Learning at the Tshimologong Bootcamp

Last weekend I attended the the Tshimologong Bootcamp. The bootcamp aimed to get us entrepreneurs to take the next steps in our business, starting with a solid foundation on linking value proposition to customers. There is so much to process, but here are some lessons:

South African’s have some seriously good ideas

I have long argued that the problem with entrepreneurship in South Africa is a “supply issue”, in the sense that we do not have enough people starting up. Over the weekend I met lots of really impressive entrepreneurs with impressive ideas, and many already had customers. But, many were in that awkward stage were they (and me) are a little tentative.


I found a couple of developments in the broader startup ecosystem really interesting. These include:

  • GroundFlr –  Ground Flr is a game changer in the startup space. We improve the chance of startup funding by broadening the search for capital. Its now free to search for funding anywhere in the world. Our freemium service also gives startups the option of requesting a warm intro to an investor of their choice.
  • Venture Network – They hosts pitch nights and themed startup talks. Membership to our community is FREE. 
  • Lots of venture capitalist. Over the two days, there were many venture capitalists in attendance as mentors and advisers. I found this incredibly interesting.

In short, an ecosystem is developing that might make it easier for entrepreneurs to startup and eventually scaleup.


I decided to sit while the rest of the group collectively read out an entrepreneurial manifesto. I was not being difficult, but I honestly could not bring myself to participate. The nice bit was that no one was really phased by it. Live continued. Imagine doing that in a political party or a trade union – I can tell you the consequences are harsher.

Doing Stuff

I sate myself a goal for the end of the weekend to test if companies were interested in running promotions on ZApreneur. Over the weekend I emailed 15 people, got two coupon codes (exclusive to ZApreneur) and a commitment from three more companies. If you interested, just send me an email using this form.

Complex Business Models Need Visuals

Some of the business models were incredibly complex. The facilitator used the Business Model Canvas and things got a lot clearer, a lot more quickly. I had tried this process before, and I found the exercises extremely interesting.

Rules (are meant to be broken)

One of the mentors (Anthony Nathan from Tmara) gave us a talk on rules and how important it is to break them. I am not certain if I followed all of it, but what I learned was this:

  • Innovation removes a limitation
  • Market must adopt a new rules

Which I summarised as: Create value if it solves something, but only matters if people use it. If people value it, it might be disruptive. But, to make people adopt the new rules, you need to provide a minimal value guarantee. That is a however a very inadequate summary of the ideas.  You can check out the full idea here on YouTube.


Tiny Little Ideas

At the end of the two days, we had a presentation by Ken Beck.Let me admit this I had no clue who this guy was, and why he was given celebrity treatment. But, the talk was incredibly useful and inspiring. It validated what I have been learning- test ideas and see what happens.  The central message was that you needed to test (he said) kill your ideas in the shortage time possible. After the input I had a greater appreciation for this dude, called Ken Beck. Here is a link to his previous presentation at Tshimologong. It is long but very worthwhile presentation.


Next Steps…

The most important learning for me was to reinforce the idea is that as long as you learning you are making progress. The trick is to do that learning systematically and quickly (and without going broke!). If you can do that you and your business might actually have a value proposition that solve a real problem. That is a fancy way to say, it is time to test the next aspect of the business. For me that means making some decisions on ZApreneur, based not on theory but on learning from what my customers tell me.
(Huge thanks to the Tshimologing team).

Proudly South Africa – Telling an entrepreneurial story?

Proudly South African Entrepreneurs

Chatting to business owners exhibiting at the Buy Local Summit was inspiring. So inspiring that I almost entirely missed the official programme. Dragging myself away from the businesses exhibiting I attended the sessions after lunch. Over three sessions I was left with a distinct sense that the Proudly South Africa lacked a strategy and an identity. The panelists all emphasised useful points on the need for leadership in South Africa, social dialogue and raised a couple of interesting experiments in supply chain and franchising. Nothing wrong with these statements, but there was little or no attention on how this related to increasing the demands for South African products by South Africans. It is typical of all conferences in South Africa, general calls for leadership without what conference goers call ‘actionable insights’. As I listened to the interviews on radio and TV on the event, my sense of a directionless campaign grew, despite me nodding to the fact that buying local was good for economy.
The Buy Local Summit is the premier event for Proudly South Africa, an organisation aimed at promoting South Africans to buy local goods and services. The official message from leaders inside and outside of government was that buying locally was patriotic, was supportive of job creation and contributed to the economy of South Africa. Outside in the exhibition space, business owners emphasised not the link between my wallet and my patriotism, but rather the link between their product or service and how it could help me. For example, businesses focussed on designing products, focused on the innovativeness or uniqueness of the product. Next, they emphasised international quality of their products, and that they were fairly priced. I quizzed them on whether they thought South African were not patriotic by not buying more South African products, and they argued that the real problem was customers knowing about the product. Those in manufacturing and construction always added that they found it difficult to compete with the ‘big boys’. Most importantly, they understood Proudly South Africa not as patriotic buying, but rather that the country has lots going on and that they could compete internationally. Herein, may lie a future direction for Proudly South Africa campaign. A campaign that emphasises the uniqueness, quality and price points of local products.

Learning from Shot ‘Left

The Shot ‘Left campaign offers a way to illustrate what is possible. The campaign emphasises memories, fun and family all within South Africa. The Shot ‘left campaign asked the nation to change our perception, offering memories, fun and quality time. They were not arguing that the intrinsic value of the South African tourism offering was one of patriotism, but rather than great and affordable holidays are possible in South Africa. In a way it transforms what it means to be South Africans, especially for families who have never had a holiday before. It opened markets and created a new segments. This is important, because the process sees government and social partners working together to create new markets, through an exceptionally targeted campaign. In short, it is an effective and positive marketing campaign with none of the policy babble, although its motivations are to reach a policy objective of growing tourism by South Africans in South Africa. Proudly South Africa needs to do something similar. It is a marketing organisation, and needs to devise a marketing strategy that emphasises the intrinsic value of South African experience. What would such a marketing campaign focus on? First, it would deal with questions of quality of South African products, erroneously regarded as inferior to imported goods Second, it will reposition South African goods as being ‘cool’ and well designed, emphasising the intrinsic value of South African brands. Third, it would have a very specific target audience for its marketing campaign, not a broad appeal to conscious of South Africans.

Creating local demand

Now, one might be wondering what this tells us about human nature. Should an appeal to patriotism not be enough?
The problem with the current message is that it is not actionable, even for patriotic ethical consumers who are seeking local products. The problem is magnified for consumers not already convinced to buy local products. A marketing campaign linked to easy ways to find and purchase South African goods would make Proudly South Africa relevant. It would offer an important platform for South African companies, especially those that produce manufactured goods, a way to reach a wider audience. In so doing, the benefits of having many smaller businesses and more employment would be more realisable. The clarion call to patriotic shopping needs to be replaced with a message that South African products are cool and quality products. This change in the marketing strategy in itself is an important starting point, but will require complimentary initiatives to help growing businesses operate and succeed in the South African economy. Much of the wider economic strategy is outside the ambit of Proudly South Africa, but it can play a crucial role in creating demand for locally produced products and services.

Budget 2016: Encouraging for SMMEs, but more detail needed

The South African government is well aware that the small, medium and micro enterprise (SMME) sector is the key to unlocking job creation and economic growth over the next decade and a half. The National Development Plan envisions 90% of new employment by 2030 will be generated by SMMEs.
Yet SMMEs often seem to be forgotten by policymakers as they try to juggle the demands of stakeholders such as big business and labour. In that context, it was refreshing to hear Finance Minister Gordhan use the 2016 Budget Speech to mention some small business-friendly steps the government plans to take in the next year or so.
Continue reading “Budget 2016: Encouraging for SMMEs, but more detail needed”

Do startups make inequality inevitable?

SAY “PG” in South Africa, and everyone knows you are talking about Finance Minister Pravin Gordhan. In the tech start-up world the initials belong to Paul Graham, a venture capitalist and influential essayist. Recently, he controversially argued that economic inequality is a necessary consequence of start-up success. “You can’t prevent great variations in wealth without preventing people from getting rich, and you can’t do that without preventing them from starting start- ups, ” he wrote. Although written in the context of a debate on changes to the tax system in the US, Graham’s words must give us cause to pause. South Africa’s National Development Plan argues that “mass entrepreneurship” will contribute to higher employment, lower poverty and increased social mobility. It also argues for a more equal society, and focuses on equalising opportunities. But are we attempting to reconcile two irreconcilable goals —growing entrepreneurship and lowering inequality?

Inequality is good and bad?

He argues that inequality has good and bad elements, and governments and society should amplify the good and reduce the bad. He s ays arguments against rising inequality are simplified and conflate everything into a single argument. This perspective has many adherents in the American tech start-up space but is embraced by a minority here. For example, Uber employs no one, and drivers have no stake in the company. Some see this as the internet enabling progress. But work is redefined and precarious employment increases. The debate piqued my interest because tax reforms for small businesses in South Africa are imminent, and we often mimic inappropriate developed-country solutions.
Vast inequality is not inevitable, nor a requirement for progress. In responding to Graham, Nobel laureate Paul Krugman shows that the top 1% in the US are not entrepreneurs but corporate executives. Thomas Piketty also makes this point consistently —the top 1% earn from inherited wealth, which requires little investment and contributes little to job creation and wider social outcomes. In South Africa, high levels of inequality go with low private sector investment.
Our financial institutions have been criticised for underinvesting in the economy despite the availability of money, and BEE deals for not creating new invest ment. According to Stats SA , large companies receive the bulk of government subsidies and grants. The recent World Bank Sector Study of Effective Tax Burden  [PDF] in South Africa shows that large corporations generally pay less than the 28% r at e for companies due to a complex system of government subsidies and tax planning. It raises the question of whether government subsidisation of large business can be restructured to support higher levels of employment.

What should Pravin Gordhan do?

So what should our own PG do? The Davis Tax Committee recommendations on small business taxation should be speedily implemented. For start-ups, more ambitious approaches are needed. The popular option is to provide start-ups and all small business with three tax-free years. The rationale is easy to follow —establishing new businesses would be encouraged, and once successful, the businesses would start paying tax and provide jobs. One needs to understand why there is such a low take-up of tax concessions for venture capital activities. In South Africa this differentiation between small and big business is important, as their interests often conflict. We can learn from the US debate on how tax impacts start-ups that inequality matters and that government policy matters in how markets functions. The wider question remains in South Africa: can we create mass entrepreneurship as envisaged in the NDP without tackling the underlying inequality of opportunities? Our PG can make a good start by prioritising tax reforms for small businesses.
Hassen is the editor of  Zapreneur.com a student at the Wits School of Governance
This article first appeared in the Business Times (Sunday Times) on 14 February 2016.

What does set asides for South African small businesses tells us about economic policy making?

The Minister of Small Business, Lindiwe Zulu is championing the introduction of set-asides for small business in government procurement by September this year.The proposal is to set aside 30% of all government procurement for small enterprises. However, it is worth remembering that Cabinet on the 7 November 2007 announced a decision to do exactly that – create set asides for small businesses. How than do we explain the inaction on this decision for eight years?
The answer to this question cannot be answered by simply arguing that government is inefficient. Rather its the way economic policy is developed in South Africa. Three factors working together in a complex power play shed light on the delay.
First, after the Cabinet decision, the National Treasury blocked attempts to introduce set asides. The Treasury’s argument seemed to be based on two different arguments. On the one hand, they argued that the process of set asides was unconstitutional in that they preferred one supplier over another. On the other hand, they argued that the cost of services and products being supplied by the private sector to government would increase.
Second, is the broader tussle over economic policy. This policy process firmly pitted the Department of Trade and Industry against National Treasury during President Thabo Mbeki‘s administration. The tussle continued into the President Jacob Zuma administration, with the Department of Trade and Industry, Economic Development Department and now the Department of Small Business all arguing for the introduction of set asides. Zuma reaffirmed governments commitment to the policy of introducing set asides in the 2015 State of the Nation, and that potentially settles the issue.
Third, small business advocacy organisations in South Africa have a collective action problem. To impact on economic policy requires consistent lobbying and advocacy over a period of time and building support across wider groups in society. In the case of set asides being placed back on the agenda this collective action problem was solved not by better coordination of small business interest groups, but through activism within the government.
Eight years later, an agreement has been reached within government for the introduction of set asides. Treasury officials are apparently more comfortable with set asides, now that work on an online procurement system will make monitoring of contracts simpler and more transparent. Moreover, having a department focussed on small business — for which the introduction of set asides is one of its main priorities — influences internal discussions in Cabinet, as there is now a consistent champion for the idea.
Whilst, this agreement might be described as fragile, it is an important one. The agreement however took eight years to reach a point where it could be implemented and therein lies the core problem.
The 2007 plan was neither ideologically polarising nor posed a high risk of increased corruption. The green light should have been given to pilot the idea in some government departments, which would mean eight years down the line we would know whether set asides were a good policy or not, and not, as we are now, still waiting for the relevant regulations to be promulgated.
Instead we have lost years of experience in understanding how state procurement can support smaller players in the economy. It is an incredibly large lost opportunity.
But in other areas action has been speedy.
Notably, the Jobs Fund and Youth Employment Subsidy programmes run by Treasury have been fast tracked, suggesting that there are ways and means to ensure policy is implemented. Similarly, interventions in the infrastructure sector through the Presidential Infrastructure Investment Commission seem to suggest a concerted focus on resolving differences.
In other words, government might be better at solving macro-type problems, and not micro-type problems. However, it is in solving the micro problems — like selling services or products to a school or clinic, which set asides would support — that helps small businesses gain a foothold in the economy.
The eight year delay in implementing a Cabinet decision is cause for concern. If bureaucratic disagreements can stop Cabinet level decisions from being implemented then citizens have only a slim chance of impacting on government‘s agenda. This surely is not the democracy we hope to live in.
This article first appeared in the Sunday Times: Business Times (14 June 2015)

Automattic Buys WooThemes: Can you replicate the success?

Automattic vs Woo
Automattic, an American company that runs WordPress.com bought South African company called WooThemes for a reported $30 million.  Some statistics speak about the scale of business that WooThemes have built in eight years. Its ecommerce solution, called WooCommerce is estimated to power 24% of all ecommerce websites. This free plugin has been downloaded over 7,5 million times.  Automattic the buyer of the company is amongst the tech elites referred to as “unicorns” – which are companies with a valuation of over 1 billion dollars. The transaction is thus huge in possible impact, and all the more interesting as WordPress is open source software, and what it may mean for economic policy.

WordPress in South Africa

The deal shines a spotlight on WordPress in South Africa. The purchase of WooThemes by Automattic is a confirmation that South African companies are serious players in the WordPress space. The next most prominent South African WordPress company is called Obox are attempting to create a platform for non-technical users to easily make changes to their websites, which could be a game changer.  Smaller plugin companies and theme developers, such as Tiny Giant Studios, Site Origin and Promola, offer niche solutions and compete on the international stage. In the hosting space, smaller companies offer WordPress specific hosting, outcompetes on price, features and services many of the larger hosting providers. There are probably a couple hundred companies – mostly smaller ones – in South Africa selling services and products related to WordPress.

Open Source and Jobs

In our search to create more small businesses in South Africa, it is worth exploring what it would take to go from say 100 companies selling WordPress services or products to say 1 000 businesses. Assuming that each person would employ about 2 people, and that 50% of businesses succeed it could yield 500 new companies and around 1 000 jobs. All without the need for government to run expensive incentive programmes. To be clear, the government would need to play a role in supporting rapid skills acquisition and fostering a venture capital sector for smaller investors. To be successful, the market will require some support.
It may also sound as wishful thinking, given the skills challenges that we face in South Africa. Work opportunities in WordPress ecosystem are however not just about coding, with a range of employment opportunities being available. Skills needed in this ecosystem include skills of building communities, graphic design, warehousing and a range of other opportunities. Simply stated, expanding the South African ecosystem for technologies like WordPress could provide a way to stimulate jobs for people, with a short training period.
But, an ecosystem like WordPress requires world class coders. An interesting feature of both Automattic and WooThemes is that they have what are called distributed teams. Basically, employees in these companies work from wherever they want, and have no need to be physically present at an office. World class coders could thus be sourced from anywhere in the world. Moreover, South African already has a small number of world class coders, and with changes in our education system, a wide pool of coders could be developed over a 10 year period.
The foundation for expanding business ownership in South Africa are already there as companies like Automattic exist in other spaces, and allow for integrations with their core offering.  South Africa needs to quickly understand these opportunities, for in them lie potential areas for significant growth in the number of new firms being established, and for a radical revamp of education a nation of coders. It holds the promise of using the Internet to equalise our society, and with an expanded unemployment rate approaching 40% even the most doubtful should consider the prospects for service based jobs and businesses based on the Internet.


Now, let us get a little more excited. If we widen the lens to include other open source companies and those allowing integrations to the core offering. Think about large Internet companies like Salesforce or Slack, and the many smaller ones. Our estimates would become much larger for new businesses, established businesses and employment. These businesses and jobs will be created in the services industry, but in a sector that is growing and international. In some respects, it resemble outsourced call centres. But, with one crucial difference: the cost of owning a business are much lower.
The deal reached between Automattic and WooThemes is an incredible deal, that places South Africa on the map. WooThemes is obviously an exceptional success story, but there are opportunities for smaller players. The signal however is not merely that WordPress is changing, but that as the Internet takes hold, it will not merely destroy jobs but will create opportunities to create new types of businesses.  If you an entrepreneur, what are you still doing reading this?
WPossible.com is another Zapreneur site, that will be officially launching soon. Please signup to the newsletter.)

Making pizzas isn't chemical engineering

What do a pizza maker and a chemical engineer starting businesses have in common? They both recognise an opportunity, and they will both assemble the resources they need to run their businesses.

They are entrepreneurs, but they have major differences. The chemical engineer who is commercialising a new process to create solar panels is described as an innovation-driven enterprise; the pizza maker is described as a traditional small or medium business.
This distinction is the basis for an interesting paper titled “A Tale of Two Entrepreneurs: Understanding Differences in the Types of Entrepreneurship in the Economy”, available from the Kauffman Foundation.
The distinction is palpable in our discussions on economic transformation, and the role of small business and start-ups in South Africa. On the one hand, there are those arguing for “gazelles” – innovators – to be the centre of policy, as they have the potential to be large employers and wealth creators, but we never identify who these potential gazelles are and what would lead to their proliferation.
On the other hand, the mantra of creating “one million small businesses” refers only to government policies that hinder small business, and not to actual market conditions.
We simply have not moved beyond high-level policy statements to developing the strategies that we need as a nation. We are expert cheerleaders for the Little Guy in the economy, but we have not moved to tangible products and services on a scale that will have an impact. In this environment, neither the pizza maker nor the chemical engineer is likely to benefit.
Bill Aulet, one of the co-authors of the paper, provides important advice on understanding the different challenges entrepreneurs face in terms of funding, growth potential, risk levels and other needs.
This is an incredibly useful starting point in South Africa, where generalisations about red tape compete with generalisations about oligopolies. In fact, it might be truer to state that we should be tackling both red tape and highly concentrated markets. But, again, these are such high-level policy statements (often with credible evidence) that they miss the fact that entrepreneurs in South Africa have different needs.
The pizza maker will have to navigate the municipal regulations on the preparation of food, a complicated system of human resources legislation and an opaque system of government funding. But, she will also have to purchase flour in a market that is dominated by large companies, and where small millers are unable to readily ship product to market.
One option for the business would be to go the artisanal route, but it would be difficult to do brisk business given the demand for artisanal foods.
The chemical engineer with the new processes for developing solar panels has similar challenges. Government regulations on inventions in universities seem too state-centric and the cost of prototyping is extremely expensive, and the venture capital system in South Africa underdeveloped. Moreover, there are the challenges of selling the process, and patents to bigger companies might be limited due to an investment stance that does not value early-stage development, or selling the product to construction companies may not be immediately open due to difficulty in marketing an unknown product.
There are pizza makers and chemical engineers who will have the nous and tenacity to navigate each of these challenges. However, not nearly enough of either type makes it through this demanding process. South Africa has one of the lowest rates of established businesses in the world.
A starting point to improving the prospects of success is recognising the different steps required to support more traditional small businesses and innovation-driven businesses.
This article  first appeared in the Sunday Times: Business Time on the 22 March 2015. 

Local success need not be an alien concept

ENTREPRENEURS can learn a lot just from visiting and trading with other businesses and so can those making public policy.
But this critical street-level perspective is missing with government officials in the wake of recent attacks on foreign-owned spaza shops, seemingly unable to explain whether foreign-owned shops are super profitable, if they pay taxes and whether they should be formalised.
I recently went to a foreign-owned spaza shop in Yeoville, Johannesburg. The shop owner willingly sold me a soft drink, but was reluctant to share stories.
Yet even a quick glance around the shop was revealing. A machine dispensed prepaid electricity and airtime. Items of fresh produce were sold individually, as were pieces of chicken. Advanced payment systems for certain services sat cheek-by-jowl with the traditional method of selling single servings.
The setup reminded me of tactics outlined by CK Prahalad in his book The Fortune at the Bottom of the Pyramid.
Another example: on a Sunday afternoon, we needed to repair a school uniform — which was no problem, because we had a choice of about a dozen tailors in Fordsburg.
After a couple of quick quotes and the compulsory haggling, we had a repair completed professionally and within half an hour. The business we chose had one person dealing with customers and two tailors working through a large number of garments.
This business intrigued me. Three people employed in a small shop, with neat fittings, the requisite equipment and doing a brisk trade.
It is the type of business envisaged by the National Development Plan, which sees lower-skilled service businesses as employment generators. The tailors would not take kindly to being described as such — indeed, they could probably produce a bespoke suit — but their niche is for repairs done inexpensively and for day-to-day women’s outfits. If you wanted a bespoke suit, you would find a specialist around the corner, and next to him someone displaying his summer collection of evening wear for women.
Crucially, these tailoring businesses are thriving, despite the enormous job losses in the clothing and textile industries and tough negotiations on a minimum wage in the sector.
These ventures raise questions —  significant policy questions —  especially if the number of such businesses can be increased to reduce unemployment.
In townships, besides collective buying and the selling of single servings and prepaid technology, an important service is the provision of credit, often interest free.
For some it is about practising the Islamic prohibition on charging interest, but more generally it is a time-honoured way of doing business.
This practice is supported by monthly transfers from the state through social grants, remittances and salaries in these communities, and an acceptable default rate on payments.
These informal credit agreements are an important part of operating in South Africa’s townships.
One could get wrapped up in the seeming exceptionalism of foreign-owned stores, but the Gauteng City-Region Observatory has revealed that the majority of informal businesses in Gauteng are owned by South Africans. And success is not foreign to them.
Moreover, one should remember that, for a range of reasons, many foreign-owned businesses are not fully formal. But the kneejerk response to formalise them must be questioned. The Sustainable Livelihoods Foundation argues for a two-pronged strategy: formalising larger businesses and allowing microenterprises to remain informal.
This could be an optimal strategy for our government and is a policy recommendation worth considering.
Around the world, governments are encouraging immigrant entrepreneurs. The education and entrepreneurship Kauffman Foundation recently offered guidance to national, state and local governments in the US on attracting talented expats, specifically in the technology sector. And a “start-up visa” to support the relocation of businesses is already available to entrepreneurs in Chile, France and Canada, with other countries adopting similar strategies.
The common refrain in South Africa is that immigrant entre-preneurs are only involved in retail, so do not bring anything “new to the table”.
But these entrepreneurs are also involved in light manufacturing, making products such as washing powder, sweets and mattresses.
Often they are importing technologies and processes developed in other countries to serve poorer consumers. These experiences in manufacturing are an important area of study, especially because the government has a commitment to creating 1000 black industrialists.
The attacks on foreign-owned shops in Gauteng are clearly xenophobic. Underlying them are assumptions about the profitability of foreign-owned businesses and a sense that the economy does not offer locals any opportunities. But aspirant entrepreneurs can learn by observing successful businesses owned by South Africans and immigrants.
This would be enhanced by addressing the root causes of violent protest: resilient and high levels of inequality in wealth and opportunity in South Africa.
In addressing this underlying challenge, better public policy will be developed from us all having more of a street level perspective.
This article first appeared in the Sunday Times: Business Times on the 8 February 2015.

SA’s phantom ‘efficient laager’ skews thinking

THE “efficient laager” is my description of big business’s role in South Africa’s discussions on economic policy.
The central feature of this hypothesis is that it defines business — particular big business — as a bastion of efficiency, neglecting to tackle the core questions of economic concentration.
The stance is insulated and defensive. You and I are probably not welcome in this laager.
About 60 business leaders were polled on their perceptions of the South African economy for the World Competitiveness Report, and substantiate the dominance of the “efficient laager” mentality. Two responses in particular highlight a worrying perspective among business leaders.
First, respondents were asked about the intensity of local competition. The respondents rated South Africa at 36 out of 144 countries. In other words, in this perspective South Africa’s market economy is seen as competitive by international standards. However, according to the Global Entrepreneurship Monitor, the established business ownership rate is only at 2.5% -among the lowest in the world — which hardly suggests a high level of local competition.
Second, respondents were asked about value chain breadth, with a lower ranking suggesting that companies are not involved across the entire value chain. Respondents to the survey ranked South Africa 68 out of the 144 countries surveyed. Yet the South African economy is highly concentrated as cases presented to the Competition Commission have shown over the years.
Industries as diverse as steel and bread all reflect a highly concentrated ownership structures. Importantly, the price structure and dominance of value chains by very large companies is one of the biggest challenges we face in democratising the economy. Again, the perception of respondents can be questioned as much higher entrepreneurship rates are evident in countries ranked much lower on this measure than South Africa.
If the private sector is seen as excellent by respondents, the government is viewed as completely bad.
Let us be clear, the public service in South Africa requires extensive reform to combat rising patronage. The interpretation by private sector analysts is, however, hysterical, and offers scant solutions.
Two examples show this. First is the hyperbolic comparison. At a recent event hosted by the Wits School of Governance, a leading private sector commentator argued that “children under the Taliban receive a better education than children in South Africa”. It is pure sensationalism, partly because the Taliban does not rule Afghanistan. The fact-checking website Africa Check and academic Nic Spaull show that business leaders have a much more negative perception of our education system than international benchmark data supports.
The second common warning is that South Africa risks becoming a “failed state”.
Let us be clear again, the worrying signs of rising patronage must be countered.
However, it is not merely a problem for the government; it resides in the large companies. Listed companies on the JSE that have participated in black economic empowerment transactions invariably do deals, not with smaller companies in their sectors, but rather with companies that have strong political connections.
This is part and parcel of the worrying system of patronage emerging in South Africa. Patronage politics resides inside the largesse of the government, but also is deeply rooted in South Africa’s private sector.
The creation of this phantom “efficient laager” has huge implications. It reflects the duality of income and asset holdings in our society, with the so-called top 1% not merely disconnecting, but taking up a posture that paralyses them.
After all, if all the problems reside in the government, there is little a senior executive can do, except bemoan the rise of the patronage politics and premise investment decisions on this perception of South Africa.
Every so often, some business leaders offer a welcome counter perspective, showing that a more realistic assessment of South Africa and its challenges is possible. These voices are, however, in the minority.
Consequently, a dominant discourse is entrenching itself and big businesses are retreating further into a set of orthodox positions based on conservative perspective of market based reforms.
It venerates economic growth and deregulation, without tackling questions of equity. It hysterically criticises patronage, while participating in it.
A further retreat into what I am calling the “efficient laager hypothesis” would not merely widen the gap between the government and business, but would also reframe the debate in ways that take us further away from solutions. Smaller businesses should take note, because they should not join the chorus of big business, but rather challenge this perspective.
This article was first published in Sunday Times: Business Times

One large business vs. 1000 little ones

Possibly, the most important question in public policy is “who benefits”.
In answering this question, not only can distributional outcomes be assessed, but often the underlying power structures. The recent reporting on the Public Investment Commission investing R1.5 billion of government employee pension funds in CAMAC Energy raises just this question: “Who benefits”.
Three features of CAMAC Energy are important. First, the company has several investments across the African continent, mostly in oil and mining. Second, it is regarded as a high risk penny stock in New York. In fact, reports show that the first tranche of PIC investment staved off its liquidation. Third, the owner of CAMAC Energy is described as well-connected to political leaders, including those in South Africa.
Now, imagine if the PIC decided to spend this money on businesses in South Africa. For arguments sake, let‘s remove the question of patronage from the equation. The exercise is to explore the possibilities of spending R1.5 billion on venture capital for smaller businesses.
The simplest option would be to divide the total into equal stakes of R 1.5 million each given to one thousand small businesses in South Africa. Assuming that each of these businesses employ the founder and create an additional two jobs, this would yield 3000 jobs. However, we know that business failure is high, so something in the region of 1500 jobs could have been created. More to the point, even in a pessimistic scenario 500 new businesses would be created, with substantial impact on the asset holdings of the owner and her family. The broader social good would be served not only with broadening ownership, but also with small impacts on economic growth.
Another option would be to limit the selection of companies for venture capital to those working with successful franchises or incubators. The investments decision are more cautious aiming to scale currently successful experiments. The number of jobs could easily reach between 5000 and 10000 new jobs, assuming that small successful franchises runs two shifts a day.
The possibilities are however even wider. In one of the tech incubators, a company is conjuring up an open source solution to a problem facing businesses, and in so doing establishes in addition to the software cloud services. This company supports the businesses of 200 South African companies, who provide extensions and maintenance around the software that has been created. The impact on direct and indirect jobs would multiply quickly, and a guess of around 10 000 jobs would be plausible. This is not as farfetched as it seems, as research suggests that South Africa could create 145 000 jobs from cloud computing.
A more adventurous option of matching funding would expand the funds available and test the plans of entrepreneurs. Entrepreneurs would be required to receive matching funding to access government funds. This is common today in American cities. Entrepreneurs would proposition venture capitalists, banks and invest their own cash to access government funding. The total available funds would now be R 3 billion, and the potential gains for economic growth and employment much greater. More importantly, the small number of angel investors could grow rapidly, thus supporting an ecosystem for entrepreneurs seeking smaller sums of equity investment.
The mind could run wild with possible options. For instance, imagine investing R 500 million into manufacturing companies in the “East Rand”, to support the Ekhurhuleni initiative to create a aerotropolis. Or investing R 200 million into the burgeoning tech sectors in Johannesburg and Cape Town. Or, investing in logistics to support smallholder farmers to bring goods to market.
The possibilities are in fact endless, and in each of these policy options the distributional impacts on opportunities, jobs and economic growth would be greater than investing in CAMAC Energy.
These proposals should not be construed as suggesting that all pension funds start investing in risky startup activity, or that the success of any of the ideas mentioned here is guaranteed. Rather these ideas are meant to show in the world of investment opportunities, spending R 1.5 billion on a single company raises substantive questions. This is especially true given that the investment in Camac is comparable in size to investments in agencies like the Jobs Fund and the National Empowerment Fund, which have larger mandates.
In answering the question “who benefits”, it is certainly not small business. The ANC has in its explanation of the term “radical economic transformation” argued that it means amongst other things, an expansion of economic opportunity and equal ownership of assets. It is a certainty that this agenda is not aligned with an investment of R1.5 billion in CAMAC Energy.
The investment in Camac begins to shed light on the underlying power structures that guide investment decisions. However, the important conclusion is that we have prioritised one opportunity with limited gains for our society, over possibly starting one thousand small businesses.
An edited version of this article first appeared in the Sunday Times : Business Times