start-ups Archives

As a consulting company, with a special focus on economic research and the production of feasibility studies, we often engage and discuss the country’s policy landscape, the direction we should or are taking regarding small businesses and possible interventions that can be delivered by our government to assist small and emerging businesses. Recently, we have seen first-hand the negative impact of Covid-19 on small and emerging businesses, which prompted internal discussions including the importance of having a supportive ecosystem, and what the prominent ecosystems in South Africa (SA) should do to not only support small businesses, but also improve their international rating on being a start-up ecosystem.

Curious and excited, we set out to investigate this phenomenon and in this blog we share our key findings on the subject. Lessons learnt from leading ecosystems, including policy reforms (and other efforts) implemented in support of small businesses, are documented in this blog with a view to start a discussion amongst economists and policy makers on what needs to be done to make our ecosystems more supportive and globally competitive. We start this blog by defining an ecosystem.

What is a start-up ecosystem?

By definition, a start-up ecosystem is a clustering of interconnected individuals, organisations and bodies that facilitates and supports entrepreneurial activity (Mason & Hruskova, n.d.). It is defined as a cluster of start-ups and related entities that draw from a shared pool of resources and generally reside within a 100 kilometre radius of a central point in a particular region (Global Entrepreneurship Network, 2021). The main goal of an ecosystem is to launch and grow start-up companies.

What makes up a supportive start-up ecosystem?

In a quest to answer this question, we visited a number of academic and non-academic articles. In a non-academic article published by Hubbub Labs, there are a number of “key ingredients” listed that an ecosystem must possess in order to strive and be supportive to start-ups. These include the availability of funding, the willingness of funders to invest in start-ups, co-working space, mentorship, willingness of service providers to provide services such as bookkeeping to start-ups, and supportive government agencies. It is argued that the combination of these factors make it easier for start-ups to strive and ultimately scale. In another article entitled “How Startups Can Build Sustainable Ecosystems”, Yann Lechelle argues that it is not just the availability of mentorship, as suggested by Hubbub Labs, that makes up an ecosystem to be supportive and compel start-ups to strive, but also the experience of mentors and willingness of corporate leaders to be part of ecosystem.

He points out that in some ecosystems, entrepreneurs are mentored by inexperienced officials, and as a result, they do not scale. He then suggests that for any ecosystem to be sustainable or supportive, it is crucial to ensure there is profusion of knowledge, experience, capital, a bit of luck and strong business relations with other regions and international markets “access to markets outside your region”.

Don’t we have all these enablers in place as South Africa to be ranked #81 in the 100 emerging ecosystems?

As we investigated this phenomenon, we discovered that a number of strides have been made in SA to create an enabling environment for small and emerging businesses. We noted that the ease of doing business in SA has improved significantly over the years and that the prominent ecosystems such as the Silicon Cape in Cape Town have attracted millions worth of investments from both government and venture capitalists. Funds have been made available for skills development, enterprise development and supplier development. We have even seen investment to support small business from corporations through accelerators and incubators.

What is it that other ecosystems are doing better to be ranked in the top 30 globally and in the top 100 emerging ecosystems? Lesson from leading ecosystems

They excel in providing funding. Governments of the leading ecosystems have continuously made radical policy reforms when it came to supporting start-ups. Because of these radical reforms, leading ecosystems are, and continue to attract large sums of investment. We learnt that governments in the leading ecosystems have stepped in to establish tax incentives for venture capitalists and angel investors, increasing access to finance for start-ups. In the Silicon Valley ecosystem, #1 globally, access to finance is not an impediment because there are about 1000 venture capitalists firms, thriving because of the incentives provided. The government provides tax rebates for venture capitalists or angel investors investing in start-ups with high potential for growth. In Seoul, an ecosystem in South Korea, they host a venture capitalist summit, a platform for start-ups to engage directly with funders (Global Entrepreneurship Network, 2021).
Universities and colleges are not only providing talent but also leading the revolution. A second lesson we learnt was that institutions of higher learning, such as universities, located within the leading ecosystems, are not only providing talent but are an integral part of the ecosystems. We learnt that universities in these ecosystems, through their human resources and labs, are assisting small businesses conduct market research and test their innovative ideas. The university’s staff form part of the mentors in the leading ecosystems and entrepreneurship is embedded in the curriculum. As a consequence, it is interesting to note that in a number of cities, including Philadelphia, university alumni are the founders of the supported start-ups. Alumni from Philadelphia University launched more than 600 companies funded by venture capitalists in the past 10 years. Universities in these leading ecosystems are also pledging funds to support start-ups (Global Entrepreneurship Network, 2021). In February 2021, Drexel University and the Science Center announced the $500,000 to support local underrepresented founders (Global Entrepreneurship Network, 2021).
There is profusion of knowledge. A third lesson, tying to what has been articulated by the serial entrepreneur Yann Lechelle, is that there is abundance of information in the leading ecosystems. The universities and the private sector are playing a leading role in providing knowledge. CEOs and directors of successful companies are mentoring small businesses. For example, in Tokyo, they run a 60 days start-up challenge and a 6 week start-up boot camp featuring intensive workshops and mentorships (Global Entrepreneurship Network, 2021).
There are programmes designed to assist small businesses access international markets and customers outside their regions. One of the key challenges faced by small businesses is access to markets. In these leading ecosystems, small businesses are not only assisted to access local markets but also access international markets and customers outside their regions, hence the high rating on connectedness.
Have opened up to international talent. As we were researching these ecosystems, we also discovered that what makes these leading ecosystems be where they are is the abundance of talent, especially international talent. It is an undeniable fact that, as individual countries, we sometimes lack certain skills or talent, crucial to the success of small businesses or needed to build new industries. In addressing those shortcomings, cities such as Seoul supported entrepreneurs’ move to Seoul and Tokyo, a city in Japan which previously had a policy stance of no foreign talent, also made interesting reforms. In Tokyo, a start-up visa was introduced in National Strategic Special Zones, granting successful applicants a 6-month or 1-year temporary residence permit (Global Entrepreneurship Network, 2021). In 2021, because of these reforms, coupled with others relating to access to finance and markets, Tokyo moved up the ladder and is now ranked as #8 globally with a score of 9 out 10 in talent.

What progress has been registered by the South African ecosystems in relation to the above discussed factors?

As we took a closer look at the prominent South African ecosystems, Silicon Cape in Cape Town, Johannesburg and Durban ecosystems, we noted that although these ecosystems are amongst the top in the African continent, not much progress has been made to address challenges pertaining to start-ups accessing foregin customers, the availability of experienced software engineers (talent), attracting immigrant founders (visa success rate) and the availability of funding.

In 2017, only 14% compared to the global average of 23% were able to access foreign customers in the Cape Town ecosystem, visa success rate sat at 36%, lower than the global average of 60%, and the ecosystem was valued at $172 million, lower than the global median of $4,1 billion (Global Entrepreneurship Network, 2017). In 2021, four years later, Cape Town’s ecosystem has not caught up to the global average of $10,5 billion and it’s only valued at $1,2 billion. Its ranking on access to funding is amongst the lowest in the world (2 out of 10), access to foreign customers has declined since 2017 (rated 1 out 10), and foreign talent rated 5 out 10 (Global Entrepreneurship Network, 2021).

What can be done differently to improve the conditions of the South African ecosystems?

As correctly pointed out by Yann Lechelle, building a healthy ecosystem takes time “Just as soil is enriched by the lifecycle of the many organisms that grow in it, a startup ecosystem is nurtured by the lifecycle of companies within it”. Although this might be true, there are few lessons we can draw from the above discussion that the national and local governments might consider to improve the existing ecosystems.

Provide incentives for venture capitalists investing in small businesses with high growth potential. A section 12J venture capital company (VCC) tax incentive was introduced in South Africa with a sole purpose of incentivising investors. Evidence however, as tabled by the National Treasury during the 2021 budgetary statement, have suggested that the tax incentive was being abused by investors and the objectives were not being achieved. As a result, the National Treasury killed the Section 12J tax breaks for venture capital (Wasserman, 2021). Perhaps instead of abolishing the VCC tax incentive completely, the South African government should consider drawing lessons from the implementation of Section 12J and introduce a refined proposal to incentivise venture capitalists to invest in small businesses with potential. Evidence from leading ecosystems is suggesting that there is a crucial role that venture capitalists can play in this regard. Also, there are initiatives such as the Green Outcome Fund that lessons can be drawn from https://www.greencape.co.za/.
Intensify international and regional market linkage efforts. It is common knowledge that accessing international markets is a process and a half. There is red tape and compliance issues to deal with before accessing international markets. In South Africa, obtaining compliance certificates (such as the SABS approval) is very costly, a cost that small businesses cannot easily bear. Perhaps there is a need for the South African government, through its development agencies, to intensify its efforts to increase access to international markets. Development agencies such as Trade and Investment KwaZulu-Natal (TIKZN) can become more accessible and visible to small businesses.
Fast track and ease the approval of visa applications. For start-ups located in the South African ecosystem to access international talent they desperately need to grow their small businesses, the South African government needs to put some thought into how it can improve its visa application process. The suggestion is not for the complete ease of the process, but rather to identify areas for improvement. The issue of accessing international talent remains a challenge.
Make institutions of higher learning an integral part of ecosystems. The lesson from leading ecosystems is that universities need to play a key role in local ecosystems. Instead of universities and colleges only supplying ecosystems with local talent, perhaps they need to be persuaded to become key players in the ecosystem.
Capitalise on learning from leading ecosystems. One thing the leading ecosystem does well is capitalising on learnings from other ecosystems. They learn what the leading ecosystem does and improve on it.

References

Global Entrepreneurship Network. (2017). Global Startup Ecosystem Report 2017.
Global Entrepreneurship Network. (2021). The Global Startup Ecosystem Report GSER 2021. 2017(2017), 21.
Hubbub Labs. (n.d.). What is a startup ecosystem and how can you build one? https://hubbublabs.com/the-insider/startup-ecosystem/.
Wasserman, H. (2021, 02 24). In a shock move, govt just killed Section 12J tax breaks for venture capital. Retrieved 11 03, 2021, from https://www.businessinsider.co.za/budget-2021-govt-kills-section-12j-that-gave-tax-breaks-for-venture-capital-investments-2021-2

Further Reading:

For indicators on measuring the startup ecosystem in SA and KZN, with particular emphasis on innovation, see our work with Innovate Durban here.

If you are looking for a feasibility study or market demand assessment for your start business, please contact us

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We are regularly approached by start-ups requesting to undertake feasibility studies. This is largely due to the fact that, where start-ups don’t have a proven track record or offtake agreements, funders require evidence of economic and financial viability. In our last blog post, we focussed on understanding what it means to develop a ‘business case’. In this blog, we unpack the different types of economic market research that can be completed to determine economic and financial viability. We have recently developed a package of market research offerings which can be found here – this forms the basis of our discussion below. Essentially, we distinguish economic market research into two types, namely, (a) market demand assessments and (b) feasibility studies, with market demand assessments being one component of a full feasibility study.

What is a market demand assessment?

Market demand assessments are done to provide a detailed understanding of the economic viability of a business idea (i.e. product or service offering). This can be done more simply via a desktop assessment or in slightly more detail through including primary research such as surveys. In a generic market demand assessment, we usually start by undertaking a lean canvas analysis to further define the business model and provide a solid starting point for the market research. Thereafter, the research will define the target market, undertake a demographic and socio-economic profile of the target market, assess current market and industry trends, and do a competitor analysis. Once the market is well understood, these key findings are used to develop a demand model which will quantify current and projected demand for your business idea, such as the potential number of customers or units that could be absorbed by the market.

For example, if you want to start a local manufacturing business, we’d first need to understand what it is exactly that you want to do, then understand the market which you could potentially penetrate, and then quantify the market (i.e. population as an indication of potential customers, income as an indication of spending power, etc). Once this has been done, we’d look at the specific sector and industry in which you intend to operate and assess trends and patterns which will have an impact on your businesses success, and then analyse your competitors, their products, and pricing. Using all this information, we’d then develop a model which utilises assumptions based on the market and industry analysis, and provides projections to say, for example, “in 2022, should you be able to penetrate 5% of the market, there is potential for you to sell 100,000 units per annum”.

What is a feasibility study?

A feasibility study builds on the steps undertaken in a market demand assessment but also includes an institutional and operational assessment and analysis of financial viability. The institutional and operational assessment essentially represents the structure of the entity (legal, shareholding, etc), the HR structure, and business operations, while the financial analysis ties together projected revenue streams with capital and operational expenditure to show profit & loss and break-even. The results of the feasibility study can then be pulled through into a business plan, which will provide funders with strong evidence that the proposed project or business has the potential to succeed. Including off-take agreements can help to build an even stronger case.

What do funders want to see?

A market demand assessment is a great starting point in understanding market potential. However, most funders want to see how this translates into financial viability. We have been told by numerous development financing institutions that the most critical element of any feasibility study is ensuring financial projections are informed by and developed off anticipated demand calculations. So in the example above, showing that you have the potential to sell 100,000 units per annum might not be enough. However, if you can show that this can generate R25,000,000 in sales per annum at a competitive market rate of R25 per unit, and after developing your financial model you can show a reasonable profit margin, you’re likely to catch the attention of funders.

So, why do market research?

In summary, undertaking market research is an important tool in gaining a better understanding of a potential business product, service or even a concept or idea. In the case where you can prove viability through offtake agreements and a solid business plan, you most likely can raise funding without doing any market research. However, in many cases, offtake agreements are difficult or impossible to secure (i.e. when your product is service is targeting customers directly), so market research is important in building a case for funders. A market demand assessment will provide you with solid evidence as to whether or not your business venture has the potential to succeed, giving you an indication of potential customers or sales. However, taking this further into a feasibility study by including the institutional and operational structure and detailed financial analysis (tied to the market demand assessment) can go a long way in securing funding.

Over the past year and a half, we have been regularly engaging with start-up businesses and entrepreneurs from a wide variety of sectors, as well as organisations providing both funding and development support to start-ups. A common challenge faced by most start-ups is access to funding. This is often due to the fact that they do not have a proven track record and are unable to demonstrate that their business idea is viable, and are therefore viewed as ‘high risk’ by funders. This essentially creates a mismatch between funders and start-ups at the critical ‘seed stage’ of development. Understanding this, we specifically engaged with funders to gain some insight into how start-ups can access the funding that is available. What it essentially comes down to is both (a) having a solid business case and (b) being able to prove economic and financial viability.

In this blog we’ll address part a, essentially, understanding the term ‘business case’ and suggestions on how you can build a solid business case. In our next blog post, we’ll focus on part b, which unpacks how to determine market viability and how to leverage this to guide financial projections.

So what is a business case?

Simply put, do you have evidence to back up your idea? We all have ideas, but not all of us know how to step back and objectively assess our ideas to determine whether these will survive in a very competitive start-up environment. A business case is the first step at truly understanding whether an idea is worth pursuing or not, which is critical because it is going to require a lot of time and effort to take your idea through to implementation. A business case can be as simple as a one-page document that presents a clear and concise overview of your project idea and backs this up with some factual data and information. This will provide you with some evidence to start to test initial interest for your project idea.

The difference between a business case, feasibility study and business plan

A business case must not be confused with a feasibility study or a business plan. A feasibility study is usually undertaken after there is enough evidence, through some initial research, to support an idea or project and you can show you have a business case. It digs deeper to understand and assess the market and industry, analyse competitors, and measure potential market demand (i.e. economic viability), which then assists to determine financial viability. A business plan then draws from these critical findings and includes more administrative, institutional and operational requirements, and more accurate financial calculations. We are often contracted to just undertake the economic viability component of a feasibility study (i.e to determine potential market demand) for clients who have an idea and want to both be able to test their business case and have some additional evidence to support launching into a full-scale, and often multi-disciplinary feasibility study. Such specialist studies can be very costly (upwards of R50,000 for a market demand assessment and R100,000 for an economic feasibility study) and as such, start-ups often end up hitting a wall at this point. However, before spending a cent on such studies, you can do some basic research to first determine if you have an idea worth investing in by building a business case.

How to develop a business case

So, what can you do to show that you have a business case? We are huge fans of the lean canvas model and the first thing we do when approached with an idea is put it to the lean canvas test. The approach is to unpack your idea into a one-page template by providing information on the problem, customers, value proposition, solution, channels to customers, revenues and costs, key metrics and the unfair advantage, in that order. The lean canvas will quickly show you if what you have is just an idea or a good idea that has the potential to succeed. Once completed, the outputs can easily be translated into concept/proposal documents and/or a simple pitch deck.

It’s just the start!

Unfortunately, most public sector development finance institutions such as NEF and SEFA will require more detailed market research, and a business case document most likely won’t suffice in leveraging funds. It can, however, be used to leverage initial interest and develop support in undertaking specialist studies. Essentially, it will generate some level of confidence and buy-in and funders might be more likely to recommend you to other small enterprise support agencies, such as SEDA, who will assist you to undertake market research. However, the business case could go a long way to securing private sector investors.

So in summary, if you have a new idea, we would suggest that you take some time to unpack and test your idea and prepare a solid business case before approaching potential partners, investors or funding agencies. This will save you time and money, allow you to stand out above other start-ups, and put you in a better position to leverage support for additional market research.

How to become a leading and supportive start-up ecosystem? Lessons from leading start-up ecosystems