A recent research report focusing on the role of entrepreneurs in the South African economy confirms what many writers, including ourselves have been preaching and what leaders any many first world countries have been placing their bets on for long term sustainable growth.
At this point I will resist the urge to have another stab at the banks and their shortsightedness in not seriously supporting and understanding entrepreneurs.
Adam Rabinowitz writes:
Entrepreneurs have a vital role to play in South Africa’s economic growth and development, and our economy has become increasingly dependent on entrepreneurs and small businesses, with the South African informal economy absorbing approximately 25 percent of the country’s labour force. While South Africa is rich in natural resources and has amongst the best financial, communications, energy and transport sectors in Africa, the legacy of colonisation and apartheid has left the country with deep economic imbalances. Unemployment figures released by the government in September 2005 show over 40 percent unemployment, the majority of whom are aged 15 to 24.
New businesses, therefore, are seen as a significant component of the solution to South Africa’s development issues, and entrepreneurs must be wary of the pitfalls that present themselves during the vulnerable start-up stages, in order to meaningfully contribute to the economy. Research undertaken by MBA student Adam Rabinowitz at the University of Pretoria’s Gordon Institute of Business Science (GIBS) shows that start-up businesses must be structured for growth and sustainability. Key decisions such as ensuring access to capital and good analysis of the market and competitors, made well in the formative years, will ensure a higher likelihood of success.
The Ivey Business Journal cautions that entrepreneurs must equip themselves with sufficient decision-making tools in the critical early stages of business development, as only the more viable business opportunities qualify for investment of capital and human resources, and those that are commercialised have a higher chance of survival due to better management.
According to New Venture Creation, the phases of the entrepreneurial process from the time of the initial conceptualisation of the business opportunity to the time that the business has become viable, or failed, can be broken down into four parts.
SCREENING >> CAPITAL FORMATION >> ASSEMBLING RESOURCES >> IMPLEMENTATION
The first phase of any entrepreneurial venture involves testing the business model in the marketplace. Prototypes must be produced and infrastructure developed which require capital, after which the hiring process can begin. Research undertaken by ONSET, a Californian venture capital firm, shows that start-ups which delay the hiring process until the initial experimentation of the business model has stabilised have a much higher likelihood of success.
Entrepreneurs’ motivations vary from a commitment to a project to prestige, a desire to exploit an opportunity, or evading unemployment. In South Africa, the high levels of unemployment have forced many into the latter category. As every venture is influenced by personal experience, business competencies and access to resources, the Harvard Business Review has devised a three-step series of questions for entrepreneurs in order to establish priorities among the array of opportunities and problems they face. This questionnaire ensures that entrepreneurs are clear about their goals, have the right strategy, and are able to execute that strategy. Amongst other considerations, this involves making decisions about the entrepreneur’s lifestyle and business fit.
One of the greatest challenges facing an entrepreneur is managing the uncertainty inherent in trying something new. In order for a venture to work, an entrepreneur must identify a good opportunity, possess the technical skill to develop the service, technology or product, have the business skill required to raise capital, manage day-to-day opportunities, and commercialise the opportunity.
Rabinowitz’s research groups the entrepreneurial process into two categories: idea screening and mobilisation of resources. Idea screening involves assessing the viability of the concept before attempting to raise the capital and organise the resources and operational activities needed to bring the concept to market. Market research and formulation of the business plan occur at this stage. The business plan of a successful start-up will almost always go through one major and several minor changes before stabilising, and entrepreneurs should adapt their business model as they receive feedback and gain experience.
The critical factors for an entrepreneur to consider during the screening process include target market growth rates, timing of market entry, near-term revenue potential, and the impact of the cyclical nature of the industry. Once an entrepreneur has made the decision to utilise an opportunity, resources must be assembled, capital raised, key people sourced, partnerships structured and the organisation established.
The availability of finance will affect the way in which any new enterprise reaches the market, and research has shown that the biggest concern of most entrepreneurs is how they will obtain sufficient capital. To assist in this regard, the Department of Trade and Industry (DTI) launched a fund to offer start-up capital to entrepreneurs in 2005, and also offers several small business development initiatives including the APEX fund for poorer communities, and the Small Medium Enterprise Development Programme.
Structuring a business by selling shares to a venture capital firm to raise capital is costly to the founder; however a higher percentage of venture-backed firms succeed than those without venture capital investment.
Other factors to be taken into account by new businesses are a country’s tax policies and legal framework. Unfortunately South African legislation makes starting up and running a small business arduous, as they must comply with numerous legislative requirements. According to the SBP, legal compliance cost South African business R79bn in 2004.
Should an entrepreneur wish to form a partnership, careful consideration must be given to the choice of partner. The personal relationship must be conducive to a constructive work environment and the partner should have the correct resources and complementary skills needed.
Entrepreneurs require many skills to guide an enterprise to success, including creativity and innovation, strategic management, planning, marketing, commitment, leadership, perseverance, financial, project management, time management, people management, leadership, motivation, delegation, communication and negotiation.
The key to entrepreneurial success is for the entrepreneur to surround himself with quality people while taking ownership of the venture and continually adapting as the venture develops. The Ivey Business Journal highlights four key factors which influence the venture’s chances of surviving beyond the early rapid growth stage as being: financial control, data collection, skill set enhancement and strategic planning.
Every entrepreneur must consider all the factors that will affect the formation of their businesses, and accept that many of the problems highlighted above will affect their ventures in some way. By screening ideas thoroughly and mobilising sufficient resources however, success may well follow.
(This article is taken from the research report of Adam Rabinowitz (MBA 2004/5) of the University of Pretoria’s Gordon Institute of Business Science -
www.imagin8.co.za)
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