Accelerating Entrepreneurship in Africa: Tackling the Challenges of Financing for Entrepreneurs in Africa

 

“ A culture of entrepreneurship is growing in sub Saharan Africa, with indicators related to entrepreneurial motivations at least on par with or higher than global peers. However, despite those positive signs, the business landscape in Sub-Saharan Africa provides a number of challenges that prospective entrepreneurs must transcend. ’’-Malik Fal, Managing Director, Omidyar Network Africa.

 

 

It was Niccolo Machiavelli who defined entrepreneurs, saying” entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage”.

One of such obstacles entrepreneurs encounter in Africa is how to get funds to finance their businesses. The international Finance Corporation estimates that up to 84% of small and medium-sized enterprises (SMEs) in Africa are either un-served or under-served, representing a value gap in credit financing of USD140-170 billion.

The recent research conducted by Omidyar network in partnership with the Monitor Group, is a deep insight into accelerating entrepreneurship in Africa. The focus of the research which was released last week in Lagos, Nigeria at the well attended Accelerating Entrepreneurship in Africa forum is to understand Africa’s challenges to creating opportunity-driven entrepreneurship and then proffering pragmatic solutions to them.

Malik Fal, the Managing Director Omidyar Network Africa, in his introductory speech at the Forum said that despite the positive economic news and encouraging trends that have emerged from Africa over the past decade, the troubling reality remains that the everyday livelihoods of Africans have not kept pace with the macroeconomic growth, and per capita GDP levels on the continent persistently lag behind the rest of the world.

“We submit that entrepreneurship can address this stubborn income gap in Africa if-it is able to evolve beyond its current state of necessity-based informality into one that is vibrant and robust enough to promote sustained economic growth and generate long term, viable livelihoods across the continent’

 

To better understand the state of entrepreneurship in Africa, Omidyar Network launched the Accelerating Entrepreneurship in Africa Initiative in 2012 in partnership with the monitor Group, and together they set out to identify the challenges facing African entrepreneurs and pinpoint the most trenchant barriers that inhibit high- impact entrepreneurship.

While explaining how the research was carried out, Tebogo Skwambane, Global Partner, Monitor Group said that the first phase of the initiative commenced with a survey of 582 entrepreneurs in six sub-saharan African countries: Ethiopia, Ghana, Kenya, Nigeria, South Africa and Tanzania. That survey in turn was augmented by 72 in –depth interviews and then bench marked against 19 global peers.

The survey focused on four critical aspects of entrepreneurial environments.

-Entrepreneurship Assets: Financing, Skills and talent, and infrastructure

-Business support: Government programs and incubation

-Policy Accelerators: Legislation and administrative burdens

-Motivations and mindset: Legitimacy, attitudes, and culture

 

The second phase of the initiative brought together business, government and thought leaders to analyse the survey findings, as well as more closely examine the state of entrepreneurship in Africa. The sessions were held in October 2012 at the inaugural Entrepreneurship in Africa Summit in Accra, Ghana. The summit was convened by Omidyar network in collaboration with the African Leadership Network and the Monitor Group and drew more than 300 relevant leaders from both private and public sectors to participate in a solution-driven dialogue on fostering high-impact entrepreneurship across the continent.

 

This report presents the findings of the entrepreneur survey, the outcomes of the workshops in Accra and the conclusions of the third and final phase of the initiative: The recommended actions needed to accelerate entrepreneurship on the continent.

“We are happy to report that a culture of entrepreneurship is growing in sub Saharan Africa, with indicators related to entrepreneurial motivations at least on par with or higher than global peers. However, despite those positive signs, the business landscape in Sub-Saharan Africa provides a number of challenges that prospective entrepreneurs must transcend. ’’-Malik Fal.

The report shows that the greatest challenge facing entrepreneurs across Africa is the state of entrepreneurial assets in which financing is a major factor. As supply and access to capital are critical to stimulating entrepreneurship and economic growth,there is an insufficient supply of equity capital to start new firms in Africa. The main source of funding for small and growing enterprises are retained earnings, credit cards , loan associations and investments from family and friends.

 

From the report, key discussions around financing businesses in Africa are identified as:

-The cost of capital charged by banks and investors is often high that it impedes the entrepreneur’s profitability. In some cases, banks require 150% of the borrowed amount in collateral, thereby automatically disqualifying many from funding eligibility. Government funding is viewed as difficult to access due to bureaucracy and nepotism.

-Access to finance remains a dilemma. Entrepreneurs often depend on the banks to fund them but banks are not the right channels to fund a startup.

-Communication plays a vital role in accessing funds where many misperceptions and misunderstandings can be mitigated by enhanced communication.

-Limited exit options exists for investments

-Access to market is seen as a greater challenge than access to funding.

-The power of network is critical to shaping an entrepreneurs’ horizon

-Seed financing and angel networks should be more formalized in Africa

-Other sources of funding should be explored

-Preparedness for funding is also key.

 

Recommendations for financing enterprises in Africa

1. For early stage enterprise financing in Africa:

-Reduce bureaucracy for early-stage companies to access government funding in order to provide ‘softer’ sources of financing for less-experienced entrepreneurs.

-Expand or initiate local angel investing ecosystems to ensure the availability of the most appropriate type of funding for start-ups, especially for entrepreneurs who lack the network of friends and family that traditionally play this role.

-Provide tax and other incentives to formal, as well as informal (e.g. family and friends), angel investors to make it easier for people who have extra cash to invest in start-up businesses and reduce their risk. For example, in Singapore, investors in start-ups receive tax deductions if the company fails or its shares are sold at a loss, and new business receive tax exemptions for three years.

-Provide tax and other incentives for large clients of early-stage ventures to provide supplier credit to incentivize and reduce the risks suppliers take when providing generous payment terms and /or stock to new ventures, In south Africa, for instance, large businesses get Black Economic Empowerment procurement points by supporting small black-owned businesses on favorable terms.

-Educate entrepreneurs about possible sources of funding outside banking systems. Leverage website portals and other types of guides so local entrepreneurs have a quick view of various sources of funding available in their locality.

-Train and assist early-stage entrepreneurs in the intricacies of capital-raising. When necessary, extend the training to general business management so that fund seekers understand the language and requirements of fund providers and become better prepared for their fundraising searches.

-Train the local financial community to evaluate investment opportunities on the basis of future prospects rather than historical cash flows. This will help ensure that people working at financing institutions are better able to evaluate business prospects and risks inherent to the new ventures they are asked to evaluate.

2. For mid-sized enterprise financing in Africa

-Leverage indirect personal sources of funding, such as pension funds to fund SMEs, so that more resources are available to fund more established enterprises where the risks are lower. In Singapore for example, foreign pension funds are a growing source of capital investment, in the United States, pension funds are the leading source of venture capital for minority owned firms.

-Expand or initiate local venture capital investing ecosystems to ensure that the most appropriate source of funding is available for companies at the mid-level stage of development.

-Use local banking systems to disburse donor or government lines of credit to SME’s to reduce prohibitive interest rates and collateral requirements. This approach puts enterprise funding in the hands of commercial bankers who are trained to access risk and evaluate potential but may lack the kinds of soft funds needed to take slightly less-secured credit-equity positions.

-Provide incentives and support to mid-sized SMEs to practice sound financial management and maintain adequate records, including audited statements.

3. For later-stage enterprise financing in Africa

Create capital-raising engagement programmes with leaders of well-established private African enterprises to inform entrepreneurs about the benefits of private equity funding as well as the benefits of listing at local stock exchanges. This will help alleviate the concerns many successful African entrepreneurs have about giving up control of their enterprise brainchild.

-Create continent wide regional champions programmes to facilitate access to capital (both debt and equity)for independently vetted pan-African companies that are expanding across the continent.