Entrepreneurship may have much to offer SA, but it requires a health warning
As someone who is a strong proponent of entrepreneurship as a tool for economic development, arguing that glamorising entrepreneurship is a problem may, on the face of it, seem a little hypocritical. But I believe SA has developed a culture around entrepreneurship that is, in a sense, “false advertising”. The warning label is missing. It is widely accepted that 96% of new businesses fail within a 10-year period the world over. That is staggering statistic and not one that can be easily glossed over. How many kids would enlist in the army if you told them only four out of 100 would come back alive?
I believe prospective entrepreneurs should know what the real risks are when starting a business. If, as the government, you view entrepreneurship as the “medicine” to treat high unemployment, slow economic growth and a lack of wealth creation, surely it should come with a warning label like any other “medicine”? Such a warning might read: “Starting your own business will likely lead to loss of money; loss of family; loss of friends; loss of fun; and loss of confidence.” And it should most probably also state that there is only a 4% chance of the “medicine” working!
First, let us unpack the concept of failure as it relates to entrepreneurship. We need to define whether we’re talking about the failure of the entrepreneur or the failure of the business. Unfortunately, the general view is that, if an endeavour we have started shuts down and ceases to be, we have failed. While it’s true that businesses do fail, it is also true that entrepreneurs can come back and try again. Entrepreneurs who come back and try again cannot be deemed to be failures. Remember, provided an entrepreneur makes use of the lessons learnt, the networks created and the skills acquired during a failed business venture, her second endeavour will have a much higher likelihood of success.
But, when entrepreneurs try and fail and do not try again, that — to me — is the worst outcome. All that effort, money and time become fruitless and wasted. In my view, the real indicator to watch here is not the failure rate of businesses but the re-entry rate of entrepreneurs post the failure of a business.
A few years ago, I read a research paper that compared various countries’ entrepreneurial re-entry rates. In SA the rate was slightly more than one times, while in the US it was in the region of three-and-a-half times. This means that the average South African “entrepreneur” tries entrepreneurship only once and then stops trying, and the average American tries again at least two-and-a-half times after the first failure. I believe that two of the largest contributors to SA’s low entrepreneurial re-entry rate are culture and character.
There is a widely known fable of the young American entrepreneur who goes to a would-be investor for money. The investor asks the entrepreneur how many times he has failed, to which the entrepreneur replies, “Never, sir.” The investor responds, “Son, go and fail three times and then come back to me.” The South African version of the same story has the entrepreneur going to the investor to raise money. The investor asks, “How many times have you failed?” The entrepreneur responds that she has failed three times, to which the investor says, “Thank you for calling on me. We’ll be in touch.”
In a culture that shames failure in entrepreneurship, in a banking environment that structurally impedes entrepreneurs with prior failures to raise funding, in a community environment where failure is frowned upon and where negative gossip prevails, it is no wonder we have such a low re-entry rate.
Let’s also not forget the incredibly destructive myth that a good business plan accompanied by a good dose of funding (and, in SA, preferably grant funding) is the panacea to creating a vibrant start-up economy. The evidence does not support this delusion. When entrepreneurs are seen as two-minute noodles that can be processed on a weekend course — transforming them from unemployed youth on Friday to start-up entrepreneurs on Monday — it should come as no surprise that there is little evidence of success and, more importantly, no understanding of the deep damage to the entrepreneur’s self-confidence that this can create. Two-minute noodle “entrepreneurs” who have “failed” after becoming an “entrepreneur” are, in my experience, far less likely to start another business.
We also need to realise not everyone is an entrepreneur right now, and not everyone is an entrepreneur by choice. The Global Entrepreneurship Monitor (GEM) monitors the total early-stage entrepreneurial activity (TEA) rate, in first-world and emerging populations. First World countries are generally characterised by low TEA rates of 1%-2% of the population. Emerging economies tend to have a much larger TEA rate of 5%-20%. This type of economy is likely to have a disproportionate number of “necessity entrepreneurs” who, if given the opportunity for formal employment, would take it in a heartbeat.
In my experience, entrepreneurs are developed in the right conditions and life circumstances. It is the government’s role to create an environment of opportunities and a tolerance of risk, as well as a culture that allows the entrepreneurial development of those with the right life circumstances, those with the ability to take risks, those with the ability to withstand pain, and those who believe they can muster the necessary resources.
You cannot create entrepreneurs in a weekend course, as so many are trying to do.
The saddest side-effect of glamorising entrepreneurship is that, when people are led to believe funding and a good business plan or a weekend course will lead to quick success, they are unprepared for the reality of the journey: hard work, ups and downs, and perseverance.
By destroying confidence, we are destroying capital. We must stop spreading the false mythology that business plans and funding are the elixir to success.