This article was published in the 31-July-2014 issue of Finweek Magazine

It is widely believed that koi and goldfish can only grow as large as the enclosure they are in. Some grow big and others stay small, it’s all about the size of the pond or bowl.

This got me thinking about businesses in South Africa and the constraints posed by our environment here. Your business can only grow as big as the environment it is in. So if you want to scale, can you do it from South Africa?

There are a lot of advantages to starting a business here. A few come to mind:

1. South Africa holds the crystal ball on worldwide trends. SA tends to lag behind first-world countries in adoption of certain trends and technologies. For example, daily deal sites like Groupon, online shopping platforms like eBay, and online music stores like Apple iTunes were well-established overseas before coming to South Africa. The iTunes Store launched in South Africa in 2012, some 9 years after Apple launched its iTunes Store in 2003 in the US. This lag-time means South Africa holds a crystal ball on global trends and the businesses that arise from them. We can see what trends are happening in first world countries before they happen in South Africa. This creates an ideal opportunity for first-mover advantage here. Why? Because we can start local businesses based on established overseas trends, before these trends become established in SA.
2. Big fish, little pond. Because we have a smaller population than countries like the US, it is a lot easier and quicker to reach the top of your game and to become well-known in your field in SA. This is particularly true in smaller industries. Go to the US, and it is much more difficult to make your mark. There are simply too many people, and chances are you’ll be a very small fish in a very large lake for a long time.
3. In your home country, you’re familiar with the culture and the people, know where to find resources, and have built your business and support networks here. This means it is often easier to build relationships with clients and customers. South Africans also like dealing with South African businesses. In fact, knowledge about local resources provides a huge advantage over global companies that decide to set up shop in South Africa.
4. Local very often has technological advantages. If an organisation wants a solution customised specifically for them, a South African business that has built its technology locally will probably do that for them. A large overseas company is less likely to do this. Template-driven solutions and standardised packages tend to be the norm with many large, established companies outside of SA. However, this could also be a function of size. A sizeable South African company would be less likely to customise their offerings for customers. On the other hand, a small South African start-up has fewer customers and less revenue, so will often bend over backwards to get new paying customers, even if it means reinventing their current offerings.

 

But there are also a lot of disadvantages to starting a business here. Here are only a few:

1. Based on 2013 data from Stats SA, South Africa has a population of 52.98m people. Compare that to the US with 316m people (according to the US Census Bureau’s stats for July-2013). This means there are far more potential customers for your business in the US than in SA, especially if you’re in a niche market. South African Internet entrepreneur Vinny Lingham founded Yola, a US-based Internet start-up that provides free website building. In Vinny’s view, to truly scale a business that relies on members for its success, you cannot do it from South Africa. This was a major factor in Lingham’s decision to position Yola in Silicon Valley in the US. According to their blog, Yola has over 9 million users nowadays. To get 9 million members in South Africa, Yola would need to sign up 17% of our population. That’s more than the total pool of people in South Africa with Internet access (12% or 6.18m people, based on Arthur Goldstuck’s interpretation of the Stats SA General Household Survey 2013), of which only a small fraction would realistically build their own website! This isn’t to say you cannot scale a world-class business from South Africa. After all, SAB Miller did it. It’s just not for the fainthearted.
2. Fewer people means a smaller talent pool to draw from. In fields like IT, hi-tech and engineering hit hard by skills shortages, there are a limited number of highly experienced, quality people to recruit. Following the basic principles of supply and demand, the A-players can charge more because there are fewer in the pot.
3. Although this is improving, the Internet is slower and more expensive in SA than in first-world countries like the US and the UK. This makes it harder and less profitable to globalise a business from South Africa.
4. Our suffocating labour laws make it very difficult to hire good people and to fire those who don’t deliver. This issue was dealt with in depth in a previous Finweek article entitled “Is SA labour law killing entrepreneurship?” In South Africa it is too risky, difficult and costly for companies to hire and fire people. Our dismissal requirements are expensive and inflexible, and small businesses cannot afford the high costs of making hiring mistakes. Together with uncompetitive minimum wages, these issues discourage businesses from bringing on more workers. What impact does this have on our ability to globalise? In order to scale a business, entrepreneurs need to bring on good people. If a new hire doesn’t perform, entrepreneurs have to be able to get rid of them easily, and to recruit new people who do deliver. Sadly, South Africa’s labour laws make it very difficult to do this.

 

Bearing these issues in mind, if you want to scale, realistically can you do it from South Africa? It all comes down to your priorities and the industry you’re in. If we can just get the basics right, the pros of doing business in SA can outweigh the cons, making this country a fantastic place to start your business.