions (DFIs) play a key role in the ecosystem, but they need to better market their services and develop their capacity to mentor startup businesses and offer post investment management.

“DFIs should work with the private sector by allocating funds to organisations that have the necessary experience and capacity to work with entrepreneurs,” said Rachelson.

Seed Academy called for the creation of innovative funding mechanisms.

“Pension and provident funds do not currently invest in early stage businesses, as their mandates prevent this and they are not incentivised to do so,” said Rachelson. “They should be mandated to spend a small component (even as little as 0.5 percent) of their allowable 10 per cent (under regulation 28 of the Pension Funds Act) on venture capital funds. When invested, this will create significant momentum for the entrepreneur ecosystem.”

The report noted that as the South Africa National Development Plan aims to have 90 per cent of new employment created by small, medium and micro enterprises (SMMEs) by 2030, it would follow that job creation should be a key outcome of entrepreneurial activity. The results indicate, however, that the number of businesses which employ five or more employees are still in the minority.

Rachelson said if South Africa is striving to create sustainable businesses and job creation, focus needs to centre on building an integrated entrepreneurial ecosystem.

“This means a focus on entrepreneurial development through programmes that are based on the needs of each phase of the development of the startup, as they vary depending on the age of the business. The emphasis is primarily on the early stage but if South Africa wants to ensure sustainable businesses, entrepreneurs need longer term support, development and funding,” she said.

The fact only 35 per cent of respondents were female suggests there is still room for further growth in female entrepreneurship. Rachelson said initiatives for women entrepreneurs need to be integrated, strengthened and improved, while female success stories need to be actively promoted.

“Female mentors should be encouraged to support other female entrepreneurs in the specific challenges they face,” she said.

The report also recommends the promotion of a culture of entrepreneurship in South Africa by acknowledging the significant role played by education in developing entrepreneurs.

The growth of incubators and accelerators, according to the report, is becoming a powerful tool for entrepreneurial development and early-stage business growth in the ecosystem, though even these organisations need funding to get their own businesses off the ground.

Seed Academy called on government to allocate additional funds to support incubators and accelerators.