African Governments Must Focus on Entrepreneurs, Not Small Business Owners

South Africa wants to invest about $170 million on its startups. That is good. Most African countries do those rituals: give money to companies as part of assisting them to grow. The problem is that no one goes back to see how these programs have performed, post implementations.  Nigeria’s YouWin has come and gone; I am not sure anyone has a publication on the value created. We have no memory, and that is why we cannot plan effectively since today’s mistakes do not shape tomorrow’s strategies.

Personally, what the governments are doing is fine: we need to find ways to jumpstart companies. My problem is that they are focusing on the wrong entities in these intervention programs: they fund small business owners instead of entrepreneurs.

Finance minister Malusi Gigaba announced at today’s 2018 Budget Speech that the government will set aside R2.1-billion for startups.

“Work is being done to provide crucial funding to innovative small businesses when they need it most,” said Gigaba.

“A fund with an allocation of R2.1-billion over the medium term is being developed between the Departments of Small Businesses and Science and Technology, and benefit small and medium enterprises during the early startup phase.”

That is the problem: African governments are supporting small business owners when entrepreneurs would have done better. They know what they are doing. It it politically better to share $10,000 among ten citizens than to give $10,000 to expand a promising business. The ten people are potential voters. Yes, even the governments do not believe in those jobs creation capabilities. It is all positioning for political gains. Once you get your $1,000, you have gotten your share. The whole grand strategy is stalled.

Foreign development finance institutions (DFI) do not do a favor here: they come up with the outrageous statements that Africans are more “entrepreneurial” than say Americans because we have more “companies” per capita than Americans. They say those to our leaders who delight on them despite the clear ironies. Yes, by the time you visit Oshodi market (Lagos), you can count 10,000 sellers doing what one supermarket in U.S. can use 70 employees to do.  The supermarket is one company; the Oshodi shops are 10,000 companies! Does that make us better? Not really.

But the DFIs are not trying to deceive: they are following the same manual even the U.S. Government uses where it counts Uber, Lyft and barbershop in the same league as newly created companies. Yes, when taking census and you want to know the number of new companies created, a barbershop is counted along with empires like Uber as new companies. What matters is that Uber has one Tax ID and the barbershop has also one Tax ID. It creates confusion when examining how new entities are creating values in economies.

This is the hard part which everyone knows: small businesses do not scale. They are static with largely no scalable advantage. They have huge marginal cost which means that the owner does his or her thing monthly with no change. The woman that sells corn by the road side in Aba (Nigeria) is not an entrepreneur – she is a small business owner. An entrepreneur is someone who has built a scalable business where the fundamentals of the business make it possible that there is no bounded constraint to growth.  Entrepreneurs give us startups, not small businesses.

NB: Startup in this content means going to create something of value with transformational impacts in the market. It is different from small business which could be barbing salon, selling corn along the roads, etc that rarely scales. You do not build such firms without focus.

“A company five years old can still be a startup,” writes Y Combinator accelerator head Paul Graham via email. “Ten [years old] would start to be a stretch.”…

One thing we can all agree on: the key attribute of a startup is its ability to grow. As Graham explains, a startup is a company designed to scale very quickly. It is this focus on growth unconstrained by geography which differentiates startups from small businesses.

Yes,startup has the fluidity and organic element to keep growing. It brings innovation, fixing specific frictions in the market, at SCALE. When a nation has many entrepreneurs, it creates pipelines for jobs. Small business owners rarely change the trajectory of the unemployment because their primary motivation is to create jobs for themselves. Entrepreneurs focus on expanding the world; they hire many people to do so.

So, a government policy when sharing the commonwealth to support firms that focuses on entrepreneurs would produce better results in Africa. That is why my proposition is always to focus on expanding businesses instead of looking at people to start new ones. That is the American model: they pump money into already growing ones with financial incentives in some specific sectors, over looking for people to start new ones. The model reduces the risk for government but it comes at a political high cost – only few would get the money and that could make politicians feel uneasy. Sure, politically, it sounds better that you empowered 10,000 people (most likely to fail) than 10 people (most likely to succeed).

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