Risk vs Reward – the future of doing business in South Africa
By now it is no secret. People have spoken about the fork in the road that we as a country find ourselves at, as well as the knife’s edge on which our young democracy is balancing. There is no doubt that now will go down as a pivotal time in South Africa’s history.
Economically, our environment is tough. Slow if not stagnant growth is not creating the jobs, wealth and economic opportunities that our people demand. Intense poverty and inequality is causing crises like Fees Must Fall, strikes and our high levels of crime. Politically, we find ourselves in one of the worst states that we have ever been in. A massive leadership chasm and severe corruption among the political elite leave us with our hands in our hair daily.
Unfortunately, the international investment community does not care much for excuses. The probability of a downgrade to junk status is already being partially priced into the market, with political power struggles adding oil to the fire. A presidential budget speech and a finance ministry willing to stand up for our country goes a long way, but might not be enough to avoid losing our investment level status in December.
The question must then be asked what the future holds for starting and growing businesses in the current chaos and uncertainty. Are there enough opportunities in this market to warrant the risk of building a company and a future here? Let’s look at some of the unique characteristics of RSA from the perspective of an entrepreneur and investor:
Low levels of entrepreneurship leave gaps and opportunities.
South Africans are generally a risk-off nation when it comes to entrepreneurial ventures. The 2015/2016 Global Report from Global Entrepreneurship Monitor ranks South Africans’ perception about good opportunities to start a business as well as their confidence in their skills and capabilities to successfully run a business among the bottom half of the 62 countries surveyed.
This outlook paired with our general fear of failure has unfortunate effects on our levels of entrepreneurship. It does however mean that the gaps and opportunities in the market for those who are willing to take the plunge are bigger than in more entrepreneurially competitive countries.
Huge demand for jobs
With staggering unemployment figures, we have a very long way to go towards providing decent jobs for our whole working population. This oversupply of labour drives the cost of employment down.
Highly skilled, skilled and unskilled labour costs less here when compared to most other countries in the world when converted to Rand. This creates an opportunity for the company that is able to employ locally and compete internationally.
Investment incentives like Section 12J
Section 12 J of the Income Tax Act creates a unique opportunity for tax savings for South Africans who are willing to invest in young companies through a Venture Capital Company (VCC). Investment in such a SARS registered VCC is met with a taxable income deduction of 100% of the value of their investment. In the 41% tax bracket, investors will get R410,000 back in tax savings on every R1m invested. This mechanism has seen 42 Venture Capital Companies registered as at the end of October 2016. Although many of them are not yet trading and most of those that are have not yet raised significant capital, I strongly believe that this incentive will greatly accelerate our young venture capital market and the availability of seed and growth funding available for entrepreneurs on the back of the exciting tax saving offered to investors.
Positioning that can yield growth
Globally we find ourselves in a low growth environment. Listed assets are expensive compared to their current yields, with little room for strong growth projected – especially in established markets. Massive amounts of government level debt is threatening financial stability, adding to the risk of liquid assets at current price levels. Investors need to ask themselves where growth will be found in the next five to ten years.
I believe that this creates a unique value proposition for investment into private companies in Africa. The continent has a massive amount of problems to be solved, with governments that are unable to contribute to solutions. The emergence of new technology and connectivity is enabling new types of businesses and new business models. Not being affected much by what GDP growth, manufacturing data results or the market at large is doing, successful emerging private companies are able to generate returns well beyond that of traditional asset classes.
Yes, these types of investments are subject to higher inherent risk, currency volatility risk and more. But considering that an investment in a company with a similar team, tech, traction and scalability can be made for one tenth of the price that it would cost to invest in the Silicon Valleys of the world, the upside potential is undeniable.
This brings me to the conclusion that we are indeed in hot water, but that there are always good opportunities where market mechanisms are not functioning properly. With access to the right network and by applying sound business and financial management principles, entrepreneurial success can be achieved by those who are able to solve real problems really well. It will never closely resemble an easy journey, but for those with the passion and perseverance to never accept defeat, the rewards will be astronomical. To quote Jimmy Dean (as beautifully spoken by Mozzy in White Collar): “although we cannot change the direction of the wind, we might adjust our sails accordingly”. Happy venturing!
Louw Barnardt CA(SA) is the founder and MD of financial management company Outsourced CFO (www.outsourcedcfo.co.za). His role has seen him named as the youngest entrepreneur on SAICA’s top 35 under 35, the Fast Company top 20 under 30 and the final three for Young Professional of the Year. Outsourced CFO has helped their SME client base raise more than R130m in seed and growth finance from all corners of the world.