Start-ups are not creating enough jobs, says survey

Start-ups are not creating enough jobs, says survey

Jul 5, 2016

South Africa is putting a lot of time and resources into entrepreneurship (as recently as May, government and big business announced a R1,5-billion entrepreneurial fund), but the country’s start-ups aren’t producing anywhere near the number of jobs they should be.

That’s one of the more worrying finds from a new survey conducted Seed Academy, which also shows that while South African entrepreneurs are generally optimistic, they have a long way to go when it comes to showing real growth and reflecting the demographics of the country as a whole.

According to a press release sent to Ventureburn, the 2016 start-up survey polled more than 1 500 entrepreneurs and built on the benchmarks established in 2015 when Seed Academy conducted the first start-up survey to get a picture of the challenges start-ups face and the support they need to increase success rates.

The majority of entrepreneurs reported starting businesses in the Information Technology (22%), Creative (12%), Wholesale and Retail (9%) or Social and Community Services (9%) sectors. Mining and Automotive were amongst the least popular sectors for aspiring entrepreneurs.

The job issue
Given that a large reason for the government-incentivised start-up fund and a number of other initiatives are focused on job creation, the survey’s stats on that front are particularly worrying.

According to the survey, only four percent of entrepreneurs surveyed employ more than 10 staff and as many as 38% of start-up entrepreneurs do not employ anyone at all.

“Job creation should be a key outcome of entrepreneurial activity, yet a large portion of our entrepreneurs have no employees,” says Seed Academy CEO Donna Richardson.

Number of employees
That’s worrying, not just for job creation in South Africa, but for the future of entrepreneurship. As Ventureburn’s own 2015 start-up survey revealed, people who work for start-ups tend to be entrepreneurial themselves and are therefore likely to be part of the next wave of entrepreneurs.

A question of revenues
Then again, it’s difficult to bring on staff when you’re not bringing in money and things don’t look great on that front either. According to the survey, nearly half of start-ups (47.5%) bring in less than R100 000 per annum.

What is particularly worrying to Rachelson is how long entrepreneurs are taking to gain traction. According to the survey there are a large percentage of businesses which have been around for more than five years, but which are still pre-revenue. “I think that’s very concerning,” she told Ventureburn in an interview.

There aren’t too many big success stories either. According to the survey, only 4.5% of start-ups make more than R5-million in annual revenue.

According to Rachelson, one possible reason for those low revenue numbers is that large portions of South African entrepreneurs try to build their businesses while still in permanent employment.

The quest for funding

While that’s never a great option — it’s difficult to build a business when your mind’s on other things — there’s a case to be made that these entrepreneurs are staying in their current jobs out of necessity.

Backing this up is the fact that, together with access to markets, funding remains a major source of concern for most South African entrepreneurs. As many as 85% of the start-ups surveyed are self-funded, with the next biggest source of funding being friends and family. Banks, development finance institutions (DFIs), and angel investors each accounted for just two percent of start-up funding.

According to Rachelson, that isn’t necessarily down to a lack of available funding, so much as a lack of education among entrepreneurs when it comes to applying for funding. This, she says, is especially so when it comes to DFIs.

Applying for funding from these institutions, Rachelson told us, “is not an easy process[…]people eventually just give up”.

Resilience in the face of harsh challenges

Despite those challenges, the survey shows that there are reasons to be optimistic.

The survey shows a slight increase in the age of the businesses from the 2015 edition. According to Rachelson, this shows that South African entrepreneurs are willing to stick it out during tough times.

Interestingly, most of the longest-running start-ups who participated in the survey were founded by people with “real world” work experience. This may suggest that the country should be doing more to encourage working people to start their own businesses.

“While the percentage increase in the age of the businesses is small, the fact it is increasing is a step in the right direction,” says Rachelson. “Our entrepreneurs are resilient. They are primarily working from home and funding themselves with small amounts of capital while facing the well-known challenges of finding customers and raising finance”.

Another cause for celebration is the optimism of the entrepreneurs themselves.

Entrepreneur optimism
That said, there is still plenty that needs to change in the South African entrepreneurial space.

“My honest view is that we’re not doing enough,” Rachelosn told us.

Female entrepreneurs, for instance remain in the minority, with just 31% of start-ups having female founders. It’s also clear that that the ethnic footprint of entrepreneurs does not mirror SA’s demographics with black start-up entrepreneurs underrepresented.

Ethnicity
In order to make those changes, says Rachelson, there needs to be a sea-change in the country’s approach to entrepreneurship. Apart from the usual advice such as making failure more acceptable, Rachelson suggests that we need to find a way of “instilling the values of entrepreneurship at a very young age”.

That can be done at school, but there other opportunities too. “We need to take a holistic view of entrepreneurship,” Rachelson told Ventureburn.

“With 50% of SA’s youth (aged 15-24) currently unemployed, there is a dire shortage of opportunities for them to gain work experience,” says Rachelson. “Innovative ways to provide our young people with work experience need to be found. To develop skills and business acumen, we should be considering interventions such as entrepreneur shadowing or on-the-job training at an SME”.

Further up the line, Rachelson believes that more South African entrepreneurs could stand to learn the value of a team, especially given that the majority of entrepreneurs (59%) are the sole founders of their business.

Moreover, she believes that South African entrepreneurs need to change their mindsets when it comes to scaling their businesses.

“I don’t think our entrepreneurs are thinking big enough,” she told us.

By Stuart Thomas for www.ventureburn.com