Africa’s first-generation entrepreneurs struggle to succeed

What you need to know:

Africans are, to a large extent, just forming businesses which handled well will register as having stood the test of time, in the future.

In 2014, CNN published a list of 10 countries with the highest percentage of adults who were either starting a business or had run it for less than three and a half years. Five of these top countries were in Africa. In fact, they were six in number with Nigeria and Zambia tying in the same position and being counted as one. This is great for Africa, especially when the continent’s population is growing significantly and unemployment is a challenge.
Also, the most prominent African business brands were born in recent decades, unlike cases of the western world and Asia which have brands that date centuries ago. Africans are, to a large extent, just forming businesses which handled well will register as having stood the test of time, in the future. As of today, many of the entrepreneurs on the continent are building their enterprises on virgin ground. This is a situation of hope and is as pleasing as it is challenging.
Research has indicated that risk-taking, which is the gist of entrepreneurship, is mostly influenced by environmental factors, as opposed to the somewhat popular belief that there is an “entrepreneurship gene” that drives risk-taking and tolerance. Relevant indicators of this were corroborated by research conducted by University of California and National Bureau of Economic Research, Cambridge, between 2013 and 2015. Individuals who had the basics of life assured by strong financial family backgrounds were the most likely to choose the path of entrepreneurship. A lot of businesses are therefore a result of the comfort of a safety net that promoters enjoy from a foundation of an already existing wealth base. Indeed some entrepreneurs even thrive on an extension of family businesses to build their own. Others inherit already existing businesses and build them into better brands than they received from their benefactors.
These advantages do not exist for a typical African entrepreneur, starting out. Many of them are the first generation in their families to venture into the business field. They therefore lack the benefit of experience and will most likely be trying out a lot, for the first time. More challenging still is the fact there may not be any chance of bailout by their families, in case of financial challenges, since many families do not have the capacity to provide a fall-back position. It is actually common that the individuals that step out into entrepreneurship are the most financially liberated in their families, even with their own financial constraints. Consequently, if such young entrepreneurs meet with financial difficulties in the infancy of their ventures, chances of total failure are significant.
These first-generation entrepreneurs also face huge challenges in raising capital. Data from the Global Entrepreneurship Monitor indicates that 80 per cent of funding for new businesses comes from personal savings, friends and family. As already indicated, this capital sourcing arrangement is compromised by poverty in the African context and not many have the network of family and friends that can facilitate their business dreams. This leaves mainly personal savings as the commonest option with which to commence business. It also introduces the necessity of looking to borrowing as a source of business start-up capital. However, with high unemployment rates, the opportunity to work and put aside savings to begin businesses is not viable for many. The International Labor Organization projects that youth unemployment for Africa will hit the 30 per cent mark in 2019; this is a significant constraint to accumulating savings.
Worse still, such individuals that are merely starting out in business are often unable to raise capital through loans from banks. Banks are always hesitant to lend to start-ups due to the uncertainties involved and high chances of default on relevant loans. A lot of the time, these individuals also lack admissible collateral to secure loans that banks would avail to them. Also, some credit risk scoring models for lender banks unlikely to prioritize very young individuals for lending purposes and are mainly inclined to avail credit to people aged 36 to 50 years in preference, again for reasons of minimizing loan default rate. By 2014, 15 per cent of the population was aged between 19 and 35 years, implying that there is a significant age constraint in accessing credit from mainstream lenders.
It is for reasons above that African governments have to shoulder the burden of offering enhanced social-economic support to young entrepreneurs on the continent. Some of the countries have indeed devised measures that are specifically focused on youth capital access, business management skilling and other relevant aspects. These are vital initiatives for the continent.
Raymond is a Chartered Risk Analyst and risk management consultant
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