Entrepreneurship in Africa: Context and Perspectives 2020024034, 2020024035, 9781138392205, 9781138392212, 9780429402319

Table of contents :
Cover
Half Title
Series Page
Title Page
Copyright Page
Dedication
Contents
List of figures
List of tables
List of contributors
About the authors
Preface
Acknowledgments
PART I: The basics
1. The African environment for entrepreneurship
A history of entrepreneurship in Africa
Scope and types of enterprises
The environment for African entrepreneurs
The political environment
The economic environment
Sociocultural environment
Legal and regulatory environment
Technological environment
Summary
Review questions
2. Theories of entrepreneurship
Why does theory matter?
The first attempts to study entrepreneurship
Defining entrepreneurship
What do we know about entrepreneurship?
The big picture
The big picture—part I—income levels
The big picture—part II—economic structure
The big picture—part III—institutions
The big picture—a coda—change
The mid–levels—industry
The day–to–day—part I—discovering and creating entrepreneurial opportunities
The day–to–day–part II—exploiting entrepreneurial opportunities
From the West to the East and South—entrepreneurship theories from emerging economies
What do we know about entrepreneurship in Africa?
What don’t we know about entrepreneurship?
Summing it all up
Review questions
PART II: Birth
3. Mindset, capabilities, and goals
Personality traits
What about creativity?
Entrepreneurial motivations
The role of passion
What skills are necessary?
An entrepreneurial mindset
Education and training
The role of gender
Do culture and the environment matter?
Summary
Review questions
PART III: Growth
4. Financing the venture
Sources of startup funding
Self-funding
Family members and friends
Debt financing
Equity financing
Grants
Microfinance
Angel investors
Crowdfunding
Venture capital
Kiva person-to-person lending
Innovative financing approaches in Africa
Informal financial systems
Financing business operations and growth
Managing the venture’s finances
Evaluating the venture’s financial health and performance
Profitability analysis
Summary
Review questions
Appendix to Chapter 4: an example of a chart of accounts for a small business
Assets
Liabilities
Owner’s equity (total assets minus total liabilities)
Income
Expenses
5. The marketing imperative
The marketing mix
Customer segments
Application exercises
Targeting and positioning
Entrepreneurial versus traditional marketing
Marketing in Africa
Summary
Review questions
6. Operations and supply chain management
Managing operations and supply chain management
Major decision areas in operations and supply chain management
Productivity measurement
Continuous improvement
Summary
Review questions
7. Managing networks and teams
Networks
The strength of weak ties
Strong and weak ties combined
Structural holes
Network density, diversity, and social frontiers
Social networks: Individual/environment interface
Entrepreneurial teams
Summary
Review questions
Appendices to Part III: Business plans and pitch decks
Business plan template
PART IV: Maturity
8. Next steps
Managing growth and expansion
Growth and expansion strategies
Entrepreneurial failure
Entrepreneurial exit
Environmental conditions in Africa that increase entrepreneurial exit propensity
Benefits of entrepreneurial exits
Entrepreneurial self-efficacy and managing overconfidence
Summary
Review questions
PART V: Special topics on African entrepreneurship
9. African women entrepreneurs
Radioxity media
Introduction
Peculiarities of the African context
Motivations and opportunity recognition/risk perception
Funding
Personal savings
Family investment
Community initiatives
Loans
Challenges
Discrimination and gender bias/stereotypes
Illiteracy
Lack of/insufficient information about microfinancing options
Bureaucratic processes
Inadequate/poor infrastructure
Performance of female-owned enterprises in Africa
Opportunities
Growing use of internet and mobile phones
International opportunities
Growing campaign for locally made materials
Policy implications
Practical implications for women entrepreneurs in Africa
Conclusion
10. Entrepreneurial opportunities in real estate development
Introduction
Real estate development entrepreneurs
African international/national developers
Real estate investment trusts
Necessary conditions for REITs
Land markets in established cities
New towns avoiding stalemate
Developing in Abuja
Land acquisition
Joint ventures
Legal issues
Summary
11. Understanding entrepreneurs: A focus on youth
OYO Rooms
MnM clothing line
What makes a good entrepreneur?
Entrepreneurial self-efficacy
Achievement motivation/Need for achievement
Risk propensity
The big 5 personality traits
Creativity
Youth entrepreneurship
Contextualizing traits
Summary
12. Technologies enabling entrepreneurship in Africa
Introduction
The African context
Technologies impacting the entrepreneurship process
Emerging themes
Summary
Index

Citation preview

Entrepreneurship in Africa

It is now widely recognized that in regions like Africa, for economic and other reasons, the public sector has had to disengage and divest from many areas of the economy and allow private enterprise, especially scalable start-ups and new ventures, to enter and flourish if economic development and employment are to grow. There is, however, a training and education gap since entrepreneurship is rarely taught formally at African universities and, when it is, it is often approached from a Western perspective which may not be appropriate given that African environments are significantly different from most Western ones in terms of economic infrastructure and political considerations. This book allows readers to understand the African entrepreneurial context by guiding them through the principal stages in the life of a new venture, and offers approaches, both Western and indigenous, that can inform their entrepreneurial actions. It concludes by examining some specialized topics, including female, youth, and social entrepreneurship, as well as real estate and technology. Exercises throughout the book will enable readers to evaluate their motivations and preparedness for entrepreneurship and learn how to communicate a new venture’s key features to potential stakeholders. By focusing on the distinctive features of entrepreneurship in the African context, and taking a conversational tone, this is an informative and practical text that will be useful for students of Global Entrepreneurship and Business as well as actual and prospective entrepreneurs in the private, non-profit, and public sectors. Ven Sriram is Professor at the University of Baltimore, USA. David Lingelbach is Associate Professor of Entrepreneurship at the University of Baltimore, USA. Tigineh Mersha is Professor of Management at the University of Baltimore, USA. Franklyn Manu is Professor at the Ghana Institute of Management & Public Administration, Ghana.

Global Entrepreneurship Edited by Pawan Tamvada, University of Southampton, UK

Entrepreneurship has become a global byword for positivity in business and management. It is viewed almost universally as the key to developing a robust and growing economy. While most would agree that at its core entrepreneurship involves the identification of opportunities in the unmet, underserved and/or emerging needs of people through the marshalling of resources and the creation of enterprises or other entities to deliver need fulfilling products and services, the nature of the activity his highly context sensitive. What works in one place and for one group of people will not necessarily work elsewhere. Both the needs themselves and the methods and structures that can be acceptably developed differ from place to place and people to people Global Entrepreneurship seeks to provide textbooks addressing entrepreneurship in the key geographic areas of the global socioeconomic system. The series provides a library of textbooks which give the student enough learning materials to gain a comprehensive understanding of entrepreneurship in general and how it is manifested in a variety of geographic and cultural settings. Entrepreneurship in Central and Eastern Europe Development through Internationalization Edited by Tõnis Mets, Arnis Sauka and Danica Purg Entrepreneurship in Africa Context and Perspectives Ven Sriram, David Lingelbach,Tigineh Mersha and Franklyn Manu

Entrepreneurship in Africa Context and Perspectives

Ven Sriram, David Lingelbach, Tigineh Mersha, and Franklyn Manu

First published 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 Ven Sriram, David Lingelbach, Tigineh Mersha and Franklyn Manu The right of Ven Sriram, David Lingelbach, Tigineh Mersha and Franklyn Manu to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Sriram,Ven, author. | Lingelbach, David, 1961- author. | Mersha, Tigineh, 1946- author. | Manu, Franklyn, 1956- author. Title: Entrepreneurship in Africa : context and perspectives / Ven Sriram, David Lingelbach, Tigineh Mersha, Franklyn Manu. Description: Abingdon, Oxon ; New York, NY : Routledge, 2021. | Includes bibliographical references and index. Identifiers: LCCN 2020024034 (print) | LCCN 2020024035 (ebook) | ISBN 9781138392205 (hardback) | ISBN 9781138392212 (paperback) | ISBN 9780429402319 (ebook) Subjects: LCSH: Entrepreneurship--Africa. | New business enterprises--Africa. | New business enterprises--Africa--Finance. | New business enterprises--Africa--Management. Classification: LCC HD62.5 .S699 2021 (print) | LCC HD62.5 (ebook) | DDC 338.04096--dc23 LC record available at https://lccn.loc.gov/2020024034 LC ebook record available at https://lccn.loc.gov/2020024035 ISBN: 978-1-138-39220-5 (hbk) ISBN: 978-1-138-39221-2 (pbk) ISBN: 978-0-429-40231-9 (ebk) Typeset in Bembo Std by KnowledgeWorks Global Ltd. Visit the eResources: www.routledge.com/9781138392212

Ven Sriram: To my wife Angela David Lingelbach: To Jenny and Catie, as always, for everything Tigineh Mersha: To Almaz, Karezhe and Fana Franklyn Manu: To Nana Ataa Amonima, my maternal grandmother, an entrepreneur par excellence

Contents

List of figuresxii List of tablesxiii List of contributorsxiv About the authorsxvi Prefacexviii Acknowledgmentsxx PART I

The basics

1

1 The African environment for entrepreneurship

3

A history of entrepreneurship in Africa  3 Scope and types of enterprises  4 The environment for African entrepreneurs  5 The political environment  5 The economic environment  6 Sociocultural environment  10 Legal and regulatory environment  11 Technological environment  11 Summary  13 Review questions  13 2 Theories of entrepreneurship Why does theory matter?  15 The first attempts to study entrepreneurship  16 Defining entrepreneurship  16 What do we know about entrepreneurship?  17 The big picture  18 The big picture—part I—income levels  18 The big picture—part II—economic structure  20 The big picture—part III—institutions  21 The big picture—a coda—change  23

15

viii  Contents

The mid–levels—industry  26 The day–to–day—part I—discovering and creating entrepreneurial opportunities  27 The day–to–day–part II—exploiting entrepreneurial opportunities  28 From the West to the East and South—entrepreneurship theories from emerging economies  30 What do we know about entrepreneurship in Africa?  32 What don’t we know about entrepreneurship?  34 Summing it all up  35 Review questions  36 PART II

Birth

39

3 Mindset, capabilities, and goals

41

Personality traits  43 What about creativity?  44 Entrepreneurial motivations  47 The role of passion  49 What skills are necessary?  52 An entrepreneurial mindset  54 Education and training  55 The role of gender  57 Do culture and the environment matter?  59 Summary  61 Review questions  61 PART III

Growth

67

4 Financing the venture

69

Sources of startup funding  69 Self-funding  70 Family members and friends  71 Debt financing  72 Equity financing  73 Grants  73 Microfinance  74 Angel investors  74 Crowdfunding  75 Venture capital  75 Kiva person-to-person lending  76

Contents ix

Innovative financing approaches in Africa  77 Informal financial systems  77 Financing business operations and growth  79 Managing the venture’s finances  80 Evaluating the venture’s financial health and performance  82 Profitability analysis  85 Summary  86 Review questions  86 Appendix to Chapter 4: an example of a chart of accounts for a small business

89

Assets  89 Liabilities  89 Owner’s equity (total assets minus total liabilities)  90 Income  90 Expenses  90 5 The marketing imperative

91

The marketing mix  91 Customer segments  92 Application exercises  93 Targeting and positioning  93 Entrepreneurial versus traditional marketing  95 Marketing in Africa  97 Summary  101 Review questions  101 6 Operations and supply chain management

102

Managing operations and supply chain management  102 Major decision areas in operations and supply chain management  104 Productivity measurement  111 Continuous improvement  113 Summary  114 Review questions  114 7 Managing networks and teams Networks  116 The strength of weak ties  118 Strong and weak ties combined  119 Structural holes  120 Network density, diversity, and social frontiers  121 Social networks: Individual/environment interface  122 Entrepreneurial teams  123 Summary  125 Review questions  126

116

x  Contents

Appendices to Part III: Business plans and pitch decks Business plan template  129 PART IV

Maturity

133

8 Next steps

135

Managing growth and expansion  135 Growth and expansion strategies  136 Entrepreneurial failure  140 Entrepreneurial exit  142 Environmental conditions in Africa that increase entrepreneurial exit propensity  143 Benefits of entrepreneurial exits  145 Entrepreneurial self-efficacy and managing overconfidence  145 Summary  148 Review questions  149 PART V

Special topics on African entrepreneurship

153

9 African women entrepreneurs

155

Radioxity media  155 Introduction  155 Peculiarities of the African context  156 Motivations and opportunity recognition/risk perception  157 Funding  158 Personal savings  158 Family investment  158 Community initiatives  158 Loans  159 Challenges  159 Discrimination and gender bias/stereotypes  159 Illiteracy  160 Lack of/insufficient information about microfinancing options  161 Bureaucratic processes  161 Inadequate/poor infrastructure  162 Performance of female-owned enterprises in Africa  162 Opportunities  163 Growing use of internet and mobile phones  163 International opportunities  163 Growing campaign for locally made materials  163

Contents xi

Policy implications  164 Practical implications for women entrepreneurs in Africa  164 Conclusion  164 10 Entrepreneurial opportunities in real estate development

167

Introduction  167 Real estate development entrepreneurs  168 African international/national developers  169 Real estate investment trusts  171 Necessary conditions for REITs  171 Land markets in established cities  172 New towns avoiding stalemate  172 Developing in Abuja  173 Land acquisition  174 Joint ventures  176 Legal issues  176 Summary  176 11 Understanding entrepreneurs: A focus on youth

179

OYO Rooms  179 MnM clothing line  179 What makes a good entrepreneur?  179 Entrepreneurial self-efficacy  180 Achievement motivation/Need for achievement  180 Risk propensity  181 The big 5 personality traits  181 Creativity  183 Youth entrepreneurship  184 Contextualizing traits  188 Summary  189 12 Technologies enabling entrepreneurship in Africa

193

Introduction  193 The African context  194 Technologies impacting the entrepreneurship process  195 Emerging themes  198 Summary  203 Index

211

Figures

2.1 2.2 2.3 2.4 2.5 2.6 6.1 6.2 7.1 7.2 12.1 12.2

The big picture Taking advantage of institutional change How things change The entrepreneurial journey Memoir exercise Creative artifacts portfolio Operations and supply chains Service flow chart Hole-rich vs. dense social networks Social networks: The individual/environment interface Entrepreneurial search for arbitrage opportunities Between country comparison of the effect of mobile adoption to OME-NME ratio 12.3.a Mobile penetration in Africa - 2000 1 2.3.b Mobile penetration in Africa - 2014 12.4 BOP actors, networks, and entrepreneurial opportunities

17 25 25 27 29 29 103 106 121 122 197 200 201 201 203

Tables

1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3.1 3.2 3.3 3.4 3.5 3.6 4.1

National inflation rates National interest rates Ease of doing business: Sub-Saharan Africa Income tiers across Africa Economic structure of African countries Hofstede’s cultural dimensions Formal institutional levels Entrepreneurial opportunities Institutional development Entrepreneurial activity in Africa Necessity and opportunity entrepreneurs Do you possess entrepreneurial passion? Self-efficacy assessment Framework for entrepreneurship education and training Proposed interventions for necessity and opportunity entrepreneurs Prelaunch checklist Income statement Muhammad Badri Retail Store, January 1, 2018 to December 31, 2018 4.2 Balance sheet Muhammad Badri Retail Store, December 31, 2018 6.1 Productivity measurement

8 9 12 19 20 22 24 27 31 32 48 51 54 57 58 62 81 83 112

Contributors

Michael A. Anikeeff is a retired professor, Johns Hopkins University, Carey Business School and former chair of the Edward St John Department of Real Estate. His research interests and publications are in the areas of seniors housing, urban development, and strategic management. He has presented papers on Demography and the city: how aging populations in some countries impact cities and building typology; Market entry and competitive strategy in the global hotel industry; and Best real estate practices for entering emerging markets. He has published in the Journal of Real Estate Research, Journal of Real Estate Portfolio Management, and the Journal of Managerial Issues. Dr. Anikeeff received his AB from University of California at Berkeley in social science, a master’s in city planning from the school of architecture, Ohio State University, and a Ph.D. in community development also from Ohio State, as well as an MBA in finance from American University. He is a Fellow, Royal Institute of Chartered Surveyors, a licensed real estate broker, and a certified urban planner. He received the Distinguished Educator Award, from Lambda Alpha International, as well as distinguished service awards from American Real Estate Society and the International Real Estate Society (IRES). Yemisi Awotoye is an Assistant Professor of Management at Gonzaga University. Her research interests include Well-being and Resilience in Organizational and Entrepreneurial Settings, Women Entrepreneurship, Work-Family Interface, and Diversity. Her research has been published in peer reviewed journals including New England Journal of Entrepreneurship, Journal of Management Policy and Practice, and Washington Business Research Journal. She is a recipient of the Center for International Business Education and Research (CIBER) award from Indiana University. Yemisi has also presented high-impact research at national and regional conferences such as the Academy of Management, Eastern Academy of Management, AMA Marketing and Public Policy, and United States Association for Small Business and Entrepreneurship (USASBE). She can be reached at [email protected]. Karuna Banerjee has a Bachelor of Arts in Psychology with a minor in English Literature from Ashoka University in New Delhi. She is currently working as a Program Analyst at the Centre for Social and Behavior Change. Her work is focused on designing and testing behavioral interventions to increase women’s and children’s access to healthcare policies in India. She has been involved in two key projects for the Centre: the first was aimed at increasing the uptake of the iron and folic acid pill among anemic women living in low-resource settings, and the second is aimed at increasing the uptake of the HPV vaccination among adolescent girls. She has also helped set up a behavior lab for the Centre.

Contributors xv

Chad Coffman is completing his Ph.D. in Entrepreneurship and Innovation at the Bloch School of Management at the University of Missouri-Kansas City. He received a bachelor’s degree in Management and a Master’s of Business Administration from Kansas State University. He spent two years serving as a United States Peace Corps Volunteer in rural Ghana, which inspired his interest in development entrepreneurship in sub-Saharan Africa. His academic research examines entrepreneurial motivation, effects of corruption, nascent business registration, and the use of smartphone and blockchain technologies by entrepreneurs in Africa. His recent peer-reviewed work appears in the Journal of Business Venturing Insights and the Academy of Management Review. Tracy Lelei is an instructor and doctoral candidate of Law at the University of Dundee. She holds an undergraduate degree in Law and an MSc. in International Law. Her research interests include Private International Law, Human Rights (with emphasis on women and children), Women Empowerment, and International Adoption. Her research work has been presented in major conferences including the Annual Conference of the African Bar Association. She can be reached at t.a.lelei@dundee. ac.uk. Robert P. Singh is a Professor of Management in the Graves School of Business and Management at Morgan State University. Dr. Singh’s research primarily focuses on strategy and entrepreneurship issues in minority-owned ventures, as well as macroeconomic issues in the U.S. economy. Dr. Singh has published three books, several book chapters, and dozens of research papers in leading academic journals such as the Academy of Management Review, Entrepreneurship Theory and Practice, New England Journal of Entrepreneurship, Journal of Developmental Entrepreneurship, and Journal of Management Policy and Practice. He has also presented papers at numerous leading national and international conferences. In addition to his academic pursuits, Dr. Singh has served on several corporate advisory boards and was a founding member of the Board of the national Collegiate Entrepreneurs Organization. He also successfully founded three businesses. He can be reached at [email protected]. Sanwar Sunny is an Assistant Professor of Entrepreneurship at the R. G. Merrick School of Business at University of Baltimore. He received a Ph.D. in entrepreneurship and innovation and Master of Public Administration (MPA) from the University of Missouri–Kansas City (UMKC) and a Bachelor of Science degree in Mechanical Engineering from the University of Kansas (KU). His academic research stream focuses on high-growth entrepreneurship, environmental sustainability, and technological innovation, with recent peer-reviewed articles and publications appearing in scientific journals, such as the Academy of Management Review, Small Business Economics, Organization & Environment, Journal of Small Business Management, International Business Review, Kybernetes, and Business Horizons.

About the authors

Ven Sriram is Professor and Chair of the Marketing and Entrepreneurship department at the Merrick School of Business, University of Baltimore, USA. He earned his bachelor’s degree in Economics from Madras University and master’s in Management Studies from Bombay University, both in India. He received his Ph.D. from the University of Maryland, College Park, USA. He has been a Fulbright Scholar in Nepal and Turkey, a Fulbright Senior Specialist in Russia, and a Visiting Fellow at the Centre of International Studies at Cambridge University, UK. His research interests focus on issues relating to marketing, strategy, entrepreneurship, and social enterprises in emerging markets. He has co-edited a book Drivers of Global Business Success: Lessons from Emerging Markets and has published articles in leading journals such as Thunderbird International Business Review, Journal of Business Research, International Journal of Entrepreneurship and Innovation, Journal of Small Business Management, International Journal of Entrepreneurial Behaviour & Research, and Omega. His research has been presented at several international conferences, and he is currently co-editing a series of academic research on entrepreneurship in Africa. He has trained students, managers, and executives in Nepal, Turkey, Argentina, Mexico, Ghana, and Russia. David Lingelbach (B.S., M.S., MIT; Ph.D., Exeter) is an Associate Professor of Entrepreneurship in the Merrick School of Business at the University of Baltimore. He is also an adjunct lecturer at Johns Hopkins University’s Nitze School of Advanced International Studies. Prior to becoming an academic, Dr. Lingelbach worked for over 20 years in financial services and international development. His experience includes five years in Russia during the 1990s, where he was CEO of Bank of America’s businesses in the former Soviet Union and president of one of the first venture capital funds in post-communist Russia. He has advised the World Bank, the Asia Foundation, the Asian Development Bank, and national governments on entrepreneurship and venture capital in a variety of economies, including Indonesia, Pakistan, and Qatar. He has won numerous awards, including a Fulbright to Myanmar, and is a 2020 Andrew Carnegie Fellowship nominee. Dr. Lingelbach has been engaged with Africa and its entrepreneurs for over 15 years. He designed and taught one of the first executive education courses in entrepreneurial finance on the continent and has conducted fieldwork in South Africa, Botswana, and Zambia. Tigineh Mersha  is Professor of Management at the Merrick School of Business, University of Baltimore, USA. He received his Bachelor of Business Administration degree from Addis Ababa University in Ethiopia and his MBA and Ph.D. degrees from the University of Cincinnati in the USA. Dr. Mersha served as chair of the

About the authors xvii

Department of Management and International business in the Merrick School for 10 years before returning to full-time faculty position in 2016. In 2010, he was awarded the Fulbright Scholarship to teach and conduct research in Ethiopia. His research interests include service operations management, quality and performance improvement, and entrepreneurship. He has published in several academic journals including the Journal of Operations Management, International Journal of Operations and Production Management, International Journal of Service Industry Management, Omega: International Journal of Management Science, International Journal of Entrepreneurial Behavior and Research, Thunderbird International Business Review, and International Journal of Entrepreneurship and Innovation. Franklyn Manu h olds a bachelor’s degree in management from the University of Ghana. He earned MBA and Ph.D. degrees from New York University (Stern). He is a professor at the Ghana Institute of Management & Public Administration where he lectures on African business environments and CSR.

Preface

As we write these words in July 2020, the world is in the grip of perhaps the greatest health and economic crisis of the past 100 years – the COVID-19 pandemic. Perhaps nothing emphasizes our interconnectedness, and our shared vulnerability, than this contagion. In a way, it is the consequence of globalization as hitherto isolated communities, societies, and nations become part of the global community through trade, travel, alliances, and so on. Other events such as the economic rise of China, the immigrant crisis in Europe, Brexit, and the rise of nationalism in the United States, Brazil, Israel, India, Turkey, Russia, the Philippines, and elsewhere remind us that the world and its people are constantly evolving. Africa too has seen its own upheavals and changes in the past few decades – the Ebola epidemic, civil wars in Libya and Somalia, the birth of new nations such as Eritrea and South Sudan, and democratic transitions. Against this global backdrop, in a seemingly increasingly globalized world, why have we written a book from the African perspective for the African reader? In its March 2020 Special Report, The Economist proclaimed that “after centuries on the periphery, Africa is set to play a much more important role in global affairs, the global economy and the global imagination”. Despite the continent’s manifold problems, the second half of this century is predicted to be the African Century. A more personal answer to this question of “Why Africa?” may also explain our motivations. Three of the four authors grew up in countries (Ethiopia, Ghana, India) where our university education relied on books and other material not entirely relevant to our countries. Our lived experience was in many cases quite different from what we were reading. Two of us were born in and educated in Africa, and the other two have significant interest in the continent, having spent time traveling extensively, writing about it and interacting with African scholars. We all feel it is time to use our knowledge, passion and expertise to write for the African reader, from an African perspective. We use African examples where possible, and African voices where we can. We are of course aware of the incredible complexity and diversity of the continent in terms of language, religion, tradition, cultural practices, group and tribal affiliations, etc. so are very aware that the local situations may be quite different. Why entrepreneurship? Africans are very entrepreneurial and have among the highest startup rates of new ventures anywhere in the world. However, many of these new ventures stay small and don’t scale-up. As many African economies privatize and transition away from statist systems to ones more dependent on private and individual initiative and enterprise, we felt it was time to organize what we know about entrepreneurship so we can provide some ideas for African entrepreneurs to reach their potential and truly become an engine of job creation and economic growth.

Preface xix

This textbook is the first dedicated specifically to entrepreneurship in Africa. Taking a conversational tone, it describes what we know about African entrepreneurship. Then it takes the reader through the principal stages in the life of the new venture: birth, growth, and maturity. In terms of structure, we start in Part I with the basics: an overview of the African environment and entrepreneurial ecosystem, and then contrast African and Western views of entrepreneurship. Placing startup activity in the African context is an important step to better understanding its dimensions. In Part II, we examine the birth of the venture, looking at the individual traits, motivations, and mindsets needed to successfully start and grow a venture and discuss ways in which some of the necessary skills can be acquired. We then turn our attention to the venture’s growth in Part III, drilling into the various sources of finance needed to expand, marketing and how to develop and communicate a value proposition, issues around operation and management of the venture, and how to develop and manage teams and social networks. Part IV discusses the entrepreneurs’ options as the venture matures, including managing growth, dealing with failure and if and when to exit. It concludes in Part V by examining some special topics we think will be of particular interest to our readers – women, real estate, youth, and technology entrepreneurs – and the challenges and opportunities facing them. Readers will benefit by (1) gaining an up-to-date overview of the state of knowledge about African entrepreneurship, (2) understanding and applying key techniques for identifying and developing new venture opportunities in the African context, and (3) appreciating the main ways in which a new venture can be grown, sustained, and disbanded. Exercises throughout the book will enable readers to evaluate their preparedness for entrepreneurship and communicate a new venture’s key features to potential stakeholders. By focusing on the distinctive features of entrepreneurship in the African context, we hope the book will complement other entrepreneurship texts which take a more general approach. African new venture opportunities are shaped by the continent’s high levels of uncertainty, resource constraints, and institutional frameworks shaped in part by colonialism. The book takes these unique features as the departure point for helping its readers – actual and potential entrepreneurs in the private, non-profit, and public sectors – to build their new venture dreams. We provide a comprehensive set of tools to help instructors. Each chapter begins with key learning objectives and ends with some review questions. The instructor’s support materials include suggested answers to these review questions, PowerPoint presentations for each chapter, sample syllabi, and additional resource material. We hope instructors will find this useful.

Acknowledgments

We’d like to thank the contributors for their interest in and commitment to the project. They brought their expertise to bear by exploring key topics that will be of interest to the book’s readers in Africa and elsewhere. Finally, a nod of appreciation to our graduate assistants Sabelo Mthembu and Razan al-Mutairi for helping with the chapter slides. Sabelo also assisted in organizing the material, tracking down references, proofreading, and most importantly, for giving us the perspective of the key audience for this book – the African student.

Part I

The basics

1

The African environment for entrepreneurship

Learning objectives: upon completing this chapter you will: • • • • •

Gain knowledge of the nature of African entrepreneurial ventures Understand the diversity and commonality that characterize African countries See the importance of context and how it shapes entrepreneurial behavior Be able to identify the macro-environmental challenges that African entrepreneurs face Develop an ability to analyze the macro-environment and assess potential impacts on entrepreneurial activity

A history of entrepreneurship in Africa Entrepreneurship has existed since humans engaged in market exchange activity with one another (fancy words for buying and selling). The earliest observed entrepreneurship anywhere in the world took place in New Guinea around 17,000 BCE, when obsidian was exchanged for tools, skins, and food. Such entrepreneurship in hunter-gatherer societies was probably common, although evidence of it remains limited. Entrepreneurship expanded greatly with the agricultural revolution. On the African continent, market activity began with the rise of agriculture in the then-fertile Saharan Desert. Agricultural surpluses allowed Africans, who possessed them, to trade with other Africans and further afield, initially with Southwest Asia. All of this began between 10,000 BCE and 8000 BCE. The next phase in African entrepreneurship began with the expansion of international trading routes, which accelerated after 2000 BCE. Such trade initially involved North Africa, which became linked through Egypt and the Phoenicians with Greece, India, China, and the Arabian Peninsula. Trade within Africa was facilitated by entrepreneurs crossing the Sahara, and by Nubia (located in contemporary Sudan) and its linkages with Chad and Libya. Traders on Africa’s east coast also plied international routes – Swahili entrepreneurs linked the continent with China and India. During the same period, entrepreneurship became a significant phenomenon in the ancient world. Then came slavery, initially as an internal affair, but then increasingly linked by European entrepreneurs with the Americas. Sad to say but true, entrepreneurship and slavery were closely linked. Each slave ship could be seen as a new venture. Many slavers came from Great Britain and the United States, but were supported by Africans who captured and then sold slaves to foreign slavers.

4  The basics

Entrepreneurship in Africa is also closely linked to colonialism. Many significant ventures arose out of colonial efforts. King Leopold II’s Congo Free State, which extracted ivory, rubber, and minerals at the cost of great human suffering and loss of life from 1885 to 1908 in the territory, is occupied today by the Democratic Republic of the Congo (DRC). In 1888, Cecil Rhodes established De Beers, which continues to be a major diamond mining and trading concern to this day. Both Leopold II and Rhodes are examples of a particular type of entrepreneur – the actor at the wealth-power nexus who uses wealth or power to gain the other. These examples also point out that, contrary to the breathless cheerleading of so many of entrepreneurship’s proponents, entrepreneurship is not always a positive thing. In postcolonial Africa, entrepreneurship has been a tale of two cities. One city is occupied by the rich, powerful, and connected entrepreneurs who have reaped most of the benefits of startup activity. The other city is lived in by the ordinary entrepreneurs, often motivated less by ambition and more by necessity to scrape out an existence in the absence of stable employment opportunities. In between are a few tech entrepreneurs who have adapted technologies from elsewhere to African conditions or used the distinctive local conditions and problems to generate interesting new products that have been exported elsewhere, such as M-Pesa mobile money. As and when institutional conditions improve and income levels rise, entrepreneurs in Africa can be expected to develop new products and firms that we can only imagine today.

Scope and types of enterprises African entrepreneurial ventures are characterized by several common features even though there is a wide variety of them. Ninety percent of them are small enterprises or mircoenterprises and mostly operate in the informal sector. They are predominantly run by “necessity-driven” people who start ventures because they have no viable employment opportunities elsewhere. Thus, very few entrepreneurial ventures are started by “opportunity-driven” people who are pursuing profit and independence (African Development Report, 2011), a phenomenon discussed in detail in Chapter 3. A 2018 report by the William Davidson Institute of the University of Michigan on a study of six Francophone West African countries identified the following groups of entrepreneurial ventures: • • • • •

A very large cluster of small necessity entrepreneurs. Moderate growth entrepreneurs running mostly family-owned businesses. Smaller clusters of high-growth startups run by young entrepreneurs mainly in the technology sector. Opportunity-driven small- and medium-sized enterprises (SMEs) run by entrepreneurs copying successful business models and operating several businesses. Gazelles (successful startups with high growth rates).

The African Economic Outlook (2017) reported the following: •

Twenty-two percent of Africa’s working-age population are starting new ventures, a rate higher than any other region of the world. There is a wide range across countries from 7% in South Africa to 39% in Senegal.

African environment for entrepreneurship 5

• • • •

•

Forty-four percent of African entrepreneurs start ventures to exploit market opportunities while 33% do so because they cannot find jobs. Most entrepreneurs operate in the services sector. The 25–34 age group accounts for 38% of entrepreneurs followed by 18–24 and 35–44 age groups with 23% each. The majority (55%) of early-stage entrepreneurs are in retail trade, hotels, and restaurant businesses. The next category is agriculture, forestry, and fishing with 10% and then manufacturing at 8%. Again, there are wide variations across countries ranging from 27% in Cameroon to 81% in Malawi for the percentage in retail trade, hotels, and restaurant sectors. The popularity of this sector is because there are fewer entry barriers, it does not require much investment or higher level skills. Fewer than 20% of African early-stage entrepreneurs offer new products to the market.

Other characteristics of African entrepreneurial ventures are low levels of employment, low sales, low profitability, and high staff turnover.

The environment for African entrepreneurs African entrepreneurs operate in diverse environments and face a multiplicity of challenges. This complicates the already difficult task of starting and running a business. The rest of the chapter discusses some of the characteristics of environments in African countries that entrepreneurs must deal with. The political environment While African countries show some diversity in their political characteristics, there are elements that are common. Except for a few conflict-ridden countries (e.g., DRC, South Sudan, Congo), there is an increasing trend toward a higher degree of political stability and accommodation in most countries. This is primarily due to a growing acceptance of democracy by the elite and increased political activity of ordinary citizens. Bucking this trend is a situation in a few countries where leaders try to change constitutions to enable them to continue to stay in power. This has often led to civil unrest. For the most part, however, there appears to be a consensus among the political elites about the benefits of stability. Despite this stability, many countries are still experiencing high levels of political polarization. In many cases entrepreneurs, especially large and medium-sized ones, are “forced” to associate with one side or the other. Changes in political fortunes often lead to negative consequences for such entrepreneurs. One area of political consensus in many African countries is a need to support entrepreneurs and small businesses. Thus, many countries develop programs and institutions to support their development. Ghana, for example, at various times under two different ruling parties, established a Medium and Small Loans Centre (MASLOC) to implement microfinance programs for microenterprises in 2006, the National Youth Employment Program (NYEP) in 2006, Local Enterprise and Skills Development Program (LESDEP) in 2010, and the Ghana Youth Enterprise and Entrepreneurial Development Agency (GYEEDA) in 2013 to replace NYEP. Despite all those initiatives, a popular feeling is that these have been set up to channel easy money to party

6  The basics

faithful. Similarly, Nigeria established a Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), Youth Empowerment Scheme (YES), and Industrial Development Centers (IDCs). Insecurity arising out of civil wars and other types of armed conflict has had major negative consequences for entrepreneurial activities in several African countries. Classic examples are the situations in Northern Nigeria (Boko Haram), Burkina Faso and Mali (Islamic State in Iraq and Syria or ISIS), DRC, and Cameroon (English-speaking part). The net effect of such insecurity is to reduce economic activity, leading to loss of infrastructure and lack of safety for both consumers and businesses. The political and public policy aspects of the environment are therefore critical for entrepreneurial development in Africa. Yet the literature is rife with descriptions of the failure of many African governments to create enabling environments. Entrepreneurial development is going to require dramatic and committed change from African governments (Sriram and Mersha, 2010). The economic environment In the last three decades or so, African economies have mostly muddled along compared to the rest of the world. They continue to be characterized by overreliance on natural resource exports, large fiscal deficits, high inflationary trends, large-scale unemployment/underemployment, and large informal sectors. Even though a few countries have achieved high growth rates in recent times, it may be argued that this is due to macroeconomic structural reforms and commodity price booms. A recent report from the World Bank (2019a) highlighted the situation: Sub-Saharan Africa’s opportunities are vast, and its challenges persistent. Home to the world’s largest free trade area and a 1.2 billion-person market, the continent is poised to create an entirely new development path harnessing the potential of its resources and people. The current COVID-19 pandemic has had a negative impact on the global economy and worsened the situation in many African countries. Estimates by the World Bank put output losses between $37 and $79 billion. Growth is expected to regress with negative impacts on societal welfare. Already fragile economies have been made even more fragile. The International Monetary Fund (2019) also highlights risks in the economic outlook. Again, quoting liberally from pages 3 to 10, Growth in sub-Saharan Africa is projected to remain at 3.2 percent in 2019 and rise to 3.6 percent in 2020. Growth is forecast to be slower than previously envisaged for about two-thirds of the countries in the region. The downward revision reflects a more challenging external environment, continued output disruptions in oil-exporting countries, and weaker-than-anticipated growth in South Africa. Growth prospects vary considerably across countries in the region in 2019 and beyond. Growth is projected to remain strong in non-resource-intensive countries, averaging about 6 percent. As a result, 24 countries, home to about 500 million people, will see their per capita income rise faster than the rest of the world. In contrast, growth is expected to move in slow gear in resource-intensive countries

African environment for entrepreneurship 7

(2½ percent). Hence, 21 countries are projected to have per capita growth lower than the world average. Inflation is expected to ease going forward. While the average sub-Saharan African-wide debt burden is stabilizing, elevated public debt vulnerabilities and low external buffers will continue to limit policy space in several countries. The outlook faces further downside risks. External headwinds have intensified compared to April and include the threat of rising protectionism, a sharp increase in risk premiums or reversal in capital inflows owing to tightening global financial conditions, and a faster-than-anticipated slowdown in China and in the euro area. Regionally, near-term downside risks include climate shocks, intensification of security challenges, and the potential spread of the Ebola outbreak beyond the Democratic Republic of the Congo. In addition, fiscal slippages, including those ahead of elections in some countries, and a lack of reform in key countries could add to deficit and debt pressures. Over the medium term, a successful implementation of reforms, including in the context of the African Continental Free Trade Area (AfCFTA), could pose significant upside risks. The COVID-19 pandemic has worsened the already bleak outlook for African economies. Specific data on inflation and interest rates in Tables 1.1 and 1.2, respectively, show in stark terms the economic environment of entrepreneurs in many African countries in what would have been “normal” times. Significant obstacles to entrepreneurship that arise out of the above are due to poor quality physical and business infrastructure that result from the poor economic environment. Lack of transportation, poor communication systems, and erratic electricity supply all raise the costs of doing business and are the bane of many an entrepreneur. The cost of producing this infrastructure is prohibitive for many governments and are therefore funded by donors with the expectation of full cost recovery. Thus, even where such infrastructure is provided the cost to entrepreneurs of using them is prohibitive in addition to taxes levied to raise revenue to satisfy donor requirements (Asongu and Odhiambo, 2019; Atiase et al, 2017). The challenging economic environment provides a mixed bag of opportunities and constraints. For example, in Nigeria and Ghana, arising out of poor road infrastructure is a booming business in the use of motorbikes and tricycles for passenger transport despite the risks. Similarly, challenges with the formal banking sector and payment systems have created opportunities for mobile money savings and transfers based on telecom system platforms. Although these opportunities lead to the formation of microenterprises, there is still the opportunity for scaling up. Another area of economic failure has been in the provision of potable water that has led to proliferation of mineral and purified water manufacturers. The negative side of this is the generation of large amounts of plastic waste that many of the countries are unable to deal with satisfactorily, leading to horrendous unsanitary environment conditions. One could, of course, argue that this produces opportunities for further entrepreneurship. One factor that is cited by almost all entrepreneurs as a barrier is the lack of access to finance. As a result of poor business conditions among others, many financiers view financing of mostly micro-entrepreneurs as very risky. They, of course, charge a premium for risk and when this is coupled with already high interest rates, borrowing becomes well-nigh impossible or leads to high default rates. These high rates also pose

8  The basics Table 1.1  National inflation rates Country

Latest

Date

Previous

Range

Zimbabwe South Sudan Sudan Liberia Ethiopia Angola Sierra Leone Zambia Nigeria Rwanda Malawi Guinea Eritrea Ghana Sao Tome and Principe The Gambia Egypt Tunisia Kenya Burundi Madagascar Lesotho South Africa Central African Republic Tanzania Congo Djibouti Mozambique Uganda Somalia Algeria Mauritania Namibia Cameroon Botswana Mauritius Swaziland Cape Verde Comoros Ivory Coast Equatorial Guinea Morocco Republic of the Congo Gabon Seychelles Senegal Benin Togo Guinea Bissau Niger Burkina Faso Chad Mali Libya

521.20 69.00 57.70 30.90 18.70 16.90 13.09 12.50 11.98 11.90 11.50 9.10 9.00 7.90 7.70 7.68 7.10 5.80 5.78 4.90 4.90 4.80 4.00 3.90 3.80 3.70 3.60 3.50 3.40 3.13 2.70 2.70 2.60 2.40 2.20 2.00 2.00 1.90 1.70 1.60 1.30 1.20 1.10 1.00 0.95 0.60 0.30 −0.30 −0.50 −1.80 −2.60 −2.80 −3.30 −6.00

Dec/19 Dec/19 Oct/19 Sep/19 Jan/20 Dec/19 Nov/19 Jan/20 Dec/19 Dec/19 Dec/19 Dec/19 Dec/18 Dec/19 Dec/19 Dec/19 Dec/19 Jan/20 Jan/20 Dec/19 Nov/19 Dec/19 Dec/19 Dec/18 Dec/19 Nov/19 Nov/19 Dec/19 Jan/20 Dec/19 Dec/19 Dec/19 Dec/19 Sep/19 Dec/19 Jan/20 Dec/19 Dec/19 Dec/18 Dec/19 Dec/18 Dec/19 May/18 Dec/19 Jan/20 Dec/19 Dec/19 Dec/19 Nov/19 Nov/19 Dec/19 Sep/19 Dec/19 Sep/19

481 72.7 53.5 31.3 19.5 16.32 15.85 11.7 11.85 11.8 10.4 9.3 9 8.2 6.7 7.73 3.6 6.1 5.82 3.6 5.2 4.6 3.6 4.1 3.8 3.6 4 2.58 3.6 3.8 1.6 3.1 2.5 2.8 2.1 0.9 1.8 0.7 −1.6 1.2 0.8 0.4 1.2 0.2 1.69 1.3 1.5 0.4 −0.6 −1.9 −3.1 −2.1 −4.1 −6.1

521:−7.5 549:−13.97 182:−1 31.3:−5.69 64.2:−4.1 241:6.89 256:−21.76 22.9:6 47.56:−2.49 28.1:−15.8 37.9:6.3 42.6:0.5 34.7:−1.38 63.1:0.4 86.8:3.5 75.64:−10.91 35.1:−4.2 16.7:−1.9 31.5:3.18 44.93:−8.4 30.4:−8.5 35.14:2 20.7:0.2 51.73:−10.67 19.8:3 511:1.35 22.47:−6.35 26.35:1.05 24.5:−5.36 216:−15 11.92:0.4 15.3:−0.6 20.54:0.94 5:0.3 15.06:2.1 18.1:−1.4 31.1:−5.27 10.2:−4.4 11.7:−3.4 9.63:−3.84 83.9:−17.6 5.2:−1.6 42.4:−9.34 46.95:−16.92 63.25:−5.54 7.2:−4.7 15.2:−3.8 15.83:−26.77 70.44:−18.23 15.4:−4.2 15.1:−5.4 41.72:−13.06 12.8:−10.16 31.6:−6.1

Source: Trading Economics (www.tradingeconomics.com) February 8, 2020.

African environment for entrepreneurship 9 Table 1.2  National interest rates Country

Latest

Date

Previous

Zimbabwe Liberia Sudan Sierra Leone Ghana Angola Malawi Nigeria Mozambique The Gambia Guinea Seychelles Egypt Zambia Madagascar Congo Sao Tome and Principe Uganda Kenya Tunisia Ethiopia Tanzania Mauritania Namibia Swaziland Lesotho South Africa Cape Verde Burundi Rwanda Botswana Benin Burkina Faso Guinea Bissau Ivory Coast Mali Niger Senegal Togo Algeria Cameroon Central African Republic Chad Equatorial Guinea Gabon Republic of the Congo Mauritius Libya Morocco Comoros

35.00 30.00 16.70 16.50 16.00 15.50 13.50 13.50 12.75 12.50 12.50 12.36 12.25 11.50 9.50 9.00 9.00 9.00 8.25 7.75 7.00 7.00 6.50 6.50 6.50 6.25 6.25 5.50 5.35 5.00 4.75 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 3.75 3.50 3.50 3.50 3.50 3.50 3.50 3.35 3.00 2.25 1.05

Jan/20 Dec/19 Nov/19 Dec/19 Jan/20 Jan/20 Jan/20 Feb/20 Dec/19 Dec/19 Jan/20 Dec/19 Jan/20 Feb/20 Jan/20 Jan/20 Jan/20 Dec/19 Jan/20 Jan/20 Jun/19 Nov/19 Dec/19 Jan/20 Jan/20 Jan/20 Jan/20 Sep/19 Aug/19 Feb/20 Jan/20 Dec/19 Dec/19 Dec/19 Dec/19 Dec/19 Dec/19 Dec/19 Dec/19 Dec/19 Dec/19 Jan/20 Dec/19 Dec/19 Dec/19 Dec/19 Dec/19 Jan/20 Dec/19 Nov/19

35 30 16.6 16.5 16 15.5 13.5 13.5 12.75 12.5 12.5 12.34 12.25 11.5 9.5 9 9 9 8.5 7.75 7 7 6.5 6.5 6.5 6.5 6.5 5.5 5.45 5 4.75 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 3.75 3.5 3.5 3.5 3.5 3.5 3.5 3.35 3 2.25 1.04

Source: Trading Economics (www.tradingeconomics.com) February 7, 2020.

Range 70:15 30:4 17.3:7 27:9.5 27.5:12.5 150:8.75 75.53:13 14:6 23.25:7.5 34:12 22.25:9 12.87:2.81 21.4:8.25 15.5:9 33:7 70:2 29.5:9 23:9 84.67:0.83 7.75:3.5 11:3 67.5:3.7 18:3.5 10.5:5.5 11.5:5 20.42:5.18 23.99:5 10.5:5.5 16.24:5.07 9:5 15.5:4.75 4.5:3.5 4.5:3.5 4.5:3.5 4.5:3.5 4.5:3.5 4.5:3.5 4.5:3.5 4.5:3.5 21:2.75 4.25:2.45 4.25:2.45 4.25:2.45 4.25:2.45 4.25:2.45 4.25:2.45 9.25:3.35 5:3 7:2.25 8.5:1.04

10  The basics

a challenge for consumers who are unable to finance consumption, thus dampening demand and keeping the size of markets small (Fal, 2013; Asongu and Odhiambo, 2019; Herrington and Coduras, 2019). Small markets create problems for scaling up and achieving economies of scale. The result is that many entrepreneurial ventures are small and operate at a high cost making them uncompetitive against mostly foreign products. This is particularly the case for agro-processed products and fashion merchandise. Thus, while there is demand for such items, most entrepreneurs who tend to be retailers prefer imported brands, which tend to have higher quality and lower prices. Sociocultural environment Sociocultural factors shape the environment in which entrepreneurs develop and operate. Some of these factors are religion, communal spirit and collective reliance, norms of social responsibility, respect for seniority, respect for authority and tradition, superstitious beliefs, and ethnicity (Anambane and Adom, 2018; Namatovu et al, 2018). Religion plays a major role in the lives of many Africans and shapes behavior in many spheres, including attitudes toward work and business. It is quite common to see employees of many enterprises start the workday with a prayer session. The exact role of religion should not be generalized. Fems et al. (2018) argue that under Islam, the roles of men and women are delineated in the Koran. Men are supposed to work or run businesses to look after their families while women attend to domestic duties. In their view, this explains the relatively lower rates of female entrepreneurship in predominantly Muslim parts of Nigeria. Katwalo and Madichie (2008), on the other hand, found that Muslim women in Uganda were entrepreneurially dynamic. It may be that the issue has more to do with tradition but has been interwoven with religious ideology. An important issue is whether religion and religiosity have an impact on entrepreneurial behavior. Studies in Ghana and Uganda (Namatovu et al., 2018; Reid et al., 2015) show that religion and spirituality shape entrepreneurial behavior. The entrepreneurs studied used these to explain and make attributions about favorable and unfavorable outcomes, guide them and help them persevere in face of challenges. Related to religion and religiosity is the issue of superstitious beliefs in African society. They are held to be widespread across the continent and have significant impacts on behavior. Gershman (2016) found a negative relationship between superstitious beliefs and social capital (interpersonal trust and cooperation). This naturally would inhibit entrepreneurial collaboration with others and also attributions of poor performance of an enterprise. The latter would be seen as due to bad luck or the negative acts of others. Buckley (1996) documents this in a study of three African countries and shows among other things that there is a belief that outcomes may not be solely within the control of an entrepreneur and that ill-will and spiritual forces play an important role in success. Another cultural factor in African societies is a belief in communalism as popularized by such words as Ubuntu and Harambee. This belief, often going hand in hand with a collectivist mindset, influences entrepreneurial behavior and performance. The influence comes about because these cultural factors create social obligations. Thus, African entrepreneurs are burdened by a social obligation to offer jobs and redistribute their income to relatives. As a result, their ventures are less productive than those of their foreign competitors (Alby et al., 2019). In some instances, enterprises are set up but evolve to having a social focus. As Obeng and Anderson (2010, p.13) observed,

African environment for entrepreneurship 11

“It is an entrepreneurship for and in the social rather than entrepreneurship with social outcomes. It seems likely to be an evolved social system to alleviate the worst impacts of poverty”. The burden of communalism is that many entrepreneurial ventures have a very precarious existence because they are not market and profit oriented. In addition to these cultural factors, there are social trends that are shaping the environment for entrepreneurs. Rising urbanization, dramatic increases in number of educated and unemployed youth, increasing sophistication of consumers, etc. are all creating market environments that are almost paradoxical in their features. On the one hand, there are significant opportunities for entrepreneurs who can catch the tide. On the other hand, there is an increasingly complicated business environment especially in terms of competition that is not easy to navigate. Many ventures are therefore risk averse and not very innovative. A significant sociocultural factor is adherence to tradition and discrimination against women, which has a major impact on entrepreneurship, especially among females. Patriarchal systems and outright bans on females in business in many countries influence the nature and volume of enterprises operated by women. In many instances, these factors “force” women to engage only in subsistence and informal sector activities. So even though African women are more likely to start businesses than their counterparts in other countries (African Economic Outlook, 2017), their impact is less than would be expected. Legal and regulatory environment The cost of starting and operating businesses is typically much higher in Africa than most parts of the world. This is due to the many bureaucratic procedures involved, corruption, difficulty in enforcing contracts, tax burdens, land and property registration challenges, and lack of intellectual property protection. As a result, most African countries rank poorly on the World Bank’s assessment of doing business across the globe. During a recent assessment in 2019, this is what the Bank reports about sub-Saharan Africa as shown in Table 1.3 (World Bank, 2019b). This is part of the reason why many Africans operate in the informal sector and do not contribute much to government revenues. Admittedly, many African countries are in the process of trying to reform their regulatory regimes, but progress is slow. Two areas that need serious attention are burdensome bureaucratic procedures that lead to petty corruption and slow legal processes in court systems. Technological environment Africa’s technological environment poses challenges as well as provides significant opportunities. Businesses operating primarily in the informal sector face major challenges in leveraging technology since, for the most part, the entrepreneurs’ level of education is quite low. The lack of technology usage explains the low productivity and inefficiency of such enterprises. There are therefore opportunities for the development of enterprise software that can be used by informal sector businesses. The continent is also characterized by rapid increases in mobile phone penetration that is creating opportunities for telephony-based enterprises even in both the informal and formal sectors. This is despite the challenges with access to electricity and other forms of power. Perhaps the biggest challenge in the technological environment has to do with a lack of people with the requisite skills to develop and apply technology

12  The basics Table 1.3  Ease of doing business: Sub-Saharan Africa Country

Angola Benin Botswana Burkina Faso Burundi Cabo Verde Cameroon Central African Republic Chad Comoros Democratic Republic of the Congo Republic of the Congo Côte d’Ivoire Equatorial Guinea Eritrea Eswatini Ethiopia Gabon The Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda São Tomé and Príncipe Senegal Seychelles Sierra Leone Somalia South Africa South Sudan Sudan Tanzania Togo Uganda Zambia Zimbabwe

Rank (1–190)

Ease of doing business score (0–100)

DB2019

DB2019

DB2018

173 153 86 151 168 131 166 183 181 164 184 180 122 177 189 117 159 169 149 114 152 175 61 106 174 161 111 145 148 20 135 107 143 146 29 170 141 96 163 190 82 185 162 144 137 127 87 155

41.70 51.29 64.94 51.45 46.68 55.93 46.95 34.23 38.21 48.52 36.18 39.47 53.06 41.66 22.94 58.82 48.15 45.81 51.49 57.16 49.49 42.58 65.06 60.41 43.55 48.18 58.75 53.27 51.07 78.29 53.75 60.29 52.48 51.52 73.73 44.84 53.78 62.42 48.59 19.98 64.66 33.30 45.09 53.29 48.88 56.41 63.60 48.52

43.86 51.42 65.40 51.57 47.41 55.95 47.78 36.90 39.36 48.66 36.85 39.83 58.00 41.94 23.07 58.95 49.06 45.58 51.72 59.22 51.51 42.85 70.31 60.60 43.51 48.89 59.59 53.50 51.99 79.58 55.53 60.53 53.72 52.89 77.88 45.14 54.15 62.41 48.74 20.04 66.03 35.34 48.84 53.63 55.20 57.06 65.08 50.44

Source: World Bank Doing Business 2019 Fact Sheet: Sub-Saharan Africa.

African environment for entrepreneurship 13

applications. African educational systems are skewed toward business and liberal arts courses. There is relatively little emphasis on the STEM areas.

Summary African entrepreneurs face very challenging macro-environments that substantially impact both opportunities and risks. The vast majority of these challenges may be said to be government related (political, socioeconomic, and technological). Governments need to develop policies that will create vibrant ecosystems for entrepreneurial development. These policies must create enabling environments by providing incentives and removing bottlenecks that impede entrepreneurial activity.

Review questions 1 Why do you think that entrepreneurship and colonialism were closely linked in African history? 2 African entrepreneurs are said to be predominantly necessity driven. What challenge does this pose for designing government policy to encourage entrepreneurship? 3 What kinds of government policies are likely to bring African entrepreneurial ventures into the formal sector? 4 In designing policies to reform the environment and encourage entrepreneurship, what should governments prioritize?

References African Development Report (2011). African Development Bank, Tunisia. African Economic Outlook (2017). AfDB. http://dx.doi.org/10.1787/aeo-2017-en Alby, P., E. Auriol and P. Nguimkeu (2019). Does social pressure hinder entrepreneurship in Africa: The forced mutual help hypothesis. Economica. 87(346), pp. 299–327. DOI: 10.1111/ecca.12330 Anambane, G. and K. Adom (2018). Assessing the role of culture in female entrepreneurship in contemporary sub-Saharan society: Insights from the Nabadam district of Ghana. Journal of Developmental Entrepreneurship. 23(3). https://doi.org/10.1142/S1084946718500176 Asongu, S. A. and N. M. Odhiambo (2019). Challenges of doing business in Africa: A systematic review. Journal of African Business. DOI: 10.1080/15228916.2019.1582294 Atiase, V. Y., S. Mahmood, Y. Wang and D. Botchie (2017). Developing entrepreneurship in Africa: Investigating critical resource challenges. Journal of Small Business and Enterprise Development. https://doi.org/10.1108/JSBED-03-2017-0084 Buckley, G. (1996). Superstitions, the family and values in microenterprise development. Small Enterprise Development. 7(4), pp. 13–21. Fal, M. (2013). Accelerating entrepreneurship in Africa. Innovations. 8(3/4), pp 149–168. Fems, K. M., O. Kuro, L. Tema, O. Angonimi and E. G. Yeibimodei (2018). Culture, religion and gender prejudice: Impact on entrepreneurship and national development. World Journal of Entrepreneurial Development Studies. 2(2), pp. 1–13. Gershman, B. (2016). Witchcraft beliefs and the erosion of social capital: Evidence from Sub-Saharan Africa and beyond. Journal of Development Economics. 120(May), pp. 182–208. Herrington, M. and A. Coduras (2019). The national entrepreneurship framework conditions in sub-Saharan Africa: A comparative study of GEM data/National Expert Surveys for South Africa, Angola, Mozambique and Madagascar. Journal of Global Entrepreneurship Research. 9, 60. International Monetary Fund (2019). Regional Economic Outlook. Sub-Saharan Africa: Navigating Uncertainty. Washington, DC: International Monetary Fund.

14  The basics Katwalo, A. M. and N. O. Madichie (2008). Entrepreneurial and cultural dynamics: a gender kaleidoscope of Ugandan microenterprises. International Journal of Entrepreneurship and Small Business. 5(3/4), pp. 337–348. Namatovu, R., S. Dawa, A. Adewale and F. Mulira (2018). Religious beliefs and entrepreneurial behaviors in Africa: A case study of the informal sector in Uganda. Africa Journal of Management. DOI: 10.1080/23322373.2018.1516939. Obeng, B. A. and A. Anderson (2010). The social constraints on entrepreneurship in a poor Ghanaian fishing community. Paper presented at the conference on “Entrepreneurship in Africa”, Whitman School of Management, Syracuse University, Syracuse, NY, USA, April 1–3. Reid, M., D. Roumpi and A. M. O’Leary-Kelly (2015). Spirited women: The role of spirituality in the work lives of female entrepreneurs in Ghana. Africa Journal of Management. DOI: 10.1080/23322373.2015.1062710. Sriram, V. and T. Mersha (2010). Stimulating entrepreneurship in Africa. World Journal of Entrepreneurship, Management and Sustainable Development. 6(4), pp. 257–272. World Bank (2019a). Africa’s Pulse, No. 19: Analysis of Issues Shaping Africa’s Economic Future. (April), Washington, DC: World Bank. Doi: 10.1596/978-1-4648-1421-1. License: Creative Commons Attribution CC BY 3.0 IGO. World Bank (2019b). Doing Business 2019 Fact Sheet: Sub-Saharan Africa. www.doingbusiness.org/ content/dam/doingBusiness/media/Fact-Sheets/DB19/FactSheet_DoingBusiness2019_SSA_Eng

2

Theories of entrepreneurship

Learning objectives: upon completing this chapter you will: • • • • • •

Understand the importance of theory for entrepreneurship Understand what entrepreneurship is Analyze the economic and institutional settings in which entrepreneurship takes place Understand the importance of change, especially institutional change, to new venture creation Analyze the differences between what we know about African entrepreneurship and entrepreneurship elsewhere Define the limits of knowledge about entrepreneurship If you don’t know where you are going, any road will take you there. (Ugandan proverb) He who loves practice without theory is like the sailor who boards a ship without a rudder and compass and never knows where he may cast. (Leonardo da Vinci)

Let’s be honest. Theory has a bad reputation. That’s too bad, because, as social psychologist Kurt Lewin said, “there’s nothing so practical as a good theory.” We entrepreneurs are practical people, right? So theory matters for us, if we want to be effective. In this chapter, we will learn together what we do and do not know about entrepreneurship. You will be excited to learn—we hope—that entrepreneurship is a science. One that can be learned by anyone. But we have to be careful. Because some of what we know about entrepreneurship applies everywhere in the world, and some of it applies only in certain situations. We will learn what knowledge can be applied, where, and when.

Why does theory matter? Entrepreneurs fancy themselves as practical sorts, as doers rather than deep thinkers. They are partially right. Effective entrepreneurs do act first. But their actions are deliberate. They are informed by theory. What is theory? It is nothing more than an organized body of knowledge that enables us to make accurate predictions and act effectively in the world. And, therein lies the problem for entrepreneurs. We have a lot of data to indicate that as many as 50% of startups fail within their first five years. Think about that for a

16  The basics

minute. That means that, for many unfortunate entrepreneurs, predicting the future success or failure of their new venture could be done with a coin flip. And, that would be a lot cheaper too! And, what that really means is that many entrepreneurs lack a good theory about how to create an effective startup, one that survives, grows, and generates value. Either they have no theory at all, or they have a bad theory. One common bad theory I hear from my students is that effective entrepreneurs work harder than ineffective ones. Hard work is laudable and necessary for entrepreneurial success—or for any success in life—but it is far from enough. So for the skeptical readers out there, theory matters—a lot. A good theory makes the difference between success and failure, between growth and stagnation, between value creation and value destruction. I hope that you will read on.

The first attempts to study entrepreneurship While entrepreneurs have been around since humans began exchanging goods and services with one another, the systematic study of this very important human phenomenon is relatively recent. In fact, it’s so recent that when one of the authors (David) joined his university in 2010, he was told by a senior faculty colleague that entrepreneurship wasn’t really a proper academic discipline! Well, it is, and smart people have been thinking about it more and more. The first person to talk about entrepreneurs academically was Richard Cantillon (1680s–1734), an Irish-French economist. He saw entrepreneurs as agents who bought goods at known prices in order to produce other goods at unknown prices, generating uncertain residual profits. Another French economist, Jean-Baptiste Say (1767–1832), is best known for the saying “supply creates its own demand.” He added to Cantillon’s work by conceptualizing entrepreneurs as coordinators who intermediate in the production process by combining land, labor, and capital to meet consumer demand. In the modern period, the two most important entrepreneurship scholars were Frank Knight (1885–1972) and Joseph Schumpeter (1883–1950). Knight was an American economist who was the first to differentiate between risk (that which is knowable through predictions based on statistics and probability theory) and uncertainty (that which is unknowable in advance). Schumpeter was born and raised in the AustroHungarian Empire, but ultimately settled in the United States. He is best known in entrepreneurship for his theory of creative destruction. Based in part on Karl Marx’s work, creative destruction is simply the process by which innovation ultimately undermines the competitive position of established firms. While other scholars wrote about entrepreneurship in the wake of Knight and Schumpeter, entrepreneurship became established as a formal academic discipline beginning in the 1970s. Important pioneers in the field include Zoltan Acs, Howard Aldrich, David Audretsch, Giacomo Becattini, David Birch, Arnold Cooper, Ian MacMillan, and David Storey.

Defining entrepreneurship What is entrepreneurship? What is an entrepreneur? Answering these questions is harder than you might think. Because a lot of myths have gotten in the way of understanding reality.

Theories of entrepreneurship 17

Entrepreneurship is the development of new organizations, products, services, and processes. The emphasis is on the word NEW. So what does NEW mean? The Global Entrepreneurship Monitor defines new ventures (private businesses) as those which are 42 months old or younger. That’s one definition. By the way, a few years ago they defined new ventures as 36 months old or younger. So this definition can change. And, it might vary by country, right? In some countries, it seems to take 42 months just to get registered as a formal business! Actually, it’s not that bad. According to www.doingbusiness.org, in 2020, the average time to get registered across Africa is 21 days. Eritrea takes the longest—84 days— and Rwanda takes the least—4 days. So if entrepreneurship is about developing something new, what is it NOT about? Well, first off, entrepreneurship is not the same thing as small business. Sure, when small businesses are new (42 months old or less), they are also entrepreneurial businesses. But across Africa, most small businesses are older than 42 months. Sometimes a lot older. Entrepreneurship is also not the same thing as innovation. Granted, some entrepreneurs are innovative: Jobs, Zuckerberg, and Musk (a South African by birth). But some of the most successful African entrepreneurs, such as Mo Ibrahim of Celtel fame, were not terribly innovative. Like entrepreneurship, innovation is also about newness. But to be judged innovative, a product, service, or process must clear a higher bar. Innovation’s newness must add value, not just be another street vendor on a corner already filled with them. Just adding to the competition does not make a business innovative. But that business is by definition entrepreneurial until it’s 42 months old. Make sense?

What do we know about entrepreneurship? Rather than scare you off with lots of theory that’s hard to consume, we are going to divide this chapter into three parts: the big picture, the mid-levels, and the day-to-day (see Figure 2.1).

Figure 2.1  The big picture. Source: David Lingelbach.

18  The basics

Don’t worry. We’re not going to throw everything we know about entrepreneurship at you, just the bits that we think are especially important if you want to be an entrepreneur in Africa. Let’s get started!

The big picture One of the ways in which this entrepreneurship textbook is different from others is that we believe that the big picture matters…a lot. Most entrepreneurship courses and programs focus on the day-to-day—what an entrepreneur can do for himself or herself to build a successful new venture. We think that this approach—emphasizing the individual entrepreneur—is not entirely correct, especially for an entrepreneur in Africa. Why? Because it takes a village to build a new venture. The founder is only one part of it. And, we think that African entrepreneurs understand this in their bones, being born and raised in cultures that are in general more collectivist than the West (more on this collectivism thing below). So in this book, we start with the village writ large, what we call the big picture. We make a strong assumption that if the village (or province, or country) is good for entrepreneurship, then that makes things easier. It’s better to sail with the wind than against it, right? Let’s divide our study of the big picture into three parts: income levels, economic structure, and institutions—and a coda—change. The big picture—part I—income levels Let’s start off with some basics. There is no such thing as Africa! Funny to say that, since this textbook is titled Entrepreneurship in Africa. There are many Africas, though. And, it matters which one we are talking about when we talk about entrepreneurship theory, and about where it is possible to build different types of new ventures. But how can we define those many different Africas? The easiest—and wrong way— is to start with Africa’s 54 countries and somehow group them into categories. Maybe by geography. Maybe by colonial power. Maybe by a dominant ethnic group. Maybe by religion. Maybe by “developing” (read poor) versus “emerging” (potentially less poor). These approaches all have some value, but we are not going to do that. Instead, we are going to use household income to divide up countries into four categories: Levels 1, 2, 3, and 4. This approach is recommended by Hans Rosling in his excellent book Factfulness. It’s an approach that has been adopted by development agencies like the World Bank and the Bill and Melinda Gates Foundation. These levels tell us so much more than calling a country low, lower-middle, upper-middle, or high income. Let’s take a look. People who live at Level 1 have daily household incomes from $1/day up to $2/day. They cook over open fires. They transport themselves by foot. They draw drinking water from a well. They eat the same thing, day after day. They sleep on a dirt floor. As you probably know already, there are many countries in “Africa” where a majority of the population live at Level 1. In fact, most of the countries in the world today that are Level 1 are African.Countries like Ethiopia, the Democratic Republic of the Congo, and Senegal. Level 2 people have daily incomes from $2/day up to $8/day. That’s a big leap from Level 1! They use propane gas to cook. They own a bicycle. Electricity exists, but it is

Theories of entrepreneurship 19

unstable. Food is more varied—maybe there is a chicken in the household providing eggs. And, a mattress on the floor at night to make sleeping more comfortable. Nigeria, Kenya, Tanzania, Ghana, and Morocco all have a majority of their populations living at this level. But some of the Asian development success stories live here too—Vietnam and India, for example. At Level 3, people live on between $8/day and $32/day. Now they have drinking water out of a spigot. A refrigerator and stable electricity. A motorbike. Varied diets. Even a vacation from time to time. Few African countries (yet) have a majority of their populations living at Level 3. South Africa, Botswana, Egypt, Algeria, and the island state of the Maldives. One or two others. And, Level 4? In Africa, only the Seychelles has made it there so far. You make more than $32/day. You are living a First World life. Here’s a chart that breaks down countries in Africa by Levels 1, 2, 3, and 4 income levels (see Table 2.1). Why does this matter for us as entrepreneurs? Because income levels largely determine the entrepreneurial opportunities open to us. Not culture, not religion, not gender, not geography, not colonial history. None of that matters as much as income level. A second reason that income levels matter is that most of the theory we have on entrepreneurship was generated from countries at Level 4: United States, Europe, and Table 2.1  Income tiers across Africa Level 1 Benin Burkina Faso Burundi Central African Republic Chad Comoros DR Congo Eritrea Ethiopia Gambia Guinea Guinea-Bissau Liberia Madagascar Malawi Mali Mozambique Niger Rwanda Senegal Sierra Leone Somalia South Sudan Togo Uganda Zimbabwe Source: www.gapfinder.org.

Level 2 Angola Cameroon Cape Verde Congo (Republic) Djibouti Ghana Ivory Coast Kenya Lesotho Mauritania Morocco Nigeria Sao Tome and Principe Sudan Swaziland Tanzania Zambia

Level 3

Level 4

Algeria Botswana Egypt Equatorial Guinea Gabon Libya Mauritius Namibia South Africa Tunisia

Seychelles

20  The basics

Japan. So you’ve got to wonder if that theory makes sense if you’re trying to create a startup in “Africa” (whatever that is). And, here’s another thing. Every country is a mix of people living at Levels 1, 2, 3, or 4. Even Somalia—the poorest African economy as of 2019—has citizens who live above extreme poverty levels ($1.90/day at present). When you look around your neighborhood, what income level do you see? The big picture—part II—economic structure So, income level matters a lot for entrepreneurs. And, it is an important influence on the second part of the big picture—economic structure. Entrepreneurs can be found anywhere on this planet. In excess of 400 million, new ventures are currently operating across the world. One of the things we’ve learned is that there are more entrepreneurs in economies that are factor-driven than there are in efficiency-driven or innovation-driven. Big words there, so let’s slow down and explain them. Like Levels 1, 2, 3, and 4, these concepts help us to understand something important about entrepreneurial opportunities. Factor-driven economies compete mainly on their factor endowments. Things like unskilled labor or natural resources. Efficiency-driven economies compete on their production processes and product quality. Innovation-driven economies compete on knowledge intensity and services. How do African economies fit into this picture? See Table 2.2. Table 2.2  Economic structure of African countries Factor-driven

Transition to efficiency-driven

Efficiency-driven

Transition to innovation-driven

Innovation-driven

Benin Burundi Cameroon Chad DR Congo Ethiopia The Gambia Ghana Guinea Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Mozambique Rwanda Senegal Sierra Leone Tanzania Uganda Zambia Zimbabwe

Algeria Botswana Nigeria

Cape Verde Egypt Eswatini Morocco Namibia South Africa Tunisia

Mauritius Seychelles

None yet!

Source: Schwab (2018).

Theories of entrepreneurship 21

When you know an economy’s structure (factor-, efficiency-, or innovation-driven) and the income level of its population (Level 1, 2, 3, or 4), then you know a lot more about the entrepreneurial opportunities there. Entrepreneurship is everywhere, but in different shades. For example, in a Level 1, factor-driven economy like Zambia, what are likely to be some interesting entrepreneurial opportunities? Well, Zambia’s Level 1 income means that day-to-day consumer demands are fairly limited. But they have aspirations! So, some part of the population—probably in the cities like Lusaka and Ndola—may want Level 2 goods like propane and bicycles, and a few may even seek Level 3 goods like motorbikes. And, everyone wants a mobile phone, right? Using the example of Zambia, we can see that entrepreneurs are always on the lookout for the next new thing. They seek change. They make change. Level 1 today, maybe. But tomorrow…everyone wants to see their life improve, if only a little. The big picture—part III—institutions While we are on the big picture, let’s consider this question: given that humans are all born with basically the same genetic composition, why are some more entrepreneurial than others? Why are some more successful as entrepreneurs than others? You already have two answers: income levels and economic structure. Entrepreneurs in countries at different income levels and with different economic structures have different entrepreneurial opportunities. Here’s a third answer: institutions. What are institutions? They are the “rules of the game” that shape how we go about our daily lives. There are two types of institutions: formal and informal. Formal institutions are things like laws, regulations, and the enforcement of both. Informal institutions include things like norms and standards. Culture is a type of informal institution. We know a fair bit about institutions and their effect on entrepreneurs.1 We even have some decent measures of institutions based on surveys. Let’s start with informal institutions first, because they are a bit more “squishy.” Geert Hofstede is a Dutch researcher who started measuring cultural differences several decades ago. Over time, he and his colleagues came up with six cultural dimensions that are one decent way to measure informal institutions: power distance, individualism, masculinity, uncertainty avoidance, long-term orientation, and indulgence. Let’s define these terms. Power distance refers to the acceptance and expectation that power is distributed unequally in a society. Individualism is the extent to which members of a society have loose ties with one another. It is contrasted with collectivism, where individuals are tightly integrated into groups. Masculinity is associated with traits such as achievement, heroism, assertiveness, and material rewards for success, as contrasted with femininity, which values cooperation, modesty, caring for the weak, and quality of life. Uncertainty avoidance is defined as a society’s tolerance for ambiguity. Long-term orientation connects the past with current and future actions or challenges, and in which traditions are kept and steadfastness is valued. Finally, indulgence refers to the degree to which a society allows individuals to fulfill their human desires. It can be contrasted with restraint, in which a society regulates the gratification of needs. Lots of big concepts here, but these six cultural dimensions are important for us as entrepreneurs. Each is measured on a scale from 0 to 100 (where a higher number represents more of that dimension. So, for example, with a score of 68 on uncertainty

22  The basics Table 2.3  Hofstede’s cultural dimensions Country Angola Burkina Faso Cape Verde Egypt Ethiopia Ghana Kenya Libya Malawi Morocco Mozambique Namibia Nigeria Senegal Sierra Leone South Africa Tanzania Zambia For comparison China India United States

Power distance

Individualism

Masculinity

Uncertainty avoidance

Long-term orientation

Indulgence

83 70 75 70 70 80 70 80 70 70 85 65 80 70 70 49 70 60

18 15 20 25 20 15 25 38 30 46 15 30 30 25 20 65 25 35

20 50 15 45 65 40 60 52 40 53 38 40 60 45 40 63 40 40

60 55 40 80 55 65 50 68 50 68 44 45 55 55 50 49 50 50

15 27 12 7 NA 4 NA 23 NA 14 11 35 13 25 NA 34 34 30

83 18 83 4 NA 72 NA 34 NA 25 80 NA 84 NA NA 63 38 42

80 77 40

20 48 91

66 56 62

30 40 46

87 51 26

24 26 68

Source: https://www.hofstede-insights.com/product/compare-countries/.

avoidance, Libyans have less tolerance for ambiguity than Mozambicans with a score of 44). Here’s the data that Hofstede has for economies in Africa (not all countries have all of the data, and many are missing entirely; see Table 2.3). We know something about how these informal institutions influence entrepreneurship. All other things being equal, economies with higher levels of individualism and lower levels of uncertainty avoidance are more likely to have higher levels of venture capital activity (Li and Zahra, 2012). Since venture capital is a significant financial resource for growth-oriented startups, and may also be an indicator of the presence of significant numbers of scalable startups, it’s reasonable to assume that economies with these informal institutional characteristics are more likely to have more growth-oriented entrepreneurs. If we look at the table, the economies with the highest individualism scores are South Africa, Morocco, and Libya. The lowest uncertainty avoidance scores are held by Cape Verde, Mozambique, and Namibia. The cultures on which these economies are based are more likely to support growth-oriented entrepreneurship, all other things being equal. Touching on another informal institution, a recent study found that more gender-neutral economies had higher levels of entrepreneurship (Assenova, 2019). When we take these three factors together—high individualism, low uncertainty avoidance, and gender neutrality—we can see that some African economies are more likely than others to have higher levels of growth-oriented entrepreneurship, while others may be more entrepreneurial overall without necessarily being more growth-oriented. Where does your country stand?

Theories of entrepreneurship 23

With formal institutions—laws, regulations, and their enforcement—the research is pretty clear. Higher levels of these institutions lead to higher levels of growth-oriented entrepreneurship. We even have a decent measure of formal institutions based on data from the World Bank’s Worldwide Governance Indicators project. This project measures six dimensions of formal institutions: voice and accountability, political stability and the absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. Table 2.4 shows the formal institutional level for most African economies in 2017. The more positive formal institutional levels the better, if you want to develop a growth-oriented startup. Low numbers—or even really negative ones—don’t mean that you can’t necessarily build a growth-oriented business in that economy. It just means that—everything else being equal—it’s harder to do it in that place than in one that has better numbers. Of course, as you can see from the table, these numbers can change over time, so it’s worthwhile to keep track of the individual index components here: https://info. worldbank.org/governance/wgi/ (see Figure 2.2). The big picture—a coda—change Finally, we come to a somewhat more abstract but critical theoretical perspective: change. What is your theory about how things change in the world? This is important, because entrepreneurs respond to changes that create entrepreneurial opportunities. And, entrepreneurs are themselves agents of change. Way back in 1995, Andrew Van de Ven and Scott Poole came up with a typology to describe the four principal motors by which things change in the world (see Figure 2.3). It’s worth our time to take a look at these change motors through the eyes of an entrepreneur. Most entrepreneurs—effective and not-so-effective—probably feel most comfortable with the box labeled Teleology in the lower right-hand corner. What is a teleological theory of change? Simply put, it’s all about being deliberate. You start with a goal (the bottom of the circle in the Teleology box). Then you implement that goal—launch a new product by date X, raise Y amount of investment capital, gain Z percentage of market share. Inevitably, the entrepreneur is dissatisfied. Either the implementation didn’t go as expected, or maybe the goal was all wrong. So then the entrepreneur searches around and comes up with a revised or new goal. Rinse and repeat. That planful approach to entrepreneurship is very comforting, because it suggests that the entrepreneur is largely in control of her/his destiny. The problem with that theory of change, however, is that it is only one of four possible ways in which things can change. Let’s take a quick look at the others. Slide left on the figure to the Life Cycle box. This is a more typical change path for most startups. In the first phase, the firm is started. Then it grows up. Then the profits of that growth are harvested in the third stage, perhaps through a sale of the startup. Then in the final stage, the startup is terminated. It is absorbed into another organization or it simply goes out of business. This path is largely prescribed, although what happens in each phase is something over which the entrepreneur has some control. Or how about the Evolutionary change process, found in the upper left corner of the figure? This process is all about Darwinian competition. Within a given industry,

24  The basics Table 2.4  Formal institutional levels Country Algeria Angola Burundi Benin Botswana Burkina Faso Cameroon Cape Verde Central Africa Republic Chad Congo, Democratic Republic of Congo, Republic of Comoros Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Ghana Gambia Guinea Guinea-Bissau Ivory Coast Kenya Lesotho Liberia Libya Madagascar Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda Sao Tome and Principe Senegal Seychelles Sierra Leone Somalia South Africa South Sudan Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

1996 Formal institutional level

2018 Formal institutional level

Change 1996–2018

−2.73 −3.53 −3.68 +0.07 +1.82 −1.18 −2.82 NA −2.72 −2.65 −4.57 −2.59 −1.91 −1.97 −0.94 −2.70 −1.90 −2.66 −0.84 −0.60 −1.02 −2.76 −3.12 −0.92 −1.77 −0.18 −4.43 −2.91 −0.85 −0.74 −0.94 −0.73 +1.19 −0.28 −0.92 +1.30 −2.10 −2.84 −3.31 +0.39 −0.36 +1.34 −3.01 −4.93 +1.15 NA −3.90 −1.15 −1.33 −1.64 −0.26 −1.79 −1.44 −1.33

−1.99 −2.25 −3.50 −0.77 +1.41 −1.07 −2.57 +1.22 −3.87 −3.38 −4.05 −2.73 −2.19 −1.92 −1.97 −3.16 −3.93 −2.01 −1.82 +0.09 −0.98 −2.31 −2.80 −1.22 −1.39 −0.81 −1.83 −4.66 −1.87 −1.2 −2.21 −1.85 +1.87 −0.72 −1.92 +0.71 −1.79 −2.62 +0.03 −0.56 −0.20 +0.89 −1.46 −5.19 +0.30 −5.14 −3.85 −1.35 −1.35 −1.94 −0.49 −1.44 −0.90 −2.92

+0.74 +1.28 +0.18 −0.85 −0.41 +0.11 +0.25 NA −1.15 −0.73 +0.52 −0.14 −0.27 +0.05 −1.03 −0.47 −2.03 +0.65 −0.98 +0.69 +0.04 +0.45 +0.32 −0.30 +0.38 −0.62 +2.60 −1.75 −1.02 −0.46 −1.27 −1.12 +0.68 −0.44 −1.00 −0.59 +0.30 +0.22 +3.34 −0.95 +0.16 −0.46 +1.55 −0.25 −0.85 NA +0.05 −0.20 −0.02 −0.30 −0.23 +0.35 +0.54 −1.59

Source: Author’s calculation based on methodology in Li and Zahra (2012) and data from https://info.worldbank.org/ governance/wgi/.

Theories of entrepreneurship 25

Figure 2.2  Taking advantage of institutional change. Source: David Lingelbach.

Units of Change Multiple entities

EVOLUTIONARY Variation

Single entity

Selection

Retention

DIALECTICAL Thesis + Antithesis Conflict Synthesis

LIFE CYCLE

TELEOLOGY

1. Startup

Set or envision goals

4. Die

Mode of Change

2. Grow

Search or interact

Implement goals

3. Harvest

Dissatisfaction

Prescribed

Constructed

Figure 2.3  How things change. Source: Adapted from Van de Ven and Poole (1995).

26  The basics

firms—new and existing—offer some variation on the existing product offering. The market and/or industry economics selects which variation survives. That variation is retained, and all others fade away. Brutal. This perspective is one that many respected entrepreneurship scholars best describe entrepreneurship today. Finally, in the upper right-hand corner of the figure, we find the Dialectical theory of change. This theory is all about conflict between a thesis (what exists, for example) and an antithesis (a new venture, perhaps). From the conflict emerges a synthesis, which is some combination of the features of the thesis and antithesis. This synthesis becomes the new thesis, which is challenged by a new antithesis, and so on. It may seem too abstract, but an effective entrepreneur has to have his/her own theory of how change is operating in the industry and economy in which they are launching their new venture. Why? Because that theory will enable the effective entrepreneur to better predict which new venture opportunity is more likely to pay off. Simple enough.

The mid-levels—industry Warren Buffett is one of the most successful investors of all time. One of his cardinal rules is: industry trumps management, almost every time. A business in an industry with attractive economics, managed by average entrepreneurs, will generally do better than one in an industry with unattractive economics managed by amazing entrepreneurs. How do we know that a business is doing well? When its return on invested capital (ROIC) is relatively high, generally above 15% and maybe higher than that in the uncertain economies across Africa. So what kind of industries tend to be good ones for entrepreneurs to get into? Scott Shane at Case Western looked at which industries (in the United States) tend to have startups that survive, grow, and have high profits (Shane, 2008). Over the first four years after startup, survival rates range from 55% for businesses in the education and health industries to 38% for startups in information technology. Natural resources, leisure and hospitality, construction, finance, manufacturing, professional services, trade and transport, and other services have survival rates somewhere between these extremes. And, these numbers vary within these broad sectors significantly too. The important thing is not these numbers, which are from the States and may be out-of-date by the time you read this. The important thing for you to know is that you MUST know these survival rates BEFORE you commit to your startup. Not knowing is like flying an airplane into a dust storm in the mountains. Scott also looked at average sales, average number of employees, and profits and found similar results: different industries have different results. Very different results! For example, wholesale trade has the highest average sales, while personal services have the lowest. Manufacturing has the higher average number of employees, while agriculture, forestry, and fishing, and finance/insurance/real estate (often called FIRE) have the lowest. And, who’s most profitable? Wholesale trade again, which had the highest percentage of firms with over $10,000 in profit. The lowest? Services. And, what if you want to be super successful as an entrepreneur? Industry matters just as much. Again using US data (so adjust to your own country’s situation), Scott found that the highest percentage of Inc. 500 firms came from…wait for it…pulp mills! A little over 18% of all pulp mills started over the period 1982–2000 made it onto this

Theories of entrepreneurship 27

Figure 2.4  The entrepreneurial journey. Source: David Lingelbach.

prestigious list. Only 0.007% of all restaurants accomplished that goal, or 0.005% of grocery stores, or 0.004% of all beauty shops and all automobile repair shops. Think about this. Industry really, really matters if you want to generate real wealth.

The day-to-day—part I—discovering and creating entrepreneurial opportunities So far we have been talking mostly about the “big picture” conditions under which entrepreneurial opportunities come into being. We’ve learned that there are three big drivers of these opportunities—income levels, economic structure, and institutions (formal and informal). But that’s just the first part of the entrepreneurial journey. As Shane and Venkataraman (2000) pointed out, there are three stages to this journey. We’ve since learned that this journey is a bit more complex (see Figure 2.4). With regard to discovering entrepreneurial opportunities, Shane and Venkat (that’s how he’s known in the field) argued that information corridors and cognitive properties determine whether individuals discover these opportunities. Information corridors refer to prior knowledge and skills that individuals have that enable them to see an opportunity that others may not see. Cognitive properties include, firstly, the ability to see new solutions to problems. We will have more to say later on how effective entrepreneurs are able to see these new solutions. Creating entrepreneurial opportunities is different than discovering them. As Alvarez and Barney (2007) pointed out, discovery and creation are really two different worldviews. Table 2.5 sums up those two views. Table 2.5  Entrepreneurial opportunities Discovery

Creation

Where do opportunities come from?

They exist, independent of entrepreneurs. They come from exogenous shocks to existing markets and industries

They don’t exist independent of entrepreneurs. They are formed by entrepreneurs seeking to exploit them

Decision-making context

Risky

Uncertain

What’s the difference between entrepreneurs?

Alert entrepreneurs discover opportunities

Enacting entrepreneurs create opportunities

What is the role of information? Information is useful and objective

Knowledge is not yet formed. Entrepreneurs creating opportunities also create new information along the way

Adapted from Alvarez and Barney (2007) and Alvarez, Barney, and Anderson (2013).

28  The basics

The day-to-day—part II—exploiting entrepreneurial opportunities So you’ve discovered or created an entrepreneurial opportunity. Now what? What separates the effective entrepreneur from the ineffective one? Fortunately, we are beginning to get some answers to these important questions. The single best answer we’ve got so far goes by a fairly awkward name: effectuation. Conceptualized by entrepreneurship rock star Saras Sarasvathy in 2001, effectuation addresses how effective entrepreneurs make decisions under uncertainty. She contrasts that approach with how entrepreneurs make decisions when entrepreneurial opportunities are risky, which is to say they are predictable (Sarasvathy, 2001). This is an important distinction—risky versus uncertain—and it has come up once before in this chapter. So perhaps we should discuss it for a minute. Frank Knight was the scholar who first thought about the fundamental difference between things that are risky and things that are uncertain. Way back in 1921, he described that difference this way. Risky things can be predicted, using the powerful tools of statistics and probability theory. Uncertain things cannot be predicted. Period. Full stop. So stats don’t help us. Saras asked the natural follow-up question: what do entrepreneurs do when they face uncertainty? If no stats, then what? Because they can face uncertainty a lot, especially when they are creating entrepreneurial opportunities. Well, she said, they effectuate. Especially the effective ones, the ones who have created more than one successful startup. And, effectuation involves four processes: Determining your means Figuring out what you can afford to lose Co-creating with committed stakeholders Leaning in to surprise Mind you, these four processes are not equally important for a given entrepreneur at a given point in time. But let’s consider them in order. Determining your means is about inventorying who you are, what you know, and whom you know. Because that’s all you have. And, that’s a pretty radical and empowering idea. We all start with ourselves, and ourself is where a great startup is built from. Not out there. In here. Answering the question “who am I?” is about determining your characteristics, your preferences, the intrinsic soup that makes you unique. The fundamental principle here is simple but powerful: We build who we are A couple of good ways to start down the road toward building who we are these exercises (see Figure 2.5). Another good exercise to help you figure out who you really are is this exercise (see Figure 2.6). Effectuation’s other processes—determining affordable loss, co-creating with partners, and leaning in to surprise—are covered in an excellent textbook (Reed, Sarasvathy, Dew, and Wiltbank, 2017). It’s a good read.

Theories of entrepreneurship 29

Figure 2.5  Memoir exercise. Source: David Lingelbach.

Effectuation can be contrasted with another logic that is more familiar—causation. Causation is all about planning for a predictable future. It is the logic of established businesses. As entrepreneurial ventures survive and grow up, they begin to combine effectual and causal thinking. Besides effectuation, are there other ways of dealing with uncertainty? Well, one other way of thinking about this is called bricolage. I know, I know—another strange

Figure 2.6  Creative artifacts portfolio. Source: David Lingelbach.

30  The basics

word. The idea of bricolage is quite simple and comes from the French anthropologist Claude Levi-Strauss. Particularly in resource-constrained environments, effective entrepreneurs build products and firms with what they have on hand. As Baker and Nelson (2005) elaborated, small firms often make something from nothing by recombining existing resources into new resource combinations. Think about bricolage as similar to rummaging around in a junk pile to see what you can use. Of course, we have a great—and now famous—example of bricolage from Africa: William Kamkwamba from Malawi. William and his family faced a common problem: no electricity in their village. So, using a physics textbook and scraps he found in the village dump, William constructed a windmill that not only generated electricity, but also pumped water to irrigate the village crops. This wonderful story of bricolage is told in Kamkwamba and Mealer (2010) and a related movie.

From the West to the East and South—entrepreneurship theories from emerging economies So far, most of what we have had to say about entrepreneurship is based on theories developed from Western data by Western scholars living and working in the West. These scholars would have all of us believed that their findings must be assumed to make sense for everyone, everywhere. But as we have already learned, entrepreneurship is different at different income levels, with different economic structures, and under different institutional conditions. In general, three factors differentiate emerging economies from developed ones. First, resources are scarcer. Second, conditions are more uncertain. Third, more people are living in conditions of poverty. These are the underlying conditions that contribute to the differing income levels, economic structures, and institutional conditions we’ve already discussed. A small but growing number of researchers have recognized that what works in the West won’t necessarily work in the East or the South. That’s the good news. The bad news for those of us who care about Africa is that most of this group of researchers have focused on two big emerging economies—China and India—that are themselves different from Africa. So we have to proceed cautiously with this research, recognizing that it’s helpful but doesn’t necessarily offer us a foolproof way forward. Before diving into this research, then, just how different are China and India from “Africa?” Starting with income level, India is at Level 2 and is most similar in this characteristic to Nigeria, Ghana, Angola, and Sudan. China is at Level 3 and most like Algeria and Libya. With regard to economic structure, India is a factor-driven economy competing mainly on factor cost advantages. It is thus similar to the majority of African economies. China is an efficiency-driven economy and therefore most similar to some of the larger, more advanced African economies such as Egypt, Morocco, and South Africa. With regard to institutional context, we’ve already seen in Table 2.3 how China and India compare with African economies across Hofstede’s six measures of informal institutions. One noteworthy difference between China and India, and the African economies is that the former have significantly lower scores for uncertainty avoidance, indicating that their informal institutions are more conducive to growth-oriented entrepreneurship. When we look at current levels of formal institutional development, Table 2.6 shows us what we see.

Theories of entrepreneurship 31 Table 2.6  Institutional development Country/Region

2018 Formal institutional level

China India Africa (average)

−0.71 −0.26 −1.73

Source: Author’s calculations based on methodology in Li and Zahra (2012) and data from https://info.worldbank. org/governance/wgi/.

China and India have much stronger formal institutions than Africa on average. Only two larger African economies—Ghana and South Africa—have comparable or better formal institutions. So with all of this as a lengthy preface, what useful can be learned from the research on entrepreneurship in emerging economies? Let’s take this in three steps: China, India, and the rest. Research on entrepreneurship in China has emphasized institutional influences, both formal (the relatively low level of law, regulation, and enforcement) and informal (the role of networks generally and guanxi (personalized social networks of power amongst Chinese) specifically. More recently, Bruton, Zahra, and Cai (2018) have noted that Chinese entrepreneurship is different from that in the United States for two major reasons. First, in China’s group-oriented culture the government is a central actor in the entrepreneurial process. Second, the innovation process for entrepreneurs emphasizes adaptation of existing technologies. As described by Bruton, Zahra, and Cai (2018): …the model for the local Chinese entrepreneurs is to actively observe firms in mature economies like the United States that are creating new products. The Chinese entrepreneur then seeks out the Chinese innovator living in the mature market to partner with them, bringing that person back to China for the new venture. Frequently, the returnee inventor might not have thought about creating a new venture until approached by a Chinese entrepreneur. The local entrepreneur provides the returnee an understanding of the local Chinese environment and how to best navigate it since the alignment with local culture and institutions is critical for legitimacy and success. (p. 355). Each of these elements of Chinese entrepreneurship—low level of formal institutions, reliance on networks, the central role of the state, and adaptive innovation—has relevance for entrepreneurs operating in Africa. Turning next to India, one distinctive and relevant contribution has been the concept of jugaad. As described in Prabhu and Jain (2015), jugaad is a type of innovation that is more frugal, flexible, and inclusive and echoes the bricolage concept we discussed earlier. Africa has similar concepts: kanju or jua kali (in Kenya). Jugaad principles can be implemented by a wide range of organizations, including social ventures, large multinationals, large domestic firms, or government agencies. Beyond India and China, research from other emerging economies has emphasized the importance of context, what we have called in this chapter “the big picture.”

32  The basics

What do we know about entrepreneurship in Africa? It seems like a long way to come, but it’s important to know first the background against which our knowledge of African entrepreneurship is cast. Let’s start with some numbers from the Global Entrepreneurship Monitor, one good source of entrepreneurship data (see Table 2.7). Some pretty amazing numbers here. First, notice the wide range: from Algeria (9% of the labor force engaged in entrepreneurship) to Nigeria and Zambia (40% of the labor force). One thing we know about that dispersion is that it is related to income level. Poorer economies tend to have higher percentages of their population engaged in entrepreneurship, often due to necessity. Second, notice how much we already know about entrepreneurship in Africa. We know how many entrepreneurs (roughly) each economy has. And, look at the dates. We have been tracking this information for a while now. When it comes to making sense of African entrepreneurship, though, the going gets rougher. Despite the fact that millions of entrepreneurs are working across Africa as you read this, we haven’t made much sense of them yet. Particularly when it comes to highlighting their differences and similarities with entrepreneurs elsewhere. Let’s start with some economics. Dani Rodrik, one of the world’s greatest development economists, wrote that Africa as a whole will have a hard time growing at high rates for the next decade. Why? Because the global economy is slowing, and African economies haven’t industrialized enough to take advantage of their potentially low costs. Rodrik believes that only a significant devaluation is likely to change this. Table 2.7  Entrepreneurial activity in Africa Country Algeria Angola Botswana Burkina Faso Cameroon Egypt Ethiopia Ghana Libya Madagascar Malawi Morocco Mozambique Namibia Nigeria Senegal South Africa Sudan Tunisia Uganda Zambia Source: https://gemconsortium.org.

Early stage entrepreneurial activity (TEA) as percentage of adult labor force (data date) 9% (2012) 41% (2018) 33% (2015) 34% (2016) 28% (2016) 7% (2019) 15% (2012) 26% (2013) 11% (2013) 20% (2019) 28% (2013) 11% (2019) 11% (2017) 18% (2012) 40% (2013) 39% (2015) 11% (2019) 22% (2018) 10% (2015) 36% (2014) 40% (2013)

Theories of entrepreneurship 33

So many African economies will remain stuck as factor-driven, or, if they are efficiency-driven, dominated by low productivity informal manufacturing. And, alternatives to industrialization—such as expansion of high-productivity services—require relatively high skill levels. As Rodrik illustrates, it’s much harder to move farm workers from the field to jobs such as programmers or even call center employees, compared with moving a farmer from his or her field to the factory floor. Other possibilities, such as natural resource-led growth, seem even less likely as paths to sustained economic growth (Rodrik, 2018). And, why does growth matter for the entrepreneur? Because growth is an important stimulus for entrepreneurial opportunities. Period. Turning now to how entrepreneurship in Africa is different from elsewhere, George et al. (2016) stated that the continent’s biggest business challenge is persistent institutional voids (remember those institutions?). In response, African entrepreneurs are “hacking” these voids through technology, connecting more Africans to goods and services such as private security in Ghana, patient monitoring in Zimbabwe, cattle herding in Kenya, and laundry washing in Uganda (p. 377). In addition to navigating these institutional voids to seek value creation opportunities, these scholars identify two other challenges (“challenge” means “opportunity” to most red-blooded entrepreneurs!): building organizational capabilities and enabling opportunities through new market-entry strategies and adopting organizational designs to operate in informal markets. In a recent review of the literature on entrepreneurship in Africa, Devine and Kiggundu (2016) discussed several dimensions along which African entrepreneurs compare with those elsewhere. First, like entrepreneurs in other settings, African entrepreneurs appear to have a greater tolerance for risk than non-entrepreneurs, are more oriented toward an entrepreneurial mindset, and are more innovative. Second, unlike entrepreneurs elsewhere, African entrepreneurs tend to be more female and from the youth segment. Third, another area of difference is the relative importance of the diaspora to African entrepreneurship, with remittances being a significant source of startup investment. Diaspora returnees are also more likely to engage in entrepreneurship. Fourth, at the level of the firm, family businesses are especially important to African entrepreneurship. Many of these firms are informal, which, as noted earlier, limits their growth. Familybased startups also incur community obligations that serve to limit their performance. Fifth, social networks in general are important for African entrepreneurs, as they are for entrepreneurs elsewhere. These networks have more positive impacts on non-family firms in Africa than they do for family firms. Sixth, while informal startups offer an important source of employment, low returns are associated with these businesses, as they are elsewhere. Seventh, financial resource constraints do not seem to stop African entrepreneurs from starting businesses, as has been observed elsewhere. Eighth, as with other settings with lower income levels, African entrepreneurs are more predisposed to social entrepreneurship. In Africa this predisposition is reinforced by the levels and types of poverty, informality, colonial legacy, and ethnic identity, all of which lead to more entrepreneurs interested in acting in the public good. The collectivist orientation of many African economies also encourages this orientation to social entrepreneurship (please see the earlier discussion on Africa’s informal institutions). In unpublished work, Ven and David (two of your co-authors) ask a more basic question: which theories—Western or African—better explain what we see happening in African

34  The basics

entrepreneurship? While we’ve already discussed some of the leading Western theories of entrepreneurship in this chapter—remember effectuation and improvisation? —African theories of entrepreneurship have been harder to identify. This is kind of interesting, because other major economic regions such as China and Russia have already headed down the road of figuring out what is distinctive about their entrepreneurs and their startups. In Africa, two possible roads to an African entrepreneurship theory have been identified so far: focusing on informal startups, and Africapitalism. Conceptualized by Nigerian businessman Tony Elumelu, Africapitalism calls entrepreneurs back to their moral roots and highlights ubuntu practices such as a focus on progress and prosperity (as opposed to just material accumulation), a sense of parity (as opposed to high inequality), a sense of peace and harmony (versus socio-environmental imbalance and creative destruction), and a sense of place and belongingness (versus globalized capitalism). Ven and David found Africapitalism principles at work in the cases they studied, but also Western theories.

What don’t we know about entrepreneurship? Entrepreneurship is a relatively new academic discipline within the social sciences. There is a lot that we don’t know about it! Probably the most important gap in our knowledge is that we don’t have anything like a surefire recipe for success. Sure, we know some actions you can take that will improve your odds of survival and growth (see the prelaunch checklist in Chapter 3). But, even if you follow all of those suggestions, you are still not guaranteed to survive and succeed as an entrepreneur. Nor is that likely to improve anytime soon. Remember—growth-oriented entrepreneurship is fundamentally based on uncertainty. Uncertainty means unpredictability. That means that we have to use the tools we have, such as the effectuation strategies, to help us to exploit that uncertainty and build a new venture. Keep in mind, however, that we don’t have good enough data yet to show that, if you follow effectuation, your odds of new venture survival and growth will actually increase. All we have so far is evidence that expert entrepreneurs follow effectuation strategies. While we know that having an undergraduate degree improves your odds of success as an entrepreneur, we don’t know how effective entrepreneurship education actually is. Some types of curriculum—business models rather than business plans—seem to be more effective, and some types of pedagogy and andragogy—such as experiential learning—also seem to work. Competence-based curricula in entrepreneurship—ones that demonstrate that students can actually do something with their knowledge—also seem to work better than curricula that are mainly about test-taking. But whether having a degree in entrepreneurship—or even taking a course in entrepreneurship—makes you a more effective entrepreneur remains largely unknown so far. Entrepreneurship scholars periodically take stock of what we do and do not know. Venkataraman, Sarasvathy, Dew, and Forster (2012) made a strong argument that we don’t yet have a full understanding of the entrepreneurial method. They saw this method— comprised of heuristics, techniques, strategies, and principles—as being the most important knowledge gap for us to fill, rather than the predominant research strain focused on scholastics around antecedents and consequences. Shepherd (2015) echoed this need for embracing alternative paradigms.

Theories of entrepreneurship 35

But what about the day-to-day level of new venture activity? What don’t we know there? As Shepherd suggested, we have a more limited understanding of how entrepreneurs interact with others to build their new ventures. Beyond the rational part of how we think, we also have an unclear view on the role of emotion in entrepreneurial performance. For example, many of us who teach entrepreneurship encourage our students to build new ventures and products where their passion intersects with the knowledge and skills that they have mastered (discussed in more detail in Chapter 3). But what’s the right level of passion to have as an entrepreneur? Or is passion even the right emotion for an effective entrepreneur to have? Gilbert (2016) argued that passion is less important than curiosity as a fuel for any creative enterprise. She also suggested that most people have a hard time developing a passionate attachment to any activity. These are just some examples of the many, many things we do not yet fully understand about entrepreneurship. While we do know some of the rules of the road that help demarcate a somewhat smooth journey from ending up in a ditch, those rules—and our understanding of them—are still emerging. Exciting, right? Yes, but as Gladwell (2010) suggested, effective entrepreneurs like to have things buttoned up. They don’t like loose ends. So when theory is not as strong as they would like it to be, they prewire for success. Kind of like effectuation, effective entrepreneurs seek to control what they cannot know. That’s probably the best path forward, given what we don’t know about entrepreneurship.

Summing it all up The purpose of this chapter has been to give you an overview of entrepreneurship theory. We began by making the case that theory matters for any entrepreneur who wants to be effective. Then, after talking about some of the early thinkers on entrepreneurship, we defined the term a bit more formally so that we know what we are actually trying to understand! From there, we talked about what we know generally about entrepreneurship in three big chunks: the big picture, the mid-levels, and the day-to-day. Most of this knowledge comes from the West. Then we talked about the next set of theories, which are those that come from emerging economies like China and India. Finally, we considered what we know about entrepreneurship in Africa. It’s a lot, we know. But if you want to remember the headlines, here are a few to consider: 1 The big picture and the mid-levels matter a lot. In other words, it’s more important to choose where you start your new venture, and the industry that the new venture is in, than it is to learn the latest and greatest technique for becoming a better entrepreneur. The latter seems more doable, right? But being more strategic—by choosing country and industry—will pay off a lot more. Some of you are probably thinking—do I really have a choice about what country I start my new venture in? I’m a Kenyan, I live in Kenya, and therefore that’s where I will start my new venture. Period. Well, look around you, friend. Wherever you are living in Africa, there are probably lots of immigrants who moved to YOUR country from some other place,

36  The basics

often to pursue new venture opportunities. Think about the Greeks, Lebanese, and Indians scattered across the continent, many of whom are accomplished entrepreneurs. Or think about entrepreneurs from elsewhere in Africa who moved to your place for a better life. For example, large numbers of immigrants from Zimbabwe, the Democratic Republic of Congo, and Somalia have moved to South Africa to make a better life for themselves. Many Somalis have moved to Kenya. And, of course, don’t forget the diaspora. Don’t like the entrepreneurial conditions in your home country? Then move to the UK, the United States, or even China, as many entrepreneurs have already done. Chungking Mansions in Hong Kong is 17 stories of African entrepreneurs. You have a choice. And, of course, you have even more of a choice when it comes to industry. Yes, to some extent, you are constrained by your prior education and, especially, industry experience. It is better to start a firm in an industry in which you have significant prior experience; at least, that’s what the Western evidence strongly suggests. But who says you have to stay in one industry for your entire professional career? Some of the authors have reinvented themselves two or more times in their careers. So for you it makes sense to think a bit more strategically when you pick the industry from which you want to launch. 2 We don’t know enough about African entrepreneurship, and that makes pursuing a startup there more challenging than elsewhere. Do Western approaches make more sense than local ones? We are still feeling our way in this regard. You should gather your own data, read the research, and proceed cautiously. More generally, we don’t know a lot of things about entrepreneurship, so the best path form seems to be an effectual one—control what you cannot know. 3 Africa continues to change, often in unpredictable ways. These changes are the main source of entrepreneurial opportunity. It is important for you to develop your own theory about change. We’ve tried to provide some general background in this chapter, but ultimately you will have to get comfortable with your own mental model.

Review questions 1 2 3 4 5 6 7 8 9

Why is theory important if you want to be a successful entrepreneur? What is an entrepreneur? What is the “big picture” and why is it important for entrepreneurs? If you could start a new business in an African country, which one would it be? Why? What’s the difference between discovery and creation? Explain the importance of the following statement: we build who we are. What are the major institutional similarities and differences between Africa, China, and India? Why are there so many entrepreneurs in Africa? Describe one area in which our knowledge of entrepreneurship is relatively weak.

Note 1. And, we know a lot about the impact of institutions more broadly on poverty reduction and economic growth. A really good book on this subject is Acemoglu and Robinson (2012). It has lots of good examples from Africa.

Theories of entrepreneurship 37

References Acemoglu, D. and Robinson, J. (2012). Why nations fail: The origins of power, prosperity, and poverty. New York: Crown. Alvarez, S.A. and Barney, J.B. (2007). Discovery and creation: Alternative theories of entrepreneurial action. Strategic Entrepreneurship Journal, 1: 11–26. Alvarez, S.A., Barney, J.B., and Anderson, P. (2013). Forming and exploiting opportunities: The implications of discovery and creation processes for entrepreneurial and organizational research. Organization Science, 24 (1): 301–17. Assenova, V. (2019). Why are some societies more entrepreneurial than others? Evidence from 192 countries over 2001-2018. Available at Social Science Research Network (SSRN). Baker, T. and Nelson, R.E. (2005). Creating something from nothing: Resource construction through entrepreneurial bricolage. Administrative Science Quarterly, 50: 329–66. Bruton, G.D., Zahra, S.A., and Cai, L. (2018). Examining entrepreneurship through indigenous lenses. Entrepreneurship Theory and Practice, 42(3): 351–61. Devine, R.A. and Kiggundu, M.N. (2016). Entrepreneurship in Africa: Identifying the frontier of impactful research. Africa Journal of Management, 2(3): 349–80. George, G., Corbishley, C., Khayesi, J.N.O., Haas, M.R., and Tihanyi, L. (2016). Bringing Africa in: Promising directions for management research. Academy of Management Journal, 59(2): 377–93. Gilbert, E. (2016). Big magic: Creative living beyond fear. New York: Riverhead. Gladwell, M. (2010). The sure thing: How entrepreneurs really succeed. The New Yorker, January 18th issue. Kamkwamba, W. and Mealer, B. (2010). The boy who harnessed the wind: Creating currents of electricity and hope. New York: William Morrow. Li, Y. and Zahra, S.A. (2012). Formal institutions, culture, and venture capital activity: A cross-country analysis. Journal of Business Venturing, 27: 95–111. Prabhu, J. and Jain, S. (2015). Innovation and entrepreneurship in India: Understanding jugaad. Asia Pacific Journal of Management, 32: 843–68. Reed, S., Sarasvathy, S., Dew, N., and Wiltbank, R. (2017). Effectual entrepreneurship. Abingdon: Routledge. Rodrik, D. (2018). An African growth miracle? Journal of African Economics, 27(1): 10–27. Rosling, H. (2018). Factfulness: Ten reasons we’re wrong about the world—and why things are better than you think. New York: Flatiron. Sarasvathy, S.D. (2001). Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management Review, 26(2): 243–63. Schwab, K. (2018). The global competitiveness report. Geneva: World Economic Forum. Shane, S.A. (2008). The illusions of entrepreneurship: The costly myths that entrepreneurs, investors, and policy makers live by. New Haven: Yale University. Shane, S. and Venkataraman, S. (2000). The promise of entrepreneurship as a field of research. Academy of Management Review, 25(1): 217–26. Shepherd, D.A. (2015). Party on! A call for entrepreneurship research that is more interactive, activity based, cognitively hot, compassionate, and prosocial. Journal of Business Venturing, 30(4): 489–507. Van de Ven, A.H. and Poole, M.S. (1995). Explaining development and change in organizations. Academy of Management Review, 20(3): 510–40. Venkataraman, S., Sarasvathy, S.D., Dew, N., and Forster, W.R. (2012). Reflections on the 2010 AMR decade award: Whither the promise? Moving forward with entrepreneurship as a science of the artificial. Academy of Management Review, 37(1): 21–33.

Part II

Birth

3

Mindset, capabilities, and goals

Learning objectives: upon completing this chapter you will: • • • • • • •

Understand the relationship between personality traits and successful entrepreneurship Appreciate the role of creativity in starting new ventures Understand the influences that motivate entrepreneurs Identify the skills you need and the importance of mastering them Recognize the role of culture and gender in African entrepreneurship Discover what education and training can do for entrepreneurs Assess your readiness to engage in entrepreneurship Afrimarket When 23-year-old Rania Belkahia decided to launch an e-commerce business in West Africa while still studying at a Paris business school, she was advised against it. However, the growing middle class and rapidly increasing internet mobile access, coupled with very low online retail activity, convinced her that the time was right to launch Afrimarket, her online platform. She started with the Ivory Coast, but, in 2015, expanded into other Francophone countries including Senegal, Benin, Cameroon, and Mali, with plans to expand to Guinea, Ghana, Kenya, and Tanzania. Starting in 2013 with a €500,000 pilot investment from Francebased angel investors, Afrimarket subsequently raised €20 million to fund its expansion and has 30 employees in France and almost 200 in West Africa, selling a wide range of products including food, electronics, appliances, household, and cosmetics. The initial intent was to target members of the African diaspora in Europe with Africa-sourced products, but very quickly, the company switched its focus to the rapidly growing African middle class. The platform had revenues of €30 million in 2018 with over half a million clients who have made at least one transaction and an average transaction spend of €70 to €90. It processes almost 250,000 orders monthly. They are planning to double their revenue in 2019. A big key to success has been Afrimarket’s control over its logistics from sourcing and curating its products to the last-mile delivery, critical in a region where many rural customers don’t have formal street addresses and pay cash on delivery. Now 29, Rania also feels that her Moroccan upbringing and European education give her a deep understanding of Africa and a possible edge over her competitors like Jumia and Chinese giant Alibaba, which is also eying Africa. Jumia, incorporated in Germany with a Portugal-based tech team and Dubai-based French co-chief executives, has had to deal with criticisms on social media that it is not really African; however, it too sees massive potential in Africa with a projected 700 million smartphone users by 2025 and 400 million internet users. This e-commerce potential is tempered by poor data

42  Birth

connectivity, low disposable incomes, and limited access to bank accounts and mobile payment wallets. Despite these challenges, Jumia claims four million consumers in the 14 countries it operates in and reports almost US$150 million in revenue, although its drive for market share has meant accumulating big losses. Update: In late 2019, Afrimarket filed for liquidation in the French courts, laying off its 250 employees. Although revenues were growing, investment dried up in summer 2019 and without the injection of new capital, it could not reach the critical size necessary to compete effectively against Jumia and others. Green Agro Solutions Abrhame Endrias, the son of a teacher and an agricultural official, struggled to make ends meet as a lecturer at Adama Science and Technology University after graduating with master’s in business administration from Addis Ababa University. Motivated by a desire for financial independence as well as to help reduce poverty in rural Ethiopia through better farming practices, and armed with a US$2000 loan, Endrias began growing vegetables on rented land in 2011. Seeing that agricultural productivity was low due to inefficient farming practices, he decided to offer a comprehensive one-stop solution to boost productivity for small farmers in the Oromia region by establishing Green Agro Solutions in 2013. Based in Sagure, about 180 km from the capital Addis Ababa, the startup provides seeds and other inputs such as animal feed and veterinary drugs and rents machinery such as harvesters and tractors. With the recent signing of the Africa Continental Free Trade Agreement (AfCFTA), which is scheduled to go into effect in mid-2020, Endrias is confident that Ethiopian agricultural produce such as potatoes will find ready markets in neighboring countries such as Djibouti, which faces food shortage problems. He is aware of the enormous challenges that come with food exporting – logistical, bureaucratic, financing, and political – but the recently opened EthiopiaDjibouti railway and the anticipated removal of administrative bottlenecks and free movement promised by AfCFTA are encouraging for agripreneurs like Endrias. Green Agro partners with Ethiopian and international universities and agencies, and Endrias feel that with more technically skilled partnerships, agribusiness will grow, and local manufacturing of equipment will begin not only in Ethiopia but other African countries as well. Equity bank The Kenya-based bank was founded by James Mwangi to provide access to financial services in Kenya. Many people in rural Kenya, like Mwangi’s mother, did not have a bank account – there were no branches close by, minimum balance requirements were too high, and cash withdrawal rules were limiting – largely because banks did not appreciate the financial situation of ordinary people. Unsurprisingly, fewer than 10% of Kenyans had bank accounts at the beginning of the 21st century. Mwangi determined that to grow banking, the needs of ordinary Kenyans had to be addressed. Equity Bank wanted to make banking more welcoming to customers and did away with high minimum balances, made products affordable, and introduced mobile village banking where mini branches were created that fit onto Land Rovers which traveled to villages across Kenya. Subsequently, the bank introduced the agency banking model whereby 30,000 small retail outlets were accredited as bank agents to perform routine functions such as dispensing cash, accepting deposits, bill paying, etc. In return, the shopkeepers become owner-managers, receiving a commission while the bank was able to significantly expand its reach. Given its

Mindset, capabilities, and goals 43

business model’s focus on high volume and low margins, the bank now uses technology rather than Land Rovers to deliver its services. Its Equitel – a mobile phone-based app – was launched in 2015 and its focus on cost reduction is seeing results, partly because Equitel has grown transaction volume significantly. All these innovations have allowed Equity Bank to scale – it is now the biggest bank by market cap in East and Central Africa. Its branches perform 5,000 transactions daily, its agents 300,000 daily, and Equitel 900,000 transactions a day. Thanks partly to Equity Bank’s innovations, two-thirds of Kenyans now have bank accounts. It now reports 12 million clients across East and Central Africa, US$5 billion in assets, and US$270 million in pretax profits.

Personality traits There is now a fairly well-established stream of research on the entrepreneurial mindset and traits that lead to startup success. The mindset and intention to become an entrepreneur is often thought to result from the personality traits the individual possesses. As a result, there has been a significant amount of research around traits, which may be seen as psychological characteristics, and values, which are broad tendencies and learned predispositions (Herron, 1990). Traits commonly associated with the desire for entrepreneurial action include innovation, risk propensity, internal locus of control, and energy level (Thomas and Mueller, 2000). Others have identified additional factors such as the need for accomplishment, tolerance of equivocalness, creativity, the need of self-rule, and self-adequacy (Achchuthan and Kandaiya, 2013). Herron (1992) argues that the need for achievement is an important differentiator of entrepreneurs from non-entrepreneurs, although he is careful to point out that personality tests are not a good predictor of the subsequent performance of a new venture. There are obviously demographic factors such as gender and age that will moderate the relationship between these traits and startup activity. Researchers have also examined the role of personality and biographical characteristics in driving entrepreneurial intentions. While such intentions are almost certainly likely to have multiple drivers, both internal (e.g., personality and human capital) and external (culture, political, and economic environment), let us look at the internal traits in greater depth. McClelland (1961) suggests that the need for achievement pushes some individuals to make great efforts to achieve their goals and objectives. This is related to the need to solve problems and take moderate risks in attempting to do so. People with high internal locus of control believe that much of their life is in their control and are therefore more likely to be entrepreneurially inclined. Conversely, those with low locus of control believe many things to be outside their control and place more weight on luck, fate, etc. Optimism – being positive about future outcomes – has also been frequently cited as a characteristic of those with entrepreneurial intentions especially given the inherent complexity and risks associated with startups. Optimists are seen as being able to handle, persist, and surmount the challenges encountered in the early stages of a new venture, whereas pessimists may not have the tenacity and drive to persist. The need for autonomy (or independence) is seen as another personality trait related to strong entrepreneurial intentions. Such individuals feel the need to have control over their decisions and objectives and are uncomfortable with depending on or reporting to a boss or supervisor.

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As mentioned earlier, demographic factors such as gender, age, and education may confound the effect of personality traits on entrepreneurial mindsets, orientation, and intention. There is evidence from Ethiopia (Mersha and Sriram, 2019), discussed in more depth later in this chapter, that women entrepreneurs exhibit greater pessimism, and fear of failure, than men. They also are less confident and display low locus of control, believing luck plays a greater role in their success than men do. Unsurprisingly, the rates of new venture startups for women in most African countries are lower than for men. It should be pointed out that gender-based personality differences may have to do with cultural norms and expectations (e.g., responsibility for the family and children) and systemic hurdles faced by women when it comes to access to finance, etc. Given all various personality dimensions hypothesized to affect various behaviors and performance, Ciavarella et al. (2004) studied the impact of the “Big Five” personality factors – extraversion, emotional stability, agreeableness, conscientiousness, and openness to experience – on entrepreneurial survival and longevity. They found conscientiousness (being organized and planned, achievement oriented, and persistent) to be positively related to the venture’s long-term survival and openness (imaginative, creative, and intelligent) to be negatively related. The other three factors were unrelated. Possible explanations for the finding on openness suggest that these traits may be more valuable in the early stages of the venture whereas managerial abilities may become more important as the venture ages. Also, more open individuals may see several opportunities and spread their resources too thinly and lose their energy and enthusiasm as the venture matures and becomes routine and stable. These findings caution us to understand that personality variables have to be looked at in the context of the stage of the venture and that those that are valuable at the nascent stage may not be as useful in maturity. It also brings into focus the need for teams and networks with complementary traits and skills (discussed in Chapter 7). What about creativity? Entrepreneurship has been seen as an act of creativity in that entrepreneurs often look at things in a novel way or find innovative solutions to problems. They often discover unfilled gaps in the market, cleverly wring resources from financially constrained environments, or ingeniously grow and scale their businesses. The whole notion of entrepreneurial bricolage, discussed in Chapter 2, is an exercise in creativity in which individuals create something of value from what’s at hand. Similarly, the principles of effectuation (Sarasvathy, 2001) – leveraging what resources you have and who you know, learning from mistakes and surprises, and losing only what you can afford to – hinge on creativity by employing who and what you know. In some respects, creativity may be akin to traits such as imagination, openness, and innovativeness. Sawyer (2012) points out that creativity researchers can be clustered around two major traditions – the individualist approach and the sociocultural approach. They each define creativity differently and examine it using different lenses. Individualist definition: Creativity is a new mental combination that is expressed in the world (p. 7). Sociocultural definition: Creativity is the generation of a product that is judged to be novel and also to be appropriate, useful, or valuable by a suitably knowledgeable social group (p.8).

Mindset, capabilities, and goals 45

From an entrepreneurship standpoint, the sociocultural definition is closer to what is commonly thought of as innovative. Since unlike personal creativity where the act, product, or idea may be novel for the innovator, but not necessarily new to the world, sociocultural creativity implies that the product is valuable to a knowledgeable group. Sawyer also presented the creative process as an integrated framework involving eight stages (p. 88): 1 2 3 4 5 6 7 8

Find and formulate the problem. Acquire knowledge relevant to the problem. Gather a broad range of potentially related information. Take time off for incubation. Generate a large variety of ideas. Combine ideas in unexpected ways. Select the best ideas, applying relevant criteria. Externalize the idea using materials and representations.

Several elements of this framework are particularly germane to would-be entrepreneurs at the startup stage. While finding solutions to existing problems is in itself an important skill, creativity also involves finding a problem. It is often easier to use past experience and rote learning to solve well-defined problems, but ill-defined problems often require more creativity since there is more uncertainty about the goals and there is more than one road to reach the end. Entrepreneurs are often seen as problem finders. Once the problem is formulated, knowledge has to be acquired. Achieving mastery (discussed in detail later in this chapter) requires deep study, concentration, effort, and practice. While formal education and schooling is essential to attain the necessary knowledge, it is possible that beyond a point, too much education could inhibit creativity just like, as we discuss later, too much passion may interfere with the entrepreneur’s judgment. It is also important in the process to get information from a wide variety of sources and discern patterns that emerge. Many problems arise as a result of multiple factors, and to correctly formulate the problem, these factors must be identified and understood. Incubation is an important step since it allows the hard work and effort expended in formulating a problem and acquiring relevant knowledge to “steep” in the mind, where one steps away from the conscious task and allows the unconscious and unstructured mind to process the information and the information to subconsciously percolate. From this introspection, a variety of ideas are generated and combined in interesting ways. The wider the knowledge base and the more domains one has, the more one sees patterns that may not be apparent to others with narrower domain knowledge. The ideas are then winnowed and whittled down, again based on the creator’s domain-specific knowledge. At the last stage in this framework, the creator gives the idea shape and form. For the entrepreneur, this would mean a prototype for a physical product or a visual or verbal description of an intangible product. Of course, the sociocultural definition of creativity assumes that creativity does not occur only in an individual’s mind. It recognizes the importance of the group in that collaboration, sharing and interactions among team members are an important part of the creative process. Many creative products such as entertainment (music, movies, and games) and apps are the product of intense collaboration and cross-fertilization of ideas where individual contributions are often hard to precisely identify and isolate.

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One useful way to stimulate new ideas is the SCAMPER checklist which as Michalko (2006) reports, were based on questions first suggested by Alex Osborn and later organized into the SCAMPER mnemonic by Bob Eberle. Substitute something Combine it with something else Adapt something to it Modify or Magnify it Put it to some other use Eliminate something Reverse or Rearrange it Michalko (2006, p. 74). If we accept that most “new” things are changes, modifications, adaptations, or additions to something that already exists, SCAMPER is a useful way for us to think creatively. Sawyer (2012) dispels some myths around the Western model of creativity and concludes with some suggestions of how we can be more creative. Briefly, creativity requires hard work and study of what’s been done before and finding ways to combine existing things in novel and unexpected ways. Collaboration and networking are crucial, as are finding mentors and learning from others doing similar things. Mastery of one’s domain, developing the right work habits, interspersed with time off for introspection and incubation, and learning how to judge and select good ideas, and seeing patterns and connections are important. There are cultural differences in that the drivers of creativity in collectivist cultures are different from those in individualistic cultures such as the desire for individual self-actualization and self-expression. The potential implications of this for African entrepreneurs are examined later in this chapter. One issue common to many resource-poor environments, such as those found in many African countries, is that of access to finance (the different options for startup and growth financing are discussed in detail later in Chapter 4), and as a result, startups have to be creative in their search for funding. While the founder’s personal funds, friends, and family are often the source for early-stage financing, these may not be viable options for entrepreneurs of modest means and limited social networks. The undercapitalization of banks, politically motivated lending by them, and the absence of assets to use as collateral limit debt-based borrowings as a viable source for startups. Business angels are another potential source, but in Africa, these are still at their nascent stage and are generally reluctant to fund necessity and lifestyle businesses. Venture capital and equity financing options, when they exist, are rarely available for early-stage, pre-revenue ventures. However, as Lingelbach et al. (2015) show from their study of the financial sector in four African countries (Botswana, Ethiopia, Ghana, and South Africa), various innovative financing methods were employed. In more economically advanced South Africa, relatively sophisticated sources such as venture capital (VC) funds, private equity, royalty-based equity, and public-private partnerships were used. In the other three countries, where VC and private equity funding is much scarcer, private share placement and customer financing were the innovations. Application exercises: 1 Visit https://www.kellogg.northwestern.edu/faculty/uzzi/ftp/page176.html and assess your level of personal creativity.

Mindset, capabilities, and goals 47

2 Examine the eight-stage creativity framework in the context of James Mwangi and Equity Bank to illustrate the application of the framework. 3 Think about something that you would like to accomplish. Apply the SCAMPER framework and identify the new ideas that emerge. The literature has shown that personality traits, while appearing to be sensible and credible bases for explaining entrepreneurial mindsets, have generally shown disappointing results when it comes to having a significant impact on new venture performance (Herron, 1994). It may be that the traits that have been studied may not have been the right ones and other factors need to be researched and examined. Subsequent studies have expanded the list of traits to include ones such as passion and tenacity (Baum and Locke, 2004), although their impact on new venture success was found to be indirect, and grit (Butz et al., 2018). An emerging stream of research is arguing that rather than looking for personality differences between entrepreneurs and non-entrepreneurs, perhaps some interesting differences will be revealed by studying how these traits differ between different entrepreneur groups such as artisan entrepreneurs (Hoyte, 2019). Similarly, do successful social entrepreneurs (such as Green Agro) and tech entrepreneurs possess different mindsets and personality from more traditional entrepreneurs? In Africa, findings based on case studies of five Egyptian social entrepreneurs reveal that they share many personality traits with “traditional” entrepreneurs such as risk taking, innovation, compassion for social change, perseverance, and entrepreneurial mindsets (Ghalwash et al., 2017). Such questions are further examined in the following sections. Application exercises: 1 From the Afrimarket and Green Agro Solutions cases, make a list of what you think are the major personality traits possessed by Belkahia and Endrias. 2 Do some additional research on these two startups and discuss whether you think demographic factors were important in their initial success. 3 Can entrepreneurial traits be taught? Why or why not?

Entrepreneurial motivations The issue of entrepreneurial motivations has received significant attention from researchers and scholars over the years. Studies (Borooah and Hart, 1999; Brockhaus, 1980; Herron, 1990; Masurel et al., 2002) have shown that there are various “push” and “pull” factors that motivate individuals to become entrepreneurs. The “pull” factors are those that attract – such as the desire for independence and control, family tradition, to improve social status, and the motivation to innovate and create new products. On the other hand, many people are pushed toward self-employment for various reasons including the lack of job opportunities, the need to supplement family income, absence of required educational and other qualifications, and limited opportunities for career advancement (Basu and Altinay, 2002). In some countries, certain groups such as immigrants and women often find that entrepreneurship is the only viable means of livelihood (Fisher and Lewin, 2018). For many UK immigrants, for instance, Barrett et al. (2002, p. 27) contend that “much ethnic minority business appears to have grown in circumstances of urban and economic adversity”. Limited access to financing and social and cultural norms which result in certain gender roles for women means that women are frequently pushed rather than pulled

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into starting businesses. In Africa, evidence from Tanzania (Kiyabo and Isaga, 2019) and Ethiopia (Mersha and Sriram, 2019) provides confirmation. Additionally, one’s values such as the balance desired between family and work, individualism, need for independence, wanting to be involved in decision-making, and liking for variety in the job also motivate some people to seek entrepreneurial opportunities and look for self-employment. Based on the theory of planned behavior (TPB) proposed by Ajzen (1991), Krueger and Brazeal (1994) proposed that the intention to start a business was influenced by the perceived feasibility and desirability of becoming an entrepreneur. Feasibility is partly a function of certain traits such as confidence in oneself and one’s abilities and skills while desirability indicates that one is motivated by one’s perception of the value of becoming self-employed and starting a business. Using the Global Entrepreneurship Monitor’s (GEM) classification, these entrepreneurs would be seen as “opportunity” entrepreneurs, that is, pulled into starting ventures by personal interest (Reynolds et al., 2002). Their businesses are often innovative and scalable, whereas those started by “necessity” entrepreneurs, pushed into it, are commonly solo enterprises and microenterprises with little growth or employment potential (Table 3.1). Table 3.1  Necessity and opportunity entrepreneurs Characteristics

Necessity entrepreneurs

1 Primary driver

Entrepreneurship is pursued by “push factors” as a last-ditch initiative for economic survival

2 Skill level 3 Education level

Generally unskilled Generally, very low education or no education at all

4 Ease of navigating the bureaucracy while starting a business

Difficult since they are not familiar with the bureaucratic red tape and do not know how to navigate the system

5 Geographical location 6 Employment size

Both in rural and urban areas Often solo operators

7 Financial resource availability

Extremely limited; best source is microfinance (where such facilities are available) or loans from family members

8 Community/family support 9 Growth potential 10 Nature of business Source: Mersha et al. (2010).

Available Limited Small retail, unskilled services

Opportunity entrepreneurs Entrepreneurial endeavor is initiated by “pull” factors to attain wealth accumulation, greater personal satisfaction, and to create employment opportunities for others Skilled At least secondary school education; many have attended/ completed college Navigating the bureaucracy is generally easy; they are familiar with the expected process and are often able to get around with ease Primarily in urban centers May hire several employees, often upwards of 10 Some financial resources which they need to augment to be able to start the venture; considered “too wealthy” to qualify for microfinance and leveraging their limited resources with bank loans is often difficult Available High Light manufacturing, skilled services, technology

Mindset, capabilities, and goals 49

Recent research has pointed to the need for further ref inement of the necessity-opportunity binarity, especially when trying to understand motivations. Precipitating events such as economic collapses, the 2020 coronavirus pandemic, and sudden job losses can result in “nons-entrepreneurs”, that is, those with no opportunities and no skills (Muhlbock et al., 2018) who start business out of a sense of desperation, despite their perception that they neither have the necessary skills nor do the opportunities exist (the issue of skills is discussed later in this chapter). They do so because they have no other option. Morris et al. (2015) identify four types of ventures – survival, lifestyle, managed growth, and aggressive growth – each with their own characteristics with regard to their goals, management styles, funding sources, and exit strategies (discussed in more detail in Chapter 8). They cite reports estimating that close to 85% of ventures in developed economies are survival or lifestyle ventures. Based on the available evidence from developing regions such as Africa, this proportion is likely to be even higher. The emergence of “hybrid” or part-time entrepreneurs, those who engage in entrepreneurship while holding regular wage employment, is being observed in some regions, such as the Nordic countries (Nordstrom et al., 2016). Morris et al. (2015) argue that each type of venture has its place in the economy with survival businesses providing employment and financial gain for their founders while the high growth ones can be innovative, create jobs, and help enhance a country’s global competitiveness. As a result of these differences, they recommend that any policy interventions need to be tailored to the unique needs of each venture type. In many African countries where environmental turbulence is not uncommon, this instability often creates conditions where individuals may attempt to start ventures out of necessity, desperation, survival, or even by accident. The important question for policy makers and others seeking to use startups to drive economic growth and job creation in these countries is how to help such entrepreneurs and what interventions may make their ventures more scalable. Part of this assistance rests on understanding the motivations of the entrepreneurs who start the ventures – do all lifestyle or necessity entrepreneurs want to build innovative, scalable businesses? Similar questions about motivation are important considerations for social entrepreneurs. While they are probably pulled into their ventures, the specific pull factors are likely to be different from other, more “traditional” entrepreneurs. The findings reported by Ghalwash et al. (2017) in their study of Egyptian social entrepreneurs reveal that the desire to solve social problems, inspiration from various sources, personal experience, and social networks were big motivators. The role of passion Entrepreneurial passion asks the question, “what do I love to do?”. Passion, sometimes conflated with persistence, is the “consciously accessible, intense positive feeling […] from engagement in activities with identity meaning and salience to the entrepreneur” (Cardon et al., 2009). It is seen as an important part of the entrepreneurial process, allowing the entrepreneur’s vision to be translated into action. From a common-sense perspective, it seems obvious that lifestyle and growth-oriented entrepreneurs will naturally be passionate about the ventures they start. What is less clear is what factors drive that passion and stimulate its emergence and what are its consequences. Stenholm and Nielsen (2019) argue that since entrepreneurial passion is a relatively new concept, with its legitimacy less clearly established as a consequence, research has focused on its impact

50  Birth

in an attempt to give it credibility as an entrepreneurial driver. However, if passion is important, as recent research suggests, then attention also needs to be paid to its antecedents. Understanding how to stimulate it, as well as how it can change over the life of the venture, is crucial for any initiatives seeking to increase passion and harness its energy. Given the challenges and hurdles startups face, passion is thought to be at its highest in the early stages of the venture, slowly diminishing as the venture ages. Cardon et al. (2013) identified the passion of inventing, founding, and developing the venture. The first two occur at the prelaunch phase and the third at postlaunch. Recent research, based on a sample of German entrepreneurs, indicates that not only does passion drive entrepreneurial effort but that passion is also an outcome of effort (Gielnik et al., 2015). Interestingly, but perhaps not surprisingly, they found that passion varies over time and that passion changes as a result of entrepreneurial effort. The ability to exercise free choice and progress in the venture increase the level of passion. The issue of passion has to be examined in the context of various situational factors such as the nature of the venture (survival, lifestyle, etc.), motivations (pecuniary vs. nonfinancial), and the role of free choice in both the desire to become an entrepreneur and the nature of the venture (push vs. pull). Although there is no suggestion that the passion of those motivated by a need for financial independence is different than that of a social entrepreneur’s, it is quite plausible that the passion of a survival entrepreneur, pushed into starting a business, will see their passion ebb quickly if the effort they put in does not show progress or reward. It should be recognized that passion, while generally a positive emotion that contributes to enthusiasm and commitment to the venture and possibly makes one resilient to setbacks, can also be destructive (Cardon et al., 2017). Overly passionate entrepreneurs can often allow it to impair their judgment by ignoring constructive feedback and advice, persisting with a venture when exiting may have been more prudent. Also, with so many new ventures involving teams, it is important to recognize that team entrepreneurial passion can emerge from individual member’s passions and that this team passion can influence outcomes both for individuals and the team (Cardon et al., 2017). Table 3.2 presents a checklist for you to assess your level of entrepreneurial passion. Application exercise: 1 From the Afrimarket, Green Agro Solutions, and Equity Bank cases, identify the key motivators for Belkahia, Endrias, and Mwangi in starting their ventures. 2 How would you classify these ventures? 3 Research and find examples of survival/necessity, lifestyle, managed growth, and high growth/opportunity venture from your own country. What factors motivated these entrepreneurs? 4 Complete the passion self-assessment. What conclusions can you draw? Stenholm and Nielsen (2019) suggest that one way in which entrepreneurial passion can arise is as a result of external influences, such as the socialization that occurs from a perception of emotional support. Although the authors measured emotional support purely through the impact of publicly funded startup grants, this support clearly can come from different sources. Financial support is a vitally important signal to startups particularly in resource-challenged regions such as in many areas of Africa, given the paucity of funding sources available to African entrepreneurs compared to those in

Mindset, capabilities, and goals 51 Table 3.2  Do you possess entrepreneurial passion? Scale 1 = Strongly disagree; 5 = Strongly agree It is exciting to figure out new ways to solve unmet market needs that can be commercialized Searching for new ideas of products/services to offer is enjoyable to me I am motivated to figure out how to make existing products/services better Scanning the environment for new opportunities really excites me Inventing new solutions to problems is an important part of who I am Establishing a new company excites me Owning my own company energizes me Nurturing a new business through its emerging success is enjoyable Being the founder of a business is an important part of who I am I really like finding the right people to market my product/ service to Assembling the right people to work for my business is exciting Pushing my employees and myself to make our company better motivates me Nurturing and growing companies is an important part of who I am

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

1 1 1

2 2 2

3 3 3

4 4 4

5 5 5

1

2

3

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5

1

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3

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5

1

2

3

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5

1

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5

1

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5

Source: Cardon et al. (2013).

wealthier regions, such as venture capital, angel investors, banks, capital markets, etc., so they often have to be innovative in financing their ventures (discussed in Chapter 4). This support can serve as a strong validation of the entrepreneur’s project in that the funders’ willingness to invest in it indicates their confidence in the viability of the venture. From their study of Finnish entrepreneurs, Stenholm and Nielsen (2019) argue that financial support was not only important because of its economic effects but also because it carried an emotional meaning which in turn helped develop passion. However, emotional support can take other forms as well. Social networks can also provide advice and nonfinancial assistance which can boost entrepreneurs’ confidence and morale. As mentioned in the previous chapters and can be seen in Table 2.3, most African countries are collectivist rather than individualistic, and loyalty to one’s group and supporting its members is an important cultural value. Both strong (friends and extended family) and weak ties (outside funders, government agencies) can serve as a basis for this support and these networks can therefore be an important source of emotional support for African entrepreneurs (see Chapter 7 for more on social networks). The table reveals some interesting differences in which while the Arab North African countries have slightly higher levels of individualism, South Africa is the clear outlier among sub-Saharan African nations, possibly reflecting its multiracial and multicultural character. It is an important reminder that although we are examining African entrepreneurship, there are important cultural differences between countries and in all likelihood within countries as well given the multilingual and diverse nature of most African countries.

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It is interesting to note that the sub-Saharan countries, with the exception of South Africa as stated earlier, have very similar and low levels of individualism, or conversely, high levels of collectivism. Individualism scores cluster between 15 (Burkina Faso, Ghana, and Mozambique) and 35 (Zambia). Although these scores are only reported for 18 of the 54 countries on the continent, it is interesting that countries representing all parts of sub-Saharan Africa are quite similar. They may be spread out in terms of geographic distance but are quite close in cultural and psychic distance. Stenholm and Nielsen’s (2019) research proposed another, internal, influence which can contribute to the development of entrepreneurial passion. They identified this as competencies, abilities, and skills. These abilities may be task related – those that “are related and transferrable to the tasks and challenges associated with being an entrepreneur” (p. 1373) – or more general such as education and professional experience. Their study found that task-related competencies influenced the development of entrepreneurial passion by increasing confidence in the viability of the venture which in turn led to positive feeling and ultimately, to passion. They also found an interdependence between emotional support and competence in that entrepreneurs with task-related skills were better able to perceive emotional support and use it to ignite passion. So, let’s turn our attention to these abilities and skills, and how to master them.

What skills are necessary? While passion asked “what do I love to do?”, we now ask the questions, “why do I need to know?” and “what do I do well?”. The first gets at the issue of what skills are needed for entrepreneurial success (discussed here briefly but in more depth later in the book) and the second probes the concept of mastery. In his book Outliers, Gladwell (2008) popularized the idea of the 10,000-Hour Rule to explain mastery, based on the ideas of Ericsson et al. (1993), who proposed a link between deliberate practice and exceptional performance. Gladwell’s argument is that in order to achieve high levels of success, hard work, along with access and advantages earned and unearned, is the key. Subsequent researchers and analysts have questioned the validity of the 10,000-Hour Rule, arguing that practice may indeed lead to mastery in some fields but not necessarily in others (Macnamara et al., 2014). Their meta-analysis of the research on deliberate practice found that deliberate practice explained as much as 26% of performance variation in games and as little as 1% of the variation in professions. One explanation they offer is that for predictable and stable activities where the rules don’t change (e.g., running and classical music), deliberate practice may lead to better performance than in the case of less predictable ones (e.g., entrepreneurship). It appears that for entrepreneurs, basic abilities and other individual difference factors that lead to improved performance have also to be identified, in addition to focusing on deliberate practice, if we are to fully understand mastery. The earlier discussion of necessity versus opportunity entrepreneurs leads to the question of the readiness to be a successful entrepreneur when one is pushed into it rather than pulled by it. Presumably the necessity entrepreneurs, quite common in Africa and other developing regions, are less skilled and prepared since their ventures are often a matter of survival. Opportunity entrepreneurs would tend to possess the requisite skills and abilities and possibly even have mastered some of them as a result of education,

Mindset, capabilities, and goals 53

accumulated experience, and practice (Mersha et al., 2010). We now look at what we know about what skills and abilities are necessary for successful entrepreneurship. The inconclusive results on the relationship between personality traits and entrepreneurial success discussed earlier may be explained by examining the role of abilities and skills. Szilagyi and Schweiger (1984) suggest that in order to adopt behaviors which result in better performance, certain skills are needed which in turn may depend on the attributes and traits that individuals possess. In a slightly different context of personnel selection, Hollenbeck and Whitener (1988) proposed that the impact of personality characteristics on performance may often not be direct but instead be mediated by motivation and moderated by ability. This appears to indicate that while some personality traits could impact performance, unless accompanied by high levels of skill, possessing the right traits may not be sufficient. Clearly, abilities and skills matter and the question becomes, which skills? Various elements of the skills and capabilities required for successful entrepreneurship have been identified such as the ability to critically evaluate complex situations and problems, networking, financial literacy, planning, marketing, etc. (Bullough et al., 2015). Herron (1990) identified seven skills as being relevant for entrepreneurial success and new venture performance: product/service design, business, industry, leadership, networking, administrative, and entrepreneurial. Baum and Locke (2004) introduced the notion of “new resource skill”, the ability to acquire the resources needed to start and grow a new business venture, a skill especially important for startups compared to the general management and administrative skills needed to run already established and ongoing concerns. Maier (1965) defined abilities as aptitudes (those that develop without training) and achievements (outcomes of training or practice) which then leads to the question of whether entrepreneurs are “born” or “made”. Interestingly, in addition to having the necessary abilities to succeed as an entrepreneur, the belief that one has these abilities may also be important. This belief, entrepreneurial self-efficacy, has been thought to differentiate between entrepreneurs and employees (Chen et al., 1998) and impact entrepreneurial intentions (Boyd and Vozikis, 1994). Self-efficacy is closely related to personality factors such internal locus of control, and possibly even extraversion. This suggests that a strong, but not misplaced, confidence in one’s abilities is a vital ingredient (see Chapter 8 for a discussion on the dangers of overconfidence). Strikingly, evidence from Afghanistan shows that even in hostile conditions, such as war, individuals develop entrepreneurial intentions if they are resilient and believe in themselves and their abilities, that is, possess self-efficacy (Bullough et al., 2014). This has particular resonance in some African countries and regions where natural calamities, disease, political instability, and civil wars are not unknown. The coronavirus pandemic, and its consequences, is another test of entrepreneurial resilience and self-efficacy in the face of a massive public health crisis for Africa and the world.

Application exercise: Complete the self-efficacy assessment (Table 3.3). What did you learn about yourself? We examine the psychological factors such as the Big 5 personality traits, self-efficacy, and creativity in much greater depth in Chapter 11 and examine them against the different types of entrepreneurial ventures identified by Morris et al. (2015) and contextualize them for the African environment.

54  Birth Table 3.3  Self-efficacy assessment Scale 1 = Strongly disagree; 5 = Strongly agree I will be able to achieve most of the goals I set for myself When facing difficult tasks, I am certain that I will be able to accomplish them In general, I think that I can obtain outcomes that are important to me I can succeed at most any endeavor to which I set my mind I will be able to successfully overcome many challenges Establishing a new company excites me I am confident that I can perform effectively on many different tasks Compared to other people, I can do most tasks very well Even when things are tough, I can perform quite well

1 1

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3 3

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2 2 2 2

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Source: Chen et al. (2001).

An entrepreneurial mindset We have discussed the traits, motivations, and skills that impel individuals to start ventures. It is clear that while motivations, abilities, passion, mastery, etc. are necessary ingredients, resource availability is also an important determinant of entrepreneurial longevity and success. This need for resources underlines the common sense, and empirically proven, view that while individuals with tenacity, passion, and determination who have the necessary aptitude and training can often start businesses, they will ultimately come to rely upon resources external to them when it comes to expanding and growing their businesses. For example, of the three entrepreneurial processes identified by Elfring and Hulsink (2003), the second is the acquisition, mobilization, and deployment of resources. Clearly, this is an important part of building a sustainable new business. We examine resource acquisition in detail in Chapter 4. We discussed earlier, using African examples, how entrepreneurs in resource-constrained environments use innovative ways to marshal resources to start and grow their ventures. Entrepreneurship theories such as effectuation and bricolage, introduced in Chapter 2, provide some ideas of how resources may be acquired in these environments. Let us now turn our attention to what makes some individuals successful in facing hurdles and challenges such as financing; the issue of mindset. One’s mindset is commonly understood as the set of attitudes one holds. However, Dweck (2006) argues that there are two types of mindsets: • •

The fixed mindset: The perception that one’s talents and abilities are set traits. The growth mindset: The perception that abilities can be developed through dedication, effort, and hard work.

Successful entrepreneurship needs a growth mindset since it requires a commitment to lifelong learning, training, and practice. Many startups end in failure and it requires a growth mindset to learn from that failure and use it as an opportunity to learn and improve. Several successful entrepreneurs have had multiple failures – it is their ability to persist, learn, pivot, regroup, and try again that ultimately leads them to success.

Mindset, capabilities, and goals 55

Success is a lousy teacher. It seduces smart people into thinking they can’t lose. Bill Gates, founder of Microsoft Mindsets too can be changed just like many of the factors we have discussed so far – personality traits, creativity, skills, and abilities. Developing a more entrepreneurial mindset does demand deep introspection, forming good habits around issues such as self-observation and committing to mastery of one’s domain. Passion and self-efficacy can also be assessed using the scales presented in this chapter. Basically, developing the entrepreneurial mindset demands that one conducts a rigorous self-examination around questions such as “what are my goals”, “what do I love to do?”, “what do I do well?”, “what do I need to know?”, and others. The important thing to note is that with thought, practice, commitment, and experience, many of the ingredients related to successful entrepreneurial action can be taught, learned, developed, nurtured, and mastered. The right mindset can also enhance the ability to identify opportunities or “find” problems, as we discussed earlier. The entrepreneurial mind, such as that of Belkahia, Endrias, or Mwangi, doesn’t just see a problem but then thinks about what can be done about it. Whatever their motivation and passion, each of these entrepreneurs were in the right mindset to respond to what they saw. Similarly, by using passion as a driver, learning how to enhance one’s creativity, self-assessing to identify what qualities one needs to develop and what skills need to be mastered, and building experience and social networks, a growth mindset can be created. This also builds self-efficacy and adds to the confidence that startups can be created and grown.

Education and training The preceding discussion leads to an important question for anyone interested in developing and nurturing entrepreneurial talent; it is whether entrepreneurs are “born” or “made”. Psychologists have long argued that skills are an outcome of inborn aptitudes, experience and training, and researchers such as Herron (1990) have reported that each of the seven skills he identified was significantly related to achievement (the product of aptitude with experience). While the correlations between skills and aptitudes were not particularly high, they were statistically significant (Herron, 1992), thereby suggesting that individuals are “born” with some of the attributes necessary for successful entrepreneurship whereas others can be “made”. While training may not make the individual the most creative or disciplined or open, it can certainly enhance these qualities, help improve self-efficacy, and develop a growth mindset. Human capital theory has also found that increasing one’s knowledge, skills, and capabilities increases the chance of better performance outcomes. For entrepreneurship in particular, Unger et al. (2011) found that investments in human capital in general and entrepreneurship-specific skills and knowledge were related to business success as measured by sales growth and profitability. Other research (e.g., Martin et al., 2013) has reported similar findings, suggesting that entrepreneurship education and training programs are useful and effective. While it appears that individuals can enhance their skills, improve their creativity, and perhaps even develop deep-seated personality traits such as extraversion and openness, experience is still critical since it allows these learned qualities to be applied and sharpened. As was discussed earlier in the

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chapter, enhancing creativity involves learning to form and effectively work in teams and domain mastery – these are trainable as well. While many of these competencies can be acquired through education and training, in Africa and elsewhere, formal university-embedded entrepreneurship education programs which impart these skills are still quite rare. There are, however, various education and training initiatives that are being undertaken by national and local governments, international agencies, and universities throughout the developing world. For instance, the Thunderbird School of Global Management at Arizona State University in the United States has a program called Thunderbird for Good (T4G), which started off to educate women in Afghanistan and now includes nontraditional students from emerging countries and disadvantaged groups in the United States, has trained and graduated over 120,000 students from 60+ countries (https://thunderbird.asu.edu/global-impact/ thunderbird-for-good-programs). Lazear (2004, 2005) suggested that an entrepreneur would be a “ jack-of-all-trades” in that they would not necessarily master all the skills but possess a balanced set of skills while developing some competence in each. This was in contrast to paid employees who would be more specialized in their skills sets. While there has been some empirical support for this idea that the propensity to become an entrepreneur increases with a balanced set of skills, the evidence is far from unanimous. Bublitz and Noseleit (2014) argue that the distinction between entrepreneurs and employees is a false dichotomy and found that even among employees, those employed by small firms had a diverse set of skills when compared to those employed by large firms. They also found that education contributed to skill balance and that skill balance was associated with income, provided that skill levels were high. One conclusion of this study appears to highlight the importance of work experience in small firms. Because employees of small firms are likely to develop balanced skills, they are often more likely to spawn new entrepreneurs. So, what should an entrepreneurship education and training program look like? One possible model is the framework proposed by Bullough et al. (2015) which they have used to train and develop women entrepreneurs in Peru, Afghanistan, and elsewhere. With some modifications for the African environment and entrepreneurial ecosystem, this framework offers a promising avenue to structure the training of African startups. The framework has three major elements: (1) goals (what outcomes the program expects to achieve); (2) program elements (trainers, content, wrap-around services, etc. needed to reach the goals); (3) moderators (i.e., participant characteristics, environment characteristics, and funding). Typical goals of entrepreneurship training programs are both economic (e.g., job creation, revenue, and profitability growth) and noneconomic (e.g., recognizing opportunities, developing entrepreneurial intentions, developing creativity and passion, mastering technical skills, and soft skills). The programmatic elements have to be tailored to the goals while keeping in mind the cultural (such as what may be more appropriate in a hierarchical and collectivist culture), human (e.g., literacy and gender equality), and environmental (resource availability, physical infrastructure, etc.) factors. Table 3.4 provides some suggestions for what this framework might look like for training new female entrepreneurs in an African country (based on Bullough et al., 2015). In this example, the goal would be to provide hands-on training that would help opportunity recognition, increase motivation, enhance creativity, and impart the necessary business and entrepreneurial skills. The program structure has to be designed

Mindset, capabilities, and goals 57 Table 3.4  Framework for entrepreneurship education and training Program goals • Entrepreneurial intentions • Entrepreneurial capabilities

Program elements • Classroom training • Mentoring • Networking

Human factors • • • •

Environment

Startup type • Collectivist Motivated/passionate • Turbulent Less educated • Weak infrastructure Low self-efficacy

keeping in mind the human and contextual factors. What also has to be explicitly considered is the goal of the startup – survival, lifestyle, managed, or aggressive growth – and the potential entrepreneur’s own starting point in terms of education, experience, and so on. There has to be a tailoring of the training to meet people where they are. As can be seen from Table 3.5, the interventions needed to assist necessity and opportunity entrepreneurs are quite different and a “one size fits all” training program is unlikely to be effective since their starting points and needs will be very different (Mersha et al., 2010). While government policy has a role to play in these interventions as discussed in Chapter 1, they have to be tailored to the unique needs of each type of entrepreneurial activity. The role of gender In many regions, including many African countries, the ability of women to start and grow enterprises is often hampered by educational and socioeconomic constraints (see Chapter 9 for a detailed discussion of female entrepreneurship in Africa). While they often are necessity entrepreneurs, due to financial pressures, female startups that are innovative and scalable are uncommon in developing countries. There are differences in motivations, traits, and skills between African men and women, as reported by Mersha and Sriram (2019) in their study of Ethiopian entrepreneurs. Despite the fact that their sample consisted mostly of opportunity entrepreneurs, the men were more experienced and better educated and pulled into their ventures by prospects of financial independence and elevated social status. In terms of traits and skills generally associated with entrepreneurial success, the men possessed these characteristics at higher levels than women. These include financial, operational, and human skills – although since this data was self-reported, the impact of self-efficacy has to be considered as well. Probably not surprising given these differences, the businesses owned by men outperformed those owned by women. We discussed the role of social capital and networks earlier, and the scores for individualism versus collectivism in several African countries. Interestingly, in-group (close friends and family) collectiveness is a significant predictor of women’s business ownership. While individualism is normally thought to be associated with entrepreneurial success, for women in developing nations, such as most countries in Africa, a balance between high and low levels of collectivism yields high levels of women’s business ownership since it allows women to seek individual opportunity while benefiting from group support (Bullough et al., 2017). It has been suggested that certain qualities that lead to successful entrepreneurship, such as networking, nurturing, openness, and power sharing, come more “naturally” to women (Myers, 2004), thereby implying that these abilities are aptitudes, that is,

58  Birth Table 3.5  Proposed interventions for necessity and opportunity entrepreneurs Type of intervention Provide financial resources Improve capacity

To assist necessity entrepreneurs • Microfinance • Traditional funding sources such as ukuba in Ethiopia • Record keeping • Efficient use of available resources • Market/customer identification for their products and services

Streamline bureaucratic hurdles and improve the business climate

• Establish a one-stop service facility to facilitate the new venture startup process • Provide assistance in navigating the bureaucratic system as necessary, such as registration and licensing • Increase transparency • Apply established laws and procedures consistently • Keep taxes and the cost of doing business (licensing fees, etc.) reasonably low

Facilitate managerial capacity to enhance productivity and profitability

• Encourage/educate necessity entrepreneurs to avoid conspicuous consumption and to accumulate wealth • Isolate cultural practices that dampen entrepreneurial success • Educate necessity entrepreneurs on operational effectiveness and wealth accumulation so that they can transition to more established business ventures

To assist opportunity entrepreneurs • Small bank loans • Identify other financing sources • Better workforce utilization; training to strengthen worker skills • Process and quality improvement • Improve record keeping, customer management; strategic planning • Establish a one-stop service facility to assist opportunity entrepreneurs in the Diaspora to navigate the bureaucratic system • Assist current local entrepreneurs with their specific needs to further strengthen their business success • Increase transparency and apply established laws and procedures consistently • Keep taxes and the cost of doing business (licensing fees, etc.) reasonably low • Assist opportunity entrepreneurs to improve their operational efficiency and profitability • Assist local entrepreneurs to increase their competitiveness

Note: aukub is an informal credit association in Ethiopia which is discussed in more detail in Chapter 4. Source: Mersha et al. (2010).

they are innate. However, the rise in entrepreneurship education and training programs in universities and elsewhere provides some evidence that there is a belief that at least some of the abilities needed to be a successful entrepreneur are not innate and can be taught and learnt. Herron (1992) has argued that experience and training affect skills, and opportunities to apply the weaker skills can result in learning. While formal entrepreneurship training programs rarely follow a standard curriculum, most tend to emphasize technical skills, management skills, and personal skills (Hisrich and Peters, 1998) and often help would-be entrepreneurs develop a business plan.

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The fashion magazine industry is but one example from Africa where women entrepreneurs are leading the charge. In Nigeria, these magazines are where younger Nigerians are turning to for news about movie and music stars, social media and reality TV personalities, and fashion models. Entrepreneurial women such as Betty Irabor, Adesuwa Onyenokwe, Chioma Onwutalobi, and Tewa Onasanya are capitalizing on interest in Nigerian fashions among Africans and members of the African diaspora in the UK, United States, and beyond. Onwutalobi started the magazine Glam Africa in 2015 and it now has offices in Nigeria, Ghana, South Africa, and the UK and plans to grow to the United States as well. All the ventures have a significant social media and online presence in addition to their print versions. For instance, Exquisite Magazine, started by British-Nigerian Onasanya in 2003, has a print circulation of 10,000 and boasts over 150,000 online subscribers and a million weekly visitors (Olanrewaju, 2018). As interest in African cultural products becomes more global, these entrepreneurs are perfectly poised to capitalize on that growth. Do culture and the environment matter? Additionally, research has also revealed that ethnicity and culture may have a role. Anecdotal evidence appears to suggest that in many countries, some ethnic and racial communities flourish despite their minority status such as the Chinese in Indonesia and Malaysia, Indians in East Africa, whites in Zimbabwe and South Africa, Lebanese in West Africa, or Jews in Russia, certain “market-dominant minorities” (Chua, 2003) are economically successful and wield significant influence. While these groups are often seen as “foreign”, in other countries, there are native communities (e.g., Gujaratis and Marwaris in India, Guraghes in Ethiopia, and Kikuyus in Kenya) who are widely recognized for their ability to start and grow businesses. However, data from Australia (Collins, 2002) shows different rates of entrepreneurship within Australian Chinese – those from Malaysia, Singapore, Taiwan, etc. – which suggests that there may be an interrelationship between national and cultural traits when it comes to entrepreneurial success. From research conducted on Spanish university students, it appears that younger, male students have higher entrepreneurial intentions (Corcoles-Munoz et al., 2019), although there is limited evidence on the relationship between age and intentions from Africa. Other research has demonstrated that the impact of personality traits on planned behavior and entrepreneurial intentions are different across different countries (Munir et al., 2019). Finally, the issue of the global universality of the “big five” has been questioned along with calls to examine indigenous personality dimensions, such as Confucianism in China, since culture has many local elements (Obschonka et al., 2018). Part of the explanation for this phenomenon may be the underlying role that culture plays in affecting the traits and values that motivate certain individuals to engage in entrepreneurial activity. Some immigrant groups may be more successful because they emphasize values such as thrift and close family ties that may allow them to be successful. Additionally, it has been suggested that temporary migrants may be more successful entrepreneurs than permanent migrants since they believe that thrift and hard work will allow them to reach their goal of returning home faster (Bonacich, 1973). For other immigrants, the availability of cheap co-ethnic labor and opportunities for serving co-ethnic customers whose needs for many products (e.g., foods and music) they understand and can better satisfy than mainstream businesses are also motivators (Ward,

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1983). Frequently, the use of unpaid family labor reduces entry and operating costs in the retail sector where many ethnic minorities get their start in business. Often many immigrant groups are able to access informal networks for financing their businesses, such as the Korean revolving credit system called kye (Yoshihashi and Lubman, 1992) and the Ethiopian ukub, which depend on social ties and informal networks and are generally not available to those outside these networks. Another way in which culture becomes significant is through the spread of diaspora populations across the world. As human migration continues globally, such as the traditional migrant stream from ex-colonies in Asia, Africa, and South America to the “mother” country in Europe and more recently to North America and elsewhere, the role of the ethnic networks and their cultural connections both as immigrants and in their home cultures becomes increasingly more important. On the one hand, immigrants start businesses in the host country that appeal to fellow immigrants. But there is another less-appreciated, perhaps indirect, impact as well. Cultural entertainment products – movies, music, and fashion – are one beneficiary of this population diffusion. For example, many new startups have emerged in Nigeria to satisfy the ever-increasing demand for culture-specific entertainment both in the home country and among the diaspora as well. The Nigerian film industry, Nollywood, is seeing a huge rise in demand for original content and is now estimated to generate US$700 million in revenue annually. This content is now being distributed through subscription-based smartphone apps, increasingly the preferred means of consuming entertainment among Africa’s youth. Other markets such as airlines are looking for content for their in-flight entertainment both for flights in and out of Africa as well as for intra-African routes. Dedicated Africa-themed channels, mainly targeting the diaspora, in North America and Europe are also fueling this demand. As a result of this interest and potential revenue, external funders such as France’s Canal Plus and Netflix are beginning to invest in Nollywood. Nigeria’s entry for the 2019 Oscar for the best international film, called Lionheart and starring Genevieve Nnaji, is Netflix’s first Nigerian movie. As was mentioned earlier, even notions of creativity and the creative process may be different for African versus Western societies. Using examples from Nubian and Asante art, Sawyer (2012) argues that while individualistic approaches can help us understand creative differences in the styles of individual artists, each of their cultures has to be understood if we are to understand the nature of innovation each artist generates. In collectivist cultures, as what prevails in most African countries (Table 2.3), it is necessary to understand the cultural context in order to understand creativity. Artists, and entrepreneurs, operate in a sociocultural environment where status, family connections, and the economic system provide the context for startup activity. Also, as we discussed earlier with regard to innovation in the African financial sector, the economic infrastructure also has an impact. The early discussion in this book about Western and African theories of entrepreneurship is an attempt to provide the context under which entrepreneurial startup and growth activity occurs. This birth stage is also perhaps the right time for the entrepreneurs to begin to conceptualize the business. The Business Model Canvas (www.strategyzer.com) is a useful template for this, requiring the startup to be introspective and think carefully about its business model, centering around its infrastructure, offering, and customers. These aspects are examined in greater detail in Part III of this book.

Mindset, capabilities, and goals 61

Summary This chapter examined the issues around entrepreneurial mindset, capabilities, and goals. There seems to be some broad agreement, perhaps not consensus, around what personality traits are associated with successful startup activity. What is clear is that creativity is a vital ingredient for creating innovative, scalable businesses. As we saw in the opening vignettes, this was true for Endrias’s social enterprise, Belkahia’s initial success in growing her Afrimarket venture, and Mwangi’s Equity Bank, even though their passions and motivations were different – reducing rural poverty in Ethiopia, capitalizing on the e-commerce growth in West Africa, and extending banking facilities to first-time customers in Kenya and elsewhere in East Africa. Another important lesson to note from these three examples is how each of these ventures learned from their experience and adapted and pivoted where necessary. What also has to be emphasized is that discipline, dedication, and effort are required to master one’s chosen domain and to acquire the necessary skills. This in turn demands deep introspection to understand what one loves to do, what one does well, what one needs to know, and what one does not know. As one gains education and experience and learns from one’s failures, this contributes to increasing self-efficacy and confidence, which allows one to place more trust in one’s judgment and ability to see opportunity and to act on it. Building networks and teams are an essential part of this maturation, since few successful entrepreneurs have done it all on their own, the lone-wolf myth notwithstanding. Fortunately for most Africans who live in collectivist societies, they have a web of family, friends, and other networks they can tap, even if support from formal institutions like banks and governments may be lacking. All these are essential ingredients for developing a growth, or entrepreneurial mindset. Also, fortunately, there is sufficient evidence that many, if not most, of these capabilities can be taught and learned. We conclude, with a prelaunch checklist (Table 3.6) for startup survivors, since rigorous self-examination is crucial to success. This has to be used with caution, as it was developed for use in the United States and African data is scant. When using this checklist, adjustments have to be made to fit local conditions.

Review questions 1 What do we know about the relationship between personality traits and entrepreneurial success? 2 What specific action can you take to improve your personal creativity? 3 Propose specific recommendations, in addition to those discussed in the chapter, that can develop more opportunity entrepreneurs in your country. 4 Does the culture of your country encourage entrepreneurship? Why or why not? 5 What challenges and obstacles would a female interested in starting a business in your country face and how can they be overcome? 6 What skills do you need and how can you acquire and master them in your country? 7 Based on the prelaunch checklist, are you ready to launch your business? If not, what specific actions do you need to take? 8 Apply the Business Model Canvas to conceptualize your business idea and model.

62  Birth Table 3.6  Prelaunch checklist Item

Yes

No

Notes

Team Founder has bachelor’s degree Founder has prior industry experience At least five years? Founder has prior experience as entrepreneur At least five years? Founder has prior professional, managerial, or supervisory experience At least five years? Founder employed prior to launch Founder motivated to earn high profits Founder working full time on startup Startup founded by team

If on track to graduate at end of semester, check yes Experience must be in industry of startup 10,000-Hour Rule, must be full-time or equivalent Entrepreneur = startup, NOT existing small business 10,000-Hour Rule, must be full-time or equivalent Managerial or supervisory = at least one other person reports to you 10,000-Hour Rule, must be full-time or equivalent Helps reduce risk by providing additional cash flow Non-profit/social entrepreneurship equivalent = motivated to achieve mission Full Time = at least 40 hours/week Team = 3+ people Idea

Focuses on one product In industry with higher survival and success rate Sells mainly to other businesses Emphasizes marketing Seeks out customers missed by others Competes on service or quality Business purchased from someone else

You can’t afford to be distracted Critically important. To start, see A. Knaup (2005). First determine sector your startup is in, then get updated data B2C is not your friend And selling too Thiel’s monopoly of a street corner idea. Go where others aren’t! Show how this will be systematically maintained Doesn’t happen often enough. Takes a lot of risk off the table, if purchase price is low relative to value Organization

Startup at least one-year-old Startup has at least 20 full time employees Startup has at least US$100K in startup capital Has written business plan Has proper financial controls Developed in orderly manner Is firm name no more than two words? Is the founder name NOT in firm name? Is firm name associated with regional cluster? Is firm name associated with a high-tech cluster? Is firm registered as a corporation? If the firm registered as corporation Does firm have control over formal intellectual property rights within one year of establishment?

Measured from first activity undertaken Separates the survivors from the failures.Very difficult to achieve, but worth doing so Difficult to achieve. Can be founder or external investor resources Some sort of commercial software package, e.g. QuickBooks

Regional clusters are a significant number of businesses in your industry Technology- or technology-enabled startups are more likely to survive Can be accomplished online in minutes. Be sure to consult legal and accounting experts beforehand Legitimacy signal Applies mainly to technology-based startups

Source: Based on Shane (2008) and Guzman and Stern (2015).

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Mindset, capabilities, and goals 65 Morris, M. H., Neumeyer, X., & Kuratko, D. F. (2015). A portfolio perspective on entrepreneurship and economic development. Small Business Economics, 45(4), 713–728. Muhlbock, M., Warmuth, J. -R., Holienka, M., Kittel, B. (2018). Desperate entrepreneurs: no opportunities, no skills. International Entrepreneurship and Management Journal, 14(4), 975–997. Munir, H., Jianfeng, C., Miao, W., & Ramzan, S. (2019). Human capital and theory of planned behavior: Unraveling entrepreneurial intentions of IT students in Pakistan. Journal of Entrepreneurship and Business Innovation, 6(2), 23. Myers, J. (2004). Developing managers: A view from the non-profit sector. Journal of European Industrial Training, 28(8/9), 639–656. Nordström, C., Sirén, C. A., Thorgren, S., & Wincent, J. (2016). Passion in hybrid entrepreneurship: The impact of entrepreneurial teams and tenure. Baltic Journal of Management, 11(2), 167–186. Obschonka, M., Zhou, M., Zhou, Y., Zhang, J., & Silbereisen, R. K. (2018). “Confucian” traits, entrepreneurial personality, and entrepreneurship in China: A regional analysis. Small Business Economics, 53(4), 961–979. Olanrewaju, A. (2018), As Nigerian fashion booms, women lead its coverage, New York Times, November 4, https://www.nytimes.com/2018/11/04/business/media/nigerian-fashion-magazines -women.html?searchResultPosition=10 (Accessed November 14, 2019). Reynolds, P. D., Gartner, W. B., Greene, P. G., Cox, L. W., & Carter, N. M. (2002). The entrepreneur next door: Characteristics of individuals starting companies in America: An executive summary of the panel study of entrepreneurial dynamics. SSRN Electronic Journal. Available at SSRN: https://ssrn.com/abstract=1262320 or http://dx.doi.org/10.2139/ssrn.1262320 Sarasvathy, S. D. (2001). Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. The Academy of Management Review, 26(2), 243. Sawyer, R. K. (2012). Explaining creativity: The science of human innovation. New York: Oxford University Press. Shane, S. A. (2008). The illusions of entrepreneurship: The costly myths that entrepreneurs, investors, and policy makers live by. New Haven, CT: Yale University Press. Stenholm, P., & Nielsen, M. S. (2019). Understanding the emergence of entrepreneurial passion. International Journal of Entrepreneurial Behavior & Research, 25(6), 1368–1388. Szilagyi, A. D., & Schweiger, D. M. (1984). Matching managers to strategies: A review and suggested framework. The Academy of Management Review, 9(4), 626. Thomas, A. S., & Mueller, S. L. (2000). A case for comparative entrepreneurship: Assessing the relevance of culture. Journal of International Business Studies, 31(2), 287–301. Unger, J. M., Rauch, A., Frese, M., & Rosenbusch, N. (2011). Human capital and entrepreneurial success: A meta-analytical review. Journal of Business Venturing, 26(3), 341–358. Yoshihashi, P., & Lubman, S. (1992). Doing business in the inner city. The Wall Street Journal, 16 June, p. A1. Ward, R. (1983). Ethnic communities and ethnic business: An overview. New Community, 11(1–2), 1–9.

Part III

Growth

4

Financing the venture

Learning objectives: upon completing this chapter you will: • • • • • • •

Identify common sources of finance for new business startups in Africa Explain the pros and cons of using different forms of financing to start new ventures Discuss different strategies used to fund business growth and expansion, and explain the advantages and disadvantages of each Establish an appropriate record keeping system Document all transactions Develop financial statements Analyze the financial statements to understand the firm’s liquidity and profitability

Acquiring adequate funding to start a new business is a major challenge for most entrepreneurs in any environment. Access to finance is a key barrier encountered by a vast majority of entrepreneurs in Africa and other developing economies. Most current and aspiring entrepreneurs in these regions are primarily necessity entrepreneurs who operate informally. In Africa, an estimated 60 to 80% of entrepreneurs operate in the informal sector. Informal enterprises have low participation rates in the banking system due to which their ability to access loans from financial institutions and investor enthusiasm to finance new ventures is limited (United Nations Economic Commission for Africa, 2015). Faced with resource scarcity, African entrepreneurs use different funding mechanisms to start new ventures. This chapter discusses the various sources of startup funding that are used, or can be used, by entrepreneurs in Africa.

Sources of startup funding Consider the following real-life stories of how some successful African entrepreneurs got started: Ken Njoroge of Kenya and Bolaji Akinboro of Nigeria co-founded Cellulant in Nairobi, Kenya, in 2001 with US$3,000 from their savings. By 2018, Cellulant’s market valuation was estimated to approach US$1 billion (Maritz and Probyn, 2018). Aliko Dangote started his business in Lagos, Nigeria, with US$2,500 seed money borrowed from his grandfather. According to Forbes, he is currently believed to be the richest man in Africa with an estimated net worth exceeding US$10.4 billion as of January 24, 2020.

70  Growth Tseday Asrat was able to start her now popular Kaldi’s Coffee business in Addis Ababa, Ethiopia, with a gift from a wealthy family friend that fully covered two years rent for the space she rented for her first café located in a prime area of Addis Ababa. In 2018, Kaldi’s Coffee chain grew to 40 facilities and also expanded into other businesses (Clark, 2018). Nana Akua Birmeh of Ghana found that the architectural firm she was working for did not provide maternity benefits to female employees, she used her life savings to start ArchXenus, a family friendly architectural firm where employees are not required to choose between having a career and a family (Ghanatalksbusiness.com). Twapewa Kadhikwa of Namibia started a hair salon business one year after she graduated college with money she saved working part-time shampooing hair in a hair salon. From this humble beginning she started her own hair salon business and expanded into other sectors including real estate, agribusiness and hospitality (Musariri, 2018).

The above are just a few examples of successful African entrepreneurs who built thriving enterprises using small seed money they acquired from different sources. A variety of formal and informal funding mechanisms from both internal and external sources are used by African entrepreneurs to finance their new ventures. These funding approaches are categorized below: 1 2 3 4 5 6 7 8 9 10 11 12

Self-funding Family members and friends Debt financing Equity financing Grants Microfinance organizations Angel investors Crowdfunding Venture capital firms Kiva person-to-person lending Informal financial systems Other innovative approaches i Buyer financed operations ii Pooling together different resources iii Other Africa-specific methods

Self-funding Also called “bootstrapping”, this funding mechanism refers to using own resources to raise the funds needed to start a new venture. Access to external funding during the startup phase is generally difficult for entrepreneurs in any environment, but in Africa and other developing regions this problem is even more severe. As a last resort, entrepreneurs in these regions turn to bootstrapping strategies to generate the required startup capital (Bygrave and Quill, 2006; Lingelbach, De La Vina, and Asel, 2005). Bootstrapping strategies include using personal savings, selling available assets such as land and homes, postponing the purchase of certain items, leasing instead of buying, purchasing discounted or used items, engaging in bricolage, and utilizing other approaches that could save money.

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Many successful African entrepreneurs have started their new ventures using bootstrapping mechanisms. Ken Njoroge, a successful Kenyan businessman, used his meagre savings to start his business. He recalls that when he and his partner, Bolaji Akinboro, co-founded Cellulant in 2001 in Nairobi, Ken had no money left to buy diapers for his newborn baby. By 2018, Cellulant achieved significant growth and its estimated market valuation was close to US$1 billion (Maritz and Probyn, 2018). Relying on one’s own resources to start and grow new ventures has both advantages and disadvantages. The advantages include avoiding debt servicing expenses that can be particularly burdensome to the new venture during its formative years. This strategy also enables the entrepreneur to maintain total ownership of the company by avoiding selling equity interest to investors. On the other hand, sole reliance on internal resources can have severe drawbacks. The venture could miss potential growth opportunities due to financial constraints and its very survival could be threatened. Capital infusion from external sources helps drive significant venture growth and expansion in a relatively short time. Successful corporations such as Dangote, Facebook, and Google would not have achieved their astounding growth by relying just on their own internal resources. Family members and friends With limited access to loans from financial institutions and weak or nonexistent equity markets, aspiring entrepreneurs and owners of new startups in Africa turn to family members and close friends for help in realizing their dream of starting new businesses. As shown at the beginning of the chapter, Aliko Dangote started his business in 1977 with Naira 500,000 (about US$2,500 at the time) loan from his grandfather to be repaid in three years. The company started selling food products such as sugar and rice in bulk, then gradually expanded to other lines of business. A diversified conglomerate at present, the Dangote Group is one of the largest corporations in Africa with over 30,000 employees and annual revenues exceeding US$4.1 billion (Edom, 2017). We have also shown that Tseday Asrat, founder of Kaldi’s coffee chain in Ethiopia, was able to open her first café in Addis Ababa with the assistance of a wealthy friend. Kaldi’s, fashioned after the renowned US-based Starbucks Coffee, is now the most popular coffee chain in Ethiopia with over 38 units in Addis Ababa alone with 2017 sales exceeding 155 million Birr (about US$5.5 million). Tsedey Asrat has now expanded into other businesses including agribusiness and restaurants. The above are just two examples of successful businesses that started with the support of family members or friends. When possible, borrowing from friends and family members offers distinct benefits to the entrepreneur compared to borrowing from financial institutions, even if loans from the latter were available. Loans from friends and family members do not come with stringent terms typically required by financial institutions and the cost of borrowing the money is likely to be lower. In Africa, it is common to advance interest-free loans to needy friends and family members. It is also easier to make mutually acceptable payment arrangements in case the entrepreneur encounters unanticipated cash flow problems. Family members who advance loans or agree to buy equity interest in untested new ventures obviously risk potential loss of their money if the business fails. If the business thrives, however, they stand to reap huge financial rewards. Many successful companies in the world started with some financial assistance from family

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members and friends. We have mentioned above how a family member advanced a small amount of money that helped Aliko Dangote get started with his business. Other family members and friends agree to buy stocks in new, untested companies primarily to help out with the new venture. It was reported that when Jeff Bezos needed to raise US$1,000,000 to launch his new company, Amazon, in 1995 he met with 60 friends, family members and prospective investors and asked each of them to invest $50,000 in Amazon stocks. Of these, 20 agreed to invest including his parents ( Jackie and Mike Bezos) who invested US$245,573 in the company thus providing nearly a quarter of the fund Jeff Bezos needed at the time. Amazon achieved astounding growth over the years, and the value of the parents’ investment in Amazon grew exponentially. As of July 2018, their investment was valued at about $30 billion, and that was after excluding nearly 600,000 Amazon shares of their total investment that they donated to the Bezos Family Foundation ( Jacobs, 2019). CNBC, citing Bloomberg, stated that even if Jackie and Mike Bezos sold all their investment in Amazon at the lowest price in 2018 the return on their investment would be 40,000% (Mejia, 2018). The Dangote and Amazon examples above indicate that while most new ventures may fail, some could achieve enormous success, and that investing in potentially high growth startups by family members and friends could be a win-win to both parties: the startup entrepreneur gets the funding it badly needs, and family members and friends who invest in the new enterprise could earn huge returns on their investments. Debt financing Very few entrepreneurs have adequate savings of their own to start new ventures and very few have wealthy family members and friends who can provide them the startup capital they need. So, they seek to finance their ventures through debt. However, due to lack of established record of credit worthiness and limited net worth and assets to satisfy the strict lending requirements of financial institutions, getting loans is often an uphill struggle for companies just starting out, particularly for startups in developing countries. In developing regions, loan decisions are not necessarily based on the merits of the loan application; often, the entrepreneur’s ability to get funding from financial institutions is influenced by personal connections with the dominant elite coalition that control the political and economic system in the country (Lingelbach, 2012). Despite these roadblocks, African entrepreneurs should not shy away from seeking loans from financial institutions. At times, promising new ventures in growth-oriented industries do receive bank financing. Debt financing is like a double-edged sword. On the one hand, the funds acquired through loans, when used appropriately, help improve the venture’s financial liquidity, increase production capacity and fuel growth. Revenues collected from expanded business operations enable loan repayments as scheduled, and lenders do not interfere with the venture’s management as long as the loan is repaid as agreed. On the other hand, debt servicing expenses can be burdensome to the new venture, particularly if sales fall short of forecasts. Failure to meet its obligations under the terms of the loan will not only adversely impact the venture’s credit standing but lenders could also take legal action that could force the venture into bankruptcy. Therefore, whether to borrow money from financial institutions and how much requires careful analysis of the loan’s impact on the venture’s profitability, liquidity and survival.

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Equity financing Equity financing involves selling company stocks to interested investors. In contrast to lenders who expect the loan to be paid in full plus the agreed upon interest, equity investors do not expect repayment of the amount they invest in the venture, and the founders of the enterprise have no obligation to pay the invested amount. Equity investors may have a say in charting the future direction and operation of the business. As part owners of the venture, they stand to benefit if the venture succeeds or lose most or some portion of their investment if the venture fails. If the new business succeeds, investors reap huge returns; if the venture collapses, they could potentially lose all or some of their investments. The decision to sell equity by the founders of the venture must carefully weigh the benefits of getting capital infusion from potential investors against the potential dilution of the owner’s share in the company. Using equity investment enables generating funds that can be used to grow the business. From the founder’s perspective, the disadvantage of using equity financing is that by selling equity the founder effectively sells a part of the venture thus reducing the proportion of ownership in the firm. While selling equity will reduce the proportion of ownership in the venture, the funds generated through company stock sales help provide critical resources that could drive market growth and product diversification. Owning a smaller fraction of a larger company may well be more beneficial compared to owning a larger share (or even 100%) of a small company. Another important consideration for the founders in deciding whether or not to sell company stocks to investors is that, as part owners of the venture, the investors may want to be involved in the venture’s management. The level of involvement may range from playing an advisory role to getting actively involved (Hisrich, Peters, and Shepherd, 2013). Investor inputs may benefit the venture but conflicts may also emerge between the founder and the new investors. In Africa, the effort to raise capital through equity may be hampered by lack of vibrant and well-functioning equity markets in most African countries. With limited access to organized stock exchange markets in many African nations, social networks are used as a vehicle for buying and selling equity interest in new ventures (Lingelbach, Sriram, Mersha, and Saffu, 2015). For example, in Ethiopia, many new ventures have been founded through private placement of stocks through personal networks. Company founders encourage business partners, friends, acquaintances, and family members not only to buy equity in the new venture but also to promote the sale of stocks through personal acquaintances. During the last 15 years, dozens of businesses including banks, insurance companies and breweries have been established in Ethiopia with equity funds generated through social networks. Grants Most African governments and several NGOs have some form of incentive program to foster entrepreneurship in selected sectors such as job creation projects in rural areas, youth employment projects, or women entrepreneurship. Business groups and philanthropists also have grants aimed at encouraging entrepreneurship in Africa. For example, Nigerian businessman and philanthropist Tony Elumelu (mentioned in Chapter 2) started the Tony Elumelu Foundation in 2015 committing $100 million to assist aspiring entrepreneurs in Africa; and the African Women’s Development Fund (AWDF)

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supports women entrepreneurs in Africa. Some programs award a fixed amount of seed money while others provide loans with flexible terms and the interest rates, if any, are usually low. Awardees are selected on a competitive basis and, not surprisingly, demand for these funds far exceeds supply. Nevertheless, nascent African entrepreneurs should pursue these opportunities even if the odds of getting such awards appear very slim. Similarly, they should also explore grant programs in their respective nations by contacting appropriate government agencies and nonprofit organizations. Microfinance Microfinance loans may be a viable source of external funding for aspiring entrepreneurs and startups looking for external funding. Since its introduction in Bangladesh in 1976, microfinance has become a popular mechanism for providing small loans to low income households and micro enterprises that would have no chance of getting funded by mainstream financial institutions. Millions of low-income individuals and households across the world have received microfinance loans. Microfinance has been credited by NGOs and the donor community to have made positive contributions to alleviating poverty in developing countries, and African governments have embraced it as a valuable catalyst for economic development. As a result, microfinance loans in Africa grew from $600 million to $8.4 billion in one decade (2002–2012), a 1,300% increase. The total number of customers during this period jumped from 3 million to 20 million (Njiraini, 2015). A UN study concluded that when managed effectively, microfinance fosters private sector development and helps alleviate poverty in Africa. Microfinance programs have become a popular source of small loans in Africa, and when used prudently and as part of a holistic package of financial services, it can be a vital source of funding to start and sustain new ventures (United Nations, 2013). Angel investors Angel investors invest in startups and early stage ventures. Most angel investors have been entrepreneurs themselves and often tend to invest in businesses which they are familiar with. Angels, as they are sometimes called, provide much needed seed money to startups in the form of convertible debt or equity. Their decision to invest in startup companies may be motivated by the desire to help new startups, or by the prospect of making high returns from the anticipated growth of new ventures. Compared to venture capitalists that expect quick revenue growth, angels tend to be more patient and are willing to wait longer for the new venture to show returns (Geier, 2018). Angel investors also offer more favorable terms to the new venture compared to other financing options. Many of the well-known global corporate giants including Amazon, Facebook, Google, Apple, and Starbucks benefited from investment by “angels” during their startup phase. Angels usually allocate just a small fraction of their portfolio to startups due to the high risk of failure involved. Nevertheless, funding provided by angels is invaluable since it often occurs at a crucial juncture for the new venture, such as when the founders have just used up their own funds, or when they had to meet some pressing financial commitment. In making investment decisions, angel investors consider the founders’ experience, the business plan, the scalability of the business and current revenue stream. Angel networks have been founded in several African countries to assist early stage investment initiatives (e.g., Lagos Angels Network, Cameroon Angels Network,

Financing the venture 75

Ghana Angels Network, and Venture Capital for Africa. Dakar Angels Network was founded in 2018 to provide entrepreneurial guidance and seed money ranging between $25,000 and $100,000 to startup businesses with high growth potential. In 2015, the African Angels Network (ABAN) was established as a consortium of independent investor networks (https://www.linkedin.com/company/african-businessangel-network— aban/about/). Its purpose is to promote and support early stage investor networks across Africa, and seeks to serve as a clearing house for data collection, knowledge sharing and dissemination of best practices. It also seeks to provide guidance to investors in the private sector and to promote home-grown African innovations. In the absence of a robust venture capital industry in most African countries, angel investors, where available, may be the best source of funding outside the founders’ own savings and family and friends’ network. As can be noted from information published in ABAN (https:// abanangels.org/), angel investment opportunities are available in several African countries. This can serve as a potential source of startup capital and/or entrepreneurial guidance for budding African entrepreneurs. Crowdfunding Crowdfunding is an innovative, internet-enabled fundraising mechanism in the form of donations or equity investment from multiple participants across the globe that is particularly useful to early-stage ventures which cannot get funding from financial institutions (The World Bank, 2013). Currently more common in the developed world, this form of capital formation is also becoming a useful financing tool for early stage entrepreneurs in developing nations. Crowdfunding websites that connect potential investors with entrepreneurs are getting increasingly popular in developed nations. Some angel investors also use crowdfunding websites to identify investment projects. In Africa, crowdfunding platforms have frequently been used to raise funds for social and philanthropic causes. More recently, crowdfunding sites are emerging as a platform linking potential investors with African entrepreneurs who have potentially attractive business ideas. For example, Navalyao Osembo and Weldon Kennedy who founded the Enda running shoe manufacturing businesses in Kenya in 2015 used crowdfunding to generate critically needed funding when they ran out of money just when they were ready to start production of their first shoe brand. They could not get loans from banks because they did not meet the lending criteria. So, they turned to crowdfunding during May 2016 and July 2017 with the hope of raising $75,000. They were able to raise $140,000 from over 1,000 backers located in 32 countries (Motylska, 2018). This enabled them to produce 2,000 pairs of shoes and order another batch of 6,000 pairs. Based on this experience, Osembo advises that it helps giving crowdfunding backers detailed information about the business and keeping them informed through regular updates. The following are some of the popular crowdfunding websites that are likely to support entrepreneurs in developing countries, but new sites keep emerging. Venture capital Venture capitalists invest in startup companies expected to have high profit and growth potential. Most tech giants such as Apple, Google, Amazon, and Facebook benefited from investment by venture capitalists during their formative years. The risk of

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investing in new, untested firms is very high but the rewards from the few new ventures that succeed can be huge. For example, Michael Moritz of Sequoia Capital, a California venture capital firm, invested $25 million in Google in 1999 when the young search engine startup company had only 12 employees (Google News, June 7/1999). When Google went public five years later, the $25 million investment jumped to $3 billion. The venture capital industry in Africa is small but growing. Relative to other countries in the continent, South Africa has a well-developed venture capital and private equity market with nearly 150 members listed in the Southern Africa Venture Capital and Private Equity Association (SAVCA) (https://savca.co.za/member-category/ fullmember/). Some VC firms in Africa, e.g., Business Partners in South Africa and Venture Partners Botswana, are public-private partnerships. A 2015 report by Venture Capital for Africa (VCF4), a platform that connects African entrepreneurs with investors, indicated that venture capital activity in Africa is gaining momentum with Nigeria, Kenya, Tanzania, South Africa, Ghana, Uganda, Cameroon, and Egypt leading the way (O’Brien, 2015). Some VC firms that operate in Africa are located outside the continent. For example, Fusion Capital is based in London. Most venture capital (VC) firms in Africa focus on specific sectors such as information technology, agribusiness, renewable energy, fashion, health care, and consumer markets. New growth-oriented ventures in Africa may be able to attract investor interest from this emerging industry. These two websites provide a list of the better-known venture capital firms in Africa: https://biznakenya.com/top-10-venture-capitalist-firms-africa/; https://answersafrica. com/venture-capitalists-africa.html. Kiva person-to-person lending Kiva has become a popular crowdfunding mechanism with growing appeal in Africa and other developing nations. The primary goal of this initiative is poverty alleviation and the typical amount provided through this system is usually small (as low as US$25). Kiva helps aspiring entrepreneurs who do not have adequate financial resources to start new ventures by connecting them with a pool of funders. Headquartered in San Francisco and a regional office in Nairobi, Kiva operates in over 80 countries (https://www.kiva.org). The designated Field Partners in each country that include microfinance organizations and NGOs connect potential borrowers with funders. To inform potential funders about the personal background of the prospective beneficiaries and their projects, the Field Partners post stories and photographs of the applicants. Field Partners also screen loan applications, give out the loans to approved applicants, and collect payments. Funders interested in assisting prospective entrepreneurs make contributions into the Kiva fund. The amounts contributed by individual funders are aggregated by a locally established credit agency and a portion of the collected fund is loaned to the applicant who meets the specified criteria for the loan (Roodman, 2009). Individuals who contribute to the Kiva fund understand that they provide interest-free loans to the successful applicant and that they may not get their money back. When the loan is repaid, the amount does not go to the individual who donated the amount; instead it is loaned to another individual that needs the fund. Thus, an individual’s contribution can benefit several aspiring entrepreneurs and, consistent with Kiva’s poverty alleviation mission, this helps empower resource-poor members of society to engage in entrepreneurial activity and achieve economic independence. Kiva reports that, from its inception in 2005 until April 2019, 1.9 million lenders provided a total of US$1.2 billion in loans

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to 3.2 million borrowers across five continents and that, on average, about US$2.5 million in loans is advanced to entrepreneurs every week through its crowdfunding platform (https://www.kiva.org/about/impact). Innovative financing approaches in Africa As discussed earlier, entrepreneurs in developing countries operate in a resource-constrained environment characterized by poor infrastructure, limited access to finance, weak property rights and regulatory system, recurring political instability, and other institutional constraints (Lingelbach, 2012). Faced with these challenges, African entrepreneurs have developed innovative financing mechanisms utilizing their social networks. We provide two examples below. In many African cities, demand for quality affordable homes is ballooning. This increase in demand is not matched by supply primarily due to limited access to mortgage loans. To alleviate the shortage of mortgage loans to finance residential home purchases in Ethiopia, a startup real estate firm in Addis Ababa called Ayat Real Estate, introduced an innovative buyer-financed system. Ayat offered buyers to pay off the total price of their house in three installments—one-third paid upon signing the contract; the second third upon completion of the house, and the final installment upon completion and delivery of the house to the buyer. In Ethiopia where most home buyers had to pay the full price upfront, this financing mechanism became instant success and was soon imitated by other home builders in the country. The introduction of this innovative buyer-financed home buying mechanism has revolutionized the real estate industry in the country. A butcher in Northern Ghana started advancing loans to cattle herders to help them expand their herds. This was a smart business move on his part that benefited both parties: the cattle farmers got access to additional financial resources that helped them increase their herds and the butcher benefited by having a more reliable supply of cattle for his butchery. Informal financial systems At present, the informal financial sector in Africa is larger than the formal sector (Aryeetey, 2008) although this is changing rapidly. For those at the grass-roots level who do not participate in the formal system, traditional financial mechanisms provide small but much needed funds that can be used to start or grow a business, or to pay for other expenses. A variety of traditional savings and loan associations have been used for ages in African societies. They are known by different names in different countries, for example, susu in Ghana, esusu in Nigeria, tontines in Cameroon and most Francophone Africa, the banquiers ambulants in Benin and Togo (Nzeyap, 2013), and ukub in Ethiopia. Tontines are financial associations that help generate funds to pay for school expenses, emergency needs, development projects, and other needs. In Ethiopia, a traditional member-based savings club called ukub is a popular financing mechanism, particularly in urban centers. Funds raised through ukub may be used to start a new business, to grow existing businesses or to tackle other financial needs. For years, it has been used as an efficient system for generating small amounts of funds. Ethiopians in the diaspora (e.g., taxi drivers in the Washington, DC area) use ukub to raise funds for starting or growing business ventures, or to pay down payment toward the purchase of a family home. While there may be slight variations in detail regarding the formation and administration of ukub, the description provided in Box 4.1 is typical.

78  Growth Box 4.1:  How Ukub works in Ethiopia Ukub is a rotating savings club with the characteristics of a lottery. An organizer, usually a respected businessman, starts an ukub by inviting a group of friends and acquaintances to join the club. The organizer also selects a secretary and determines the minimum amount to be contributed per member as well as the meeting date and time to draw the lottery to award the jackpot to the winner. Then, the organizer and the secretary promote their ukub to potential members. At the agreed upon day and time, usually weekly or bi-weekly, each member contributes the specified amount (for example, Ethiopian Birr 1,000). Members have the option of making multiple contributions, which is similar to buying multiple lottery tickets. For example, if the weekly contribution per member is Ethiopian Birr 1,000, a member may sign up to make three contributions totaling Birr 3,000 weekly or biweekly. The recipient of the jackpot is determined by lottery at the scheduled meeting date. Members MUST send their contributions but are not required to attend the meeting although most generally attend since the meeting is both a social gathering and business event. Once all contributions are accounted for, the first and second drawings are awarded to the organizer and the secretary, respectively. Another benefit the two leaders of the ukub enjoy is that the periodic contribution is waived for them. These benefits are the reward for their effort in organizing and leading the ukub. From then on, the jackpot is awarded to one of the members by lottery. To receive the money, winners are required to name at least one of the ukub members as guarantor(s) (i.e., as co-signers) in case of default. If the person who won the lottery does not have immediate need for the money, s/he can “sell” (i.e., transfer) the jackpot to another member for a fee which is generally 10% of the jackpot amount. This fee is the cost the “buyer” is willing to pay for the opportunity to access the ukub fund early. Upon approval of the transfer by the organizer, the individual that “bought” the jackpot is considered as having won the lottery and the member that transferred his/her right to win the jackpot is added back to the list of those still in contention to win future lottery drawings. The ability to “buy” the jackpot early is a huge incentive for many entrepreneurs who may have an urgent need for the fund. They may “buy” the ukub to start a new venture or to grow an existing business. The Ukub organizer is often a wealthy individual who may not have immediate need for the money. Therefore, s/he often transfers the jackpot to a member who needs the funds right away. This practice benefits both parties—the organizer gets 10% of the jackpot and the member who “bought” the jackpot gets much needed funds. The 10% cost of getting the jackpot is reasonable compared to some other financing options. The organizer guarantees that members will receive the jackpot when they win the lottery. To protect his/her interests against potential default by one or more of the early lottery winners, the organizer requires each jackpot winner to name a “guarantor” (co-signer) as a condition to receiving the jackpot. Generally, such defaults are very rare since members often know each other very well and are also carefully pre-screened through informal channels. The rewards to the organizer for taking the time and risk in starting the ukub take two forms: the first jackpot goes to the organizer without contest, and the organizer’s weekly or bi-weekly contributions are waived. The ukub rotation ends when the last member gets the jackpot. At that point, the coordinator and the members may decide to disband, continue with a new round of ukub with existing members, or start a new round with a mix of some of the current members plus new entrants. Source: Tigineh Mersha, [email protected].

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Financing business operations and growth Funding needs for business ventures do not end with the successful launch of the business. Once the business is up and running, it takes some time for the new venture to generate adequate revenues to cover operating expenses such as salaries, rent, utilities, purchase of materials and supplies, and other expenses. The venture also requires additional financing to support desired growth and expansion. Financing working capital: The entrepreneur needs adequate working capital to finance day-to-day operations. An important source of working capital is supplier credit. The entrepreneur should strive to delay paying cash for purchases by making arrangements with suppliers or service providers to purchase goods or services on credit. For cash strapped entrepreneurs who are just starting out, supplier finance (also called trade credit) provides much needed working capital and enables free use of the suppliers’ resources during the allowed grace period. In general, supplier credit facilities are available mostly for more established businesses. Most transactions by small businesses in Africa, particularly during their early years, are cash-based. Credit arrangements often benefit both buyers and sellers. The former gets free use of the suppliers’ resources for a short period, and it helps suppliers boost sales. If the new business thrives, it could mark the beginning of a long-term win-win relationship for both parties. Financing growth and expansion: Entrepreneurs who have successfully launched their ventures not only strive to survive but also seek to grow and expand their business. To achieve desired growth, they inevitably require additional resources. Funding strategies used to achieve planned growth are grouped into two broad categories: (a) internal strategy, and (b) external strategy (Barringer and Ireland, 2006). a Internal growth financing strategy: Entrepreneurs that use this strategy rely on their own resources to drive growth and business expansion. If the venture is profitable, the founders have the option of reinvesting the profits to drive long-term growth and wealth building, or using these resources to support their current lifestyle. Three scenarios are typical in this decision process: (a) draw a large proportion of the net revenues in the form of salaries and other benefits to fund lavish lifestyle at present; (b) minimize current payouts to owners and re-invest the net earnings to help boost enterprise growth and future wealth accumulation; or (c) draw moderate amount of the profits to balance current spending needs with future growth opportunities. Obviously, growth-oriented entrepreneurs prefer the second option, and choose to defer current comfort in favor of long-term enterprise growth and wealth building. Michael E. Gerber, author of E-Myth series of books on entrepreneurship, advises entrepreneurs to resist the temptation of withdrawing a large proportion of their profits to support expensive lifestyles in the short-term, particularly during the formative years of the venture (Gerber, 2005). In the early stage of the business, ploughing back the profits into the business rather than using it to support current luxury will spur enterprise growth and increase future wealth building. b External growth financing strategy: External growth and expansion strategy may use debt financing or equity financing. Each strategy has advantages and disadvantages.

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Growth through debt financing: Debt financing is a common strategy used to support planned growth. As shown in earlier sections, however, access to bank finance does not come easy. For more established businesses that have a record of profitability and stability debt financing is clearly easier. In Africa and other developing regions, access to finance is difficult, particularly during the early stages, although this situation improves significantly for those who are well connected. Even where credit is available, entrepreneurs must use caution in using this strategy to fund growth in view of the risks involved. If the anticipated growth does not materialize and the venture defaults on the loan, creditors may take legal action that could potentially force the firm’s liquidation. Therefore, the decision to take out loans should be based on careful analysis of several pertinent factors including reliability of projected demand and thorough evaluation of the loan’s impact on the venture’s liquidity and profitability. Growth through equity financing: This strategy requires selling company stocks to interested investors. Equity financing helps generate substantial capital without the obligation to repay the fund which is a huge plus. The primary disadvantage of equity financing is dilution of the owner’s share in the business. As part owners of the venture, equity investors get a share of the venture’s future earnings, if any. However, the capital infusion made possible through the sale of company stocks can enable significant venture growth and expansion, and enable a much larger stream of revenues and profits as well as capital appreciation for the founders.

Managing the venture’s finances Proper financial management is vital for entrepreneurial success. A common mistake many entrepreneurs often make during the startup phase of their venture is mixing together personal accounts with the venture’s finances. Failure to separate business and personal accounts leads to financial mismanagement, complicates tax accounting, and could result in business failure. It is therefore important that entrepreneurs handle personal and business finances entirely separately even if the business is a sole proprietorship. Sound financial management requires developing an appropriate accounting and bookkeeping system, documenting the venture’s financial activities accurately and in a timely manner, producing periodic financial statements, and thorough analysis of the statements to assess the venture’s profitability and overall financial health. Setting up an appropriate accounting and bookkeeping system: The first step to effective financial management is designing a proper accounting and bookkeeping system for the business. This begins with developing an appropriate chart of accounts to help organize and record the venture’s financial transactions. The chart of accounts includes five main categories: Assets, Liabilities, Owner’s Equity, Income, and Expenses. To facilitate proper organization of the information, each category—and each item within a category—is assigned a unique account number. The basic structure of the chart of accounts is shown in Appendix 4.1. Documenting transactions and generating financial reports: All financial transactions of the venture—owner’s investments, cash and credit purchases, cash and credit sales, wage/salary expenses, taxes paid or owed, applicable depreciation expenses, and any other business-related financial transactions—should be accurately documented. The significance of accurate and timely record keeping of all financial activities cannot be overstated. Maintaining accurate records enables generating key financial statements that inform owners, creditors as well as current and prospective

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investors about the venture’s financial condition. Various financial reports can be developed based on the financial records, but the income statement, the balance sheet and cash flow statement are crucial for small ventures. The income statement: Also called profit and loss statement, the income statement shows the venture’s revenues, expenses and net profit (or loss) for a specific period. The difference between Sales Revenue and Cost of Goods Sold for a specific period is Gross Profit. All operating expenses for the reporting period—salaries, interest, insurance, rent, depreciation and other business-related expenses—are deducted from Gross Profits to obtain Net Income (i.e., net profit) for the reporting period. The income statement may be prepared annually or for any period during the operating year. Most ventures prepare income statements quarterly, but it should be developed annually to determine the venture’s tax liability. Information contained in the income statement serves several purposes. Most importantly, it shows if the business earned a profit or incurred a loss from its operations ,during a specific period, and if so, how much. If profits were earned during the period, the business will be required to pay taxes according to the law. A portion of the net earnings after taxes may be distributed to the owners in the form withdrawals or dividends. The undistributed portion of the net profits comprises retained earnings and is added to the owners’ net worth. If the venture loses money during the operating year, the owner’s net worth is reduced by the amount of the net loss. Table 4.1 shows an example of Income Statement for a fictitious venture, Muhammad Badri Retail Store. The Balance Sheet provides a snapshot of the venture’s financial condition as of a specific date. Typically, businesses prepare balance sheets at the end of each quarter, and at the end of each year. In contrast to the income statement which shows the performance of a business during a period of time, the balance sheet provides the organization’s financial picture in terms of Assets, Liabilities and Owners’ Equity as of a specific date. The Owners’ Equity (or Owner’s Net Worth) comprises the original investment made by the owner adjusted for any accumulated profits or losses. Table 4.2 shows an example of a balance sheet for a fictitious venture, Muhammad Badri Retail Store. Table 4.1  Income statement Muhammad Badri Retail Store, January 1, 2018 to December 31, 2018 Income Gross sales–Merchandise Less: Cost of goods sold Net sales income Expenses Salaries, including fringe benefits Rent Electricity and water Telephone Advertising Supplies Business insurance Miscellaneous expenses Total expenses Gross profit before taxes Less: Estimated income tax (25%) Net income after taxes

$ 346,750 (218,560) 45,500 18,000 5,600 2,200 1,750 2,150 1,100 1,200

$128,190

77,500 50,690 12,673 38,017

82  Growth Table 4.2  Balance sheet Muhammad Badri Retail Store, December 31, 2018 Assets Current assets Cash Accounts receivable Inventory Prepaid expenses Total current assets Fixed assets Office equipment Less: Accumulated depreciation Furniture Less: Accumulated depreciation Total fixed assets Total Assets Liabilities Current liabilities Accounts payable Accrued salaries Accrued rent Accrued insurance Total current liabilities Long-term liabilities Total liabilities Owner’s equity

$7,500 27,500 12,000 7,000 $54,000 $21,250 2,000 3,800 − 380

$19,250 3,420 $22,670 $76,670 $22,500 7,200 2,100 $31,800 $12,500 $44,300 $32,370

Cash flow statement: Effective cash management is critical for small businesses. Determining how much cash to carry requires a delicate balancing act. On the one hand, having adequate cash on hand enables paying bills when due. It also serves as a cushion against unexpected drop in revenues, and can be used for speculative purposes such as making a large purchase of merchandise to take advantage of price discounts. On the other hand, holding a large stash of idle cash is wasteful since the venture foregoes potential income it could have earned by investing it. Effective cash management requires balancing the inflow and outflow of cash. Cash inflows occur when businesses sell goods or services for cash, or upon collection of outstanding accounts receivable. If credit sales are allowed, entrepreneurs should strive to collect outstanding receivables in a timely manner. Cash outflows occur when cash is paid in purchasing goods or services or upon settling outstanding accounts payable. When possible, the entrepreneur should try to arrange credit purchases and take advantage of the grace period offered by creditors. For example, if the seller allows 30 days to pay the account in full, paying cash or paying the outstanding amount much sooner does not make business sense unless the creditor offers some form of incentive for early payment. Outstanding receivables and payables should be properly tracked to ensure timely collection of receivables as well on-time payment of accounts payables.

Evaluating the venture’s financial health and performance Analysis of the income statement and the balance sheet provides valuable information regarding the venture’s financial performance and ability to meet its financial obligations. The balance sheet is used to measure the venture’s liquidity and the income

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statement is used to measure the venture’s profitability. Digesting the data contained in these two key financial statements provides the entrepreneur a clear understanding of the venture’s financial condition and helps identify opportunities for further performance improvement. Certain benchmarks are used to indicate acceptable levels of liquidity and profitability. These benchmarks should be used to track own performance over time and as a comparative measure relative to the competition. Approaches commonly used to evaluate business liquidity and profitability include the following. (a) Measuring business liquidity: Liquidity is a measure of the venture’s ability to pay its bills when due without selling fixed assets. Three measures are commonly used to measure liquidity: Net Working Capital, Current Ratio, and Quick Ratio. Net Working Capital is the difference between Current Assets and Current Liabilities. A critical challenge most entrepreneurs encounter, particularly in their early years, is the availability of adequate working capital which is the difference between the venture’s current assets and its current liabilities. A positive net working capital balance indicates the venture has net current assets to readily cover current operational expenses. A negative net working capital balance indicates that the venture may not be able to meet its financial obligations without liquidating some of its long-term assets. Based on information in the Balance Sheet in Table 4.2 net working capital for Mohammad Badri Retail Store is $22,200 (54,000–31,800). It indicates that the retail store has ample cash to meet its short-term financial obligations. i Current Ratio: Closely related to the net working capital, the Current Ratio is a widely used measure of business liquidity. The Current Ratio shows the venture’s ability to meet its short-term financial needs, and is computed as follows: Current Ratio =

Total Current Assets Total Current Liabilities

A current ratio (CR) of 1.0 or higher is considered adequate. It indicates that the business has enough liquid assets to pay its short-term liabilities. A current ratio that is below 1.0 indicates that the business may not be able to pay its shortterm debts without selling some of its fixed assets. Creditors consider low current ratio as a sign of looming insolvency and potential default. The current ratio for Muhammad Badri Retail Store is: $54,000/$31,800 = 1.70. This ratio is strong and indicates that the retail store has current assets that can cover its current liabilities 1.7 times. While a comfortable current ratio level is desired, excessively high current ratios may indicate inefficient use of the venture’s assets. As discussed in the above section, holding a large amount of cash suggests that the venture foregoes potential earnings that could have been realized if the excess current assets were invested. ii Quick Ratio: Not all current assets are equally liquid, and it may take time to convert some types of current assets into cash. At times, businesses may have obligations that need to be settled promptly. Quick Ratio (also known as Acid-Test Ratio) is used to measure if the venture has adequate liquid assets to meet its shortterm obligations. To compute Quick Ratio, only cash, and other liquid assets that can be converted into cash at short notice are included. As shown below, current

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assets such as Inventory and Prepaid Expenses which may require some time to convert to cash are excluded from Quick Ratio computations: Quick Ratio =

Current Assets − Inventory − Prepaid Expenses Current Liabilties

A Quick ratio of at least 1.0 is an accepted benchmark. For the hypothetical example, Mohammad Badri Retail Store, the Quick Ratio is: Quick Ratio =

$54,000 − $12,000 − $7,000 = 1.1 $31,800

A Quick Ratio of 1.0 or higher indicates the business has adequate current assets that it can liquidate quickly, if necessary, and will have no difficulty meeting its short-term cash obligations. Measuring long-term business solvency: In addition to monitoring short-term liquidity, entrepreneurs also need to understand if their business is solvent, i.e. if it can pay its long-term debt when due. Long-term solvency analysis is used to assess a venture’s staying power (Needles and Powers, 2001). Financial leverage ratios commonly used to assess business solvency include Total Debt Ratio and Debt to Equity Ratio. Total Debt Ratio, also called Debt Ratio, is computed as the ratio of all debt the venture owes to its total assets, i.e., Total Debt Ratio =

Total Liabilities Total Assets − Total Equity  or  Total Assets Total Assets

A debt ratio of 1.0 is considered adequate since the business has sufficient assets to fully cover its outstanding financial obligations. Low debt ratio, i.e., debt ratio below 1.0, indicates that the venture has room to borrow additional funds to run its operations or to grow. A Debt Ratio that exceeds 1.0 suggests that the venture’s debt is relatively high. Highly leveraged companies find it more difficult to get additional loans or to attract new investments since creditors and investors consider them risky. Muhammad Badri Retail Store’s Total Debt Ratio is 0.58 ($44,300/$76,670). This indicates that 58% of the retail store’s assets are financed with debt and the balance (42%) with equity. The retail store has adequate assets to cover outstanding liabilities. Debt to Equity Ratio: Another approach to measure leverage is to look at the debt to equity ratio (also called Debt to Net Worth ratio). This ratio shows the extent to which the business is leveraged and is measured in terms of the ratio of the assets financed with debt relative to owners’ equity. It should be noted that the intangible component of equity such as accumulated goodwill, if any, is excluded from the computations—only the tangible investments made by the owners are included in this ratio analysis. Debt to Equity Ratio =

Total Liabilities Total Equity

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High debt to equity ratio indicates that the company is more reliant on creditors to finance its operations compared to the owners’ contributions. A debt-equity ratio of 1.0 would mean that creditors and owners have contributed equally to finance the venture’s assets. Debt-equity ratio below 1.0 suggests lower debt burden and greater solvency. For M. Badri Retail Store, the Debt-Equity ratio = $44,300/$32,370 = 1.37. This indicates that for every $1.0 of equity the owners have contributed, Badri Retail Store has borrowed $1.37. Badri is somewhat heavily leveraged, and some creditors may begin to be concerned about their ability to collect the amount they are owed in case the business fails. Profitability analysis Data provided in the income statement is used to evaluate a venture’s profitability. Common profitability measures include Return on Assets, Return on Sales, and Return on Owners’ Investments. While higher profitability ratios clearly show better profitability, these should be used as a comparative measure relative to the competition or to track own performance over time. Return on Assets (ROA) ratio. ROA (also known as Return on Total Assets) is used to evaluate a firm’s profitability in terms of Net Income earned by using all assets during a specific period. This measure informs investors, creditors and managers how efficiently the firm is using its assets to generate net profit. Higher ROAs indicate better business performance. Return on Assets (ROA) =

Net Income   ×  100 Total Assets

M. Badri Retail Store’s ROA =

$38,017   ×  100 = 49.6% $76,670

Return on Sales (ROS) ratio. This ratio measures the return a firm generates from its sales revenues. The ROS indicates the proportion of the venture’s sales revenues that are converted into profits. ROS may be computed based on Gross Income Before Taxes, or Net Income After Taxes. In view of the fact that these two different approaches yield different results, the entrepreneur may consider using both of these measures. The ROS is computed as: Net Income Before Taxes Net Income After Taxes Return on Sales  ( ROS ) =  or  Gross Sales Gross Sales M. Badri Retail Store’s ROS =

$50,690   ×  100 = 14.62% or  $346,750

$38,017   ×  100 = 10.96% $346,750 Badri’s ROS is 14.62% if Net Income Before Sales is used, or 10.96% if Net Income After Sales is used. This shows the venture was profitable during the year. The higher the ROS ratio, the better the venture’s performance.

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Return on Investment (ROI): This Measures the venture’s profitability relative to the owner’s net worth. The ROI is computed as follows: Return on Investment  ( ROI ) = M. Badri Retail Store’s ROI =

Net Profit Net Worth

$38,017   ×  100 = 117.45% $32, 370

This shows that the retail store’ net profit relative to the owner’s net worth was 17.45% during the year. This is not too shabby but the higher the ROI, the better. Careful assessment of the financial ratios over time provides valuable information about the financial health and performance of the venture. Tracking these ratios regularly serves as an early alert system about the possible weaknesses in the liquidity or profitability of the business and helps identify opportunities for improvement.

Summary African entrepreneurs use different mechanisms to acquire startup capital. Common funding sources are self-funding, debt financing including taking loans from family members and friends, and equity financing. African entrepreneurs should also strive to take advantage of available funding assistance programs offered by their governments, NGOs as well as other donor organizations. Membership in informal savings clubs can provide cost-efficient funding. Finally, African entrepreneurs should explore potential investment by angel investors and venture capital firms as well as other crowdfunding opportunities such as Kiva person-to-person lending. Improved internet access in Africa is making utilization of different crowdfunding methods more accessible than ever before. Need for funding does not end with the successful launch of the venture. The entrepreneur also requires financing to achieve business growth and expansion. Three strategies may be considered: use internal resources by reinvesting the venture’s profits, or obtain external financing, primarily taking out loans or using equity financing. Each strategy has advantages and disadvantages which the entrepreneur must assess carefully. Due to limited external financing opportunities, most entrepreneurs in Africa rely on internal resources to support growth and expansion. The pros and cons of using different financing strategies should be carefully examined. Using multiple funding sources helps improve the odds of generating much needed capital to start a new venture and to achieve desired growth. This chapter also discussed the importance of developing an appropriate accounting and bookkeeping system to accurately document business transactions and track venture performance. To understand the venture’s performance and financial health, periodic financial statements, particularly the income statement and the balance sheet, should be prepared periodically, preferably every quarter. Analysis of the income statement shows the venture’s financial performance in terms of profitability, and analysis of the balance sheet shows the venture’s ability to pay its loans and bills when due.

Review questions 1 The text has identified several funding sources that entrepreneurs can potentially use in starting their ventures. Identify and explain the funding source that entrepreneurs in your region often use in starting new ventures.

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2 Discuss the pros and cons of using (a) debt or (b) equity to finance a new venture. 3 Distinguish between venture capital firms and angel investors. Research if this form of financing is available in your region. 4 Informal financial systems are commonly used in many parts of Africa. Identify if any such system is used in your region, and explain how it operates. 5 To support growth, new ventures may use internally generated funds or external financing. Discuss the advantages and disadvantages of using each approach. 6 Differentiate between “liquidity” and “profitability”. What methods are commonly used to measure liquidity and profitability? 7 Refer to the Balance Sheet for Muhammad Badri Retail Store given in the text. Suppose Total Current Assets were stable at $54,000 but Accounts Receivable declined to $7,500 and Inventory increased to $32,000. What is the impact of this change on: (a) The Current Ratio; and (b) Quick Ratio. 8 Refer to the Income Statement for Muhammad Badri Retail Store. For the year ended December 31, 2019, suppose Gross sales was $410,000 and Net Income Before Taxes was $210,000. Compute the venture’s return on sales.

References Aryeetey, Ernest (2008). “From informal finance to formal finance in Sub-Saharan Africa: Lessons in linkage efforts”. https://www.researchgate.net/publication/254264799_From_Informal_Finance_ to_Formal_Finance_inSub-Saharan_Africa_Lessons_from_Linkage_Efforts Barringer, Bruce R. and Ireland, R. Duane (2006). Entrepreneurship: Successfully Launching New Ventures, Pearson Education, Inc., Upper Saddle River, NJ. Bygrave, William D. and Quill, Mark (2006). “Global entrepreneurship monitor: 2006 Financing report”, Global Entrepreneurship Research Association. Clark, Jeanette (2018). Tsedey Asrat: A modern twist on Ethiopia’s coffee culture, In: Jaco Maritz, How We made it in Africa: Learn from the Stories of 25 Entrepreneurs who’ve built thriving businesses, www.maritzafrica.com Edom, Edon (2017). “How Aliko Dangote became the richest person in Africa”, https://startuptipsdaily .com/aliko-dangote-richest-person-in-africa/ Geier, Ben (2018). “What is an angel investor”, https://smartasset.com/investing/what-is-anangel-investor Gerber, Michael. (2005). E-Myth Mastery: The Seven Essential Disciplines for Building a World Class Company, Collins Business, New York. Google News (1999). “Google receives $25 million in equity funding”, June 7. https://googlepress. blogspot.com/1999/06/google-receives-25-million-in-equity.html Hisrich, R.D, Peters, M.P. and Shepherd, D.A. (2013). Entrepreneurship, 9th edition, McGraw-Hill/ Irwin. “How Aliko Dangote Became the Richest Person in Africa”, https://startuptipsdaily.com/alikodangote-richest-person-in-africa/ Jacobs, Todd ( January 17, 2019). “The untold truth of Jeff Bezos”, Bloomberg, https://www.nickiswift. com/143187/the-untold-truth-of-jeff-bezos/?utm_campaign=clip Lingelbach, David (2012). “Entrepreneurship finance in weak institutional environments”, in Cumming, D., ed. The Oxford Handbook of Entrepreneurial Finance, Oxford University Press, New York, pp. 777–824. Lingelbach, David, Sriram, Ven, Mersha, Tigineh and Saffu, Kojo (2015). “The innovation process in emerging economies: An effectuation perspective”, The International Journal of Entrepreneurship and Innovation, Vol. 16, No. 1, pp. 5–17.

88  Growth Lingelbach, David C., De La Vina, Lynda and Asel, Paul, (March 2005). “What’s distinctive about growth-oriented entrepreneurship in developing countries”, UTSA College of Business Center for Global Entrepreneurship Working Paper No. 1, https://ssrn.com/abstract=742605 or http://dx.doi. org/10.2139/ssrn.742605 Maritz, Jaco and Probyn, Justin (2018). “Ken Njoroge: The Long, hard journey to build a billiondollar company”, in Jaco Maritz, How we made it in Africa: Learn from the stories of 25 entrepreneurs who’ve built thriving businesses, www.maritzafrica.com Mejia, Zamena (2018). African Business Network--ABAN, https://www.cnbc.com/2018/08/02/ how-jeff-bezos-got-his-parents-to-invest-in-amazon–turning-them-into.html, (accessed 9/13/19). Motylska, Iga (2018). Navalayo Osembo: How to make a Kenyan running shoe, In: Jaco Maritz, How we made it in Africa: Learn from the stories of 25 entrepreneurs who’ve built thriving businesses. Maritz www.maritzafrica.com Musariri Confidence (2018). “Twapewa Kadhikwa: How one hair salon became a group of companies”, In: Jaco Maritz, How We made it in Africa: Learn from the Stories of 25 Entrepreneurs who’ve built thriving businesses, www.maritzafrica.com Needles, Belverd E. and Powers, Marian (2001). Financial Accounting, 7th ed., Houghton Mifflin Company, Boston, MA. Njiraini, John (2015). “Microfinance: Good for the poor?” Africa Renewal, https://www.un.org/ africarenewal/magazine/august-2015/microfinance-good-poor Nzeyap, Lea Pulcherie Maffengang (January 16, 2013). “Tontines: The informal financial sector in Cameroon”, Fair Observer, https://www.fairobserver.com/region/africa/tontines-informal-financialsector-and-sustainable-development-cameroon/ O’Brien, Chris (2015). “African venture capital: Nigeria and Kenya are leading the continent with startups and fundraising”, https://venturebeat.com/2015/03/25/african-venture-capital-nigeriaand-kenya-are-leading-the-continent-with-startups-and-fundraising/ Roodman, David (2009, October 2). “Kiva is not quite what it seems”, https://www.cgdev.org/ blog/kiva-not-quite-what-it-seems The World Bank (2013). “Crowdfunding’s potential for the developing world”. 2013. info Dev, Finance and Private Sector Development Department, World Bank, Washington, DC. http://funginstitute.berkeley.edu/wp-content/uploads/2013/11/Crowdfundings_Potential_forthe_Developing_ World.pdf United Nations, (2013, February). “Microfinance in Africa: Overview and suggestions for action by stakeholders”, https://www.un.org/en/africa/osaa/pdf/pubs/2013microfinanceinafrica.pdf. United Nations Economic Commission for Africa (2015). “Innovative financing for economic transformation in Africa”, https://www.uneca.org/sites/default/files/PublicationFiles/ innovative-financing-economic-transformation-africa2015-adf_en.pdf

Appendix to Chapter 4 An Example of a Chart of Accounts for a Small Business

Assets Current assets: 101: Cash: The amount of cash the firm has on hand and in bank 102: Accounts receivable: The outstanding amount customers owe the firm from credit sales. 103: Inventory: The value of raw materials the firm has in stock 104: Supplies: The value of miscellaneous supplies the firm has in stock 105: Prepaid expenses: Unused portion of advance payments made by the f irm (e.g., insurance premiums, rent) Fixed (or long-term assets)* 111: Automobiles/trucks Less: Accumulated depreciation 112: Office equipment Less: Accumulated depreciation 113: Furniture Less: Accumulated depreciation 114: Machinery Less: Accumulated depreciation 115: Other fixed assets Less: Accumulated depreciation 301: Intangible assets** Total assets: (The sum of current, fixed and intangible assets, if any)

Liabilities Current liabilities 201: Accounts payable: Amount owed to suppliers for items bought on credit 202: Salaries payable: Unpaid salaries already owed by employees 203: Rents payable: Rent due but not yet paid 204: Loans payable: Outstanding loans Total current liabilities Long-term liabilities 221: Mortgage: The total original amount of mortgage loan Less: Accumulated payments of the principal

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222: Equipment: Total cost of equipment before depreciation Less: Accumulated depreciation 223: Furniture Less: Accumulated depreciation Total Liabilities (Current Liabilities + Long-term Liabilities)

Owner’s equity (total assets minus total liabilities) 301: Owner’s Equity

Income [Each income category is assigned a unique account number.] Example: 401: Sales revenue 402: Income from services (if any) 403: Interest income 409: Miscellaneous income

Expenses [Each expense category is assigned a unique account number.] Example: 501: Wages and salaries expense 508: Telephone/internet expense 502: Rental expense 509: Office supplies 503: Advertising expense 510: Shipping and postage expense 504: Business interest expense 511: Cleaning and maintenance expense 505: Business insurance expense 512: Sales taxes 506: Utility expense 513: Other taxes 507: Automobile expense 514: Miscellaneous expenses Note: The above is an example of a basic structure of a Chart of Accounts. Different companies will assign different account names and numbers as appropriate. *Fixed (or Long-term assets) These include land, buildings, equipment, furniture, vehicles, and other tangible assets. Assets whose value declines over time are reported at face value minus accumulated depreciation. Example: A firm owns a vehicle that it purchased for $40,000 two years ago, and it uses straight-line depreciation of 20% per year. The current value of the vehicle will be recorded in the balance sheet as follows: Vehicle (original cost) $40,000 Less accumulated depreciation 16,000 Current vehicle value $24,000 **Intangible assets: Established businesses have goodwill accumulated through the years. Intangible assets comprise hidden values of an established business such as name recognition, the prospect of returning customers and other forms of goodwill comprise the estimated value of intangible assets. Source: Tigineh Mersha

5

The marketing imperative

Learning objectives: upon completing this chapter you will: • • • • •

Understand the basics of the marketing mix for goods and services Evaluate consumer needs and recognize the importance of segmenting the market Appreciate the importance of creating a sustainable and credible value proposition Identify the unique aspects of entrepreneurial marketing and understand how it is different from traditional marketing Understand the special challenges and opportunities of marketing in Africa

The framing of the key marketing principles is generally around the marketing mix (also commonly referred to as the 4Ps – product, price, promotion, and place, for physical products and the 7Ps – people, packaging, and positioning in addition to the first four – mostly in the case of intangibles and services). These four (or seven) elements constitute the tactics that marketers have at their disposal to accomplish their key goal – that of acquiring and retaining customers. Various definitions have been offered for marketing which generally center around the notions of creating and delivering value, fashioning a mutually beneficial exchange between the company and the customer, ensuring customer satisfaction, and the like. However, we believe that the primary function of marketing is to get the customer, and once acquired, keep them. For a for-profit venture, this customer, and the price they are willing to pay in order to enter into the exchange, is the primary source of revenue. In this section, we examine these marketing tactics in detail from a broad perspective initially and then drill down into how marketing may be practiced and applied differently (1) by entrepreneurs and startups and (2) in Africa.

The marketing mix In the 4P/7P formulation: •

Product – a physical (good) or intangible (service) offered for exchange that has the ability to satisfy a need. This is usually on a tangible-intangible continuum since many products are a combination of physical and intangible. For instance, Equity Bank (see Chapter 3) is largely a service that falls on the intangible end of the spectrum, while Afrimarket is a service provider that sells physical goods. Green Agro’s (see Chapter 3) goal of improving farming practices in Ethiopia relies on physical farm machinery and equipment.

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• • • • • •

Price – represents the monetary value that customers place on the product based on what they are willing to pay. Promotion – at its essence, it’s about communication. The marketer needs to use various media, and a clear, well-crafted message, to communicate with their current and potential customers. Place – refers to the location of the exchange of the product. This can be physical (e.g., a retail store) or virtual (via a smartphone or website). People – the individuals responsible for sales and marketing. People are very significant particularly in the marketing of services since human interaction is often a major element of customers’ evaluation of service quality. Packaging – every visual element of the product that the customer sees in another tactical tool for marketers. This is also an important part of branding, which we discuss later. Positioning – often referred to as the “unique selling proposition”, “product differentiation”, “competitive advantage”, this really is about the “value proposition” – what makes the product offering stand out from its competition.

Customer segments A starting point for the entrepreneur is to first understand the customer, given what we said earlier about customer acquisition. This implies the need to identify who the various customer segments are and which one(s) of those segments they want to focus on (targets). While it may be tempting to think that one can cast a wide net and serve all customers, the likelihood is that, for most companies, certain customers are likely to be more interested in the product offering. Customer segmentation usually involves the following variables, by themselves or in combination: • • • •

Geographic – regions, cities, urban versus rural, climatic Demographic – age, income, occupation, education, religion, generation Psychographic – attitudes, interests, lifestyle, personality Behavioral – usage occasion, rate, benefits sought, loyalty

Once the segments are defined, certain criteria have to be applied in order to determine which of them are viable. In order to be viable, they generally have to be measurable (size, growth, etc.), accessible (reachable), substantial (large, profitable), differentiable (respond differently to marketing tactics), and actionable (fit with the company’s resources and capabilities). Let’s apply some of these concepts to Afrimarket (see Chapter 3) and Equity Bank and try to understand what segments exist for their customers and why they chose to target the customers they did. Afrimarket’s Rania Belkahia’s original idea was to sell Africa-sourced products to members of the African diaspora living in Europe. She very quickly pivoted, as many successful startups do, to target the fast-growing middle class in West Africa. She determined that this was a viable market because of several indicators: a middle class projected to increase dramatically between 2020 and 2030, growing mobile internet penetration, and low levels of online retailing. She segmented the market geographically, initially Abidjan in Côte d’Ivoire, and later, other parts of Francophone West Africa, and had plans to expand elsewhere on the continent. This choice of segmentation, the middle

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class in West Africa rather than the African diaspora in Europe, was informed by the criteria discussed above. The segment was measurable since data showed the growth in both size and incomes of this group; it was becoming increasingly accessible via smartphones, and the €20 million that she raised afforded Belkahia the resources needed to build the website, market, drive traffic, and deliver the products to the consumer. The distribution had become quite cost-intensive because of the high cost of “last-mile” delivery, particularly to rural customers. Given that many of them did not have physical addresses or credit cards, Afrimarket had to invest in logistics and transportation rather than use third parties to perform these functions. She felt that this investment was justified since delivery problems would seriously impact customer satisfaction and retention. Given Afrimarket’s subsequent financial problems, one can question the wisdom of this investment-heavy strategy since expansion hinged on fresh investment, but it also highlights the need for segments to not only be large and have potential but also be profitable. Application exercises 1 You have decided to start an e-commerce business in your country to compete against startups like Afrimarket. Look at each of the four bases for segmentation and identify the key segments that exist and develop a customer profile of each. 2 Of the segments you identify, which one will you target and why?

Targeting and positioning Once the customer segments are defined and target customers are chosen, the marketer has to turn their attention to acquiring and retaining these customers. This is where the marketing mix (4Ps/7Ps) is deployed. The entrepreneur has to clearly identify the positioning/value proposition and build this value (product/service), capture this value (price), communicate this value (promotion), and deliver this value (place). Current marketing thinking suggests that framing the marketing mix around the 4Ps or 7Ps is somewhat constraining and narrow since it is internally focused (on the company and product) rather than externally on the consumer. In this new formulation, consumers are not buying product features but benefits and solutions. They are not paying a price, but are buying value. They want education about the product and information to learn about it and build a relationship with the company rather than be promoted to two-way not one-way communication. Finally, they want access to the product via multiple modes and formats with the exact purchase location becoming less important. This new framework SAVE – solutions, access, value, education – makes the consumer a value co-creator with the company and a more active and informed participant in the exchange. Along with selecting the target customer, determining the position (value proposition) is central to developing a tactical marketing plan that is the basis for the mutually beneficial exchange with the customer. In developing this value, it is important to focus from the outside-in (starting with the consumer) rather than inside-out (starting with the company). It’s often said that the latter results in creating products around features (inside-out) while what consumers buy is benefits (outside-in). When looking at these customer benefits, the company should focus as well on differentiating its products from existing competitors, and making it robust enough to make it difficult for existing and

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new competitors to emulate. This is necessary for customer retention. So, which differences can be the basis of a robust value proposition? •

• • •

•

•

Sustainability – not easy for competitors to copy. For example, a lower price by itself is not sustainable unless the business model and cost structures can support this lower price. If an airline X lowers its fares, it’s easy for competitors to match that. However, if airline X is profitable at that fare because it has lowered its costs relative to its competitors while they lose money at that price point, the difference is sustainable in the long term. Importance – customers value the benefit. The European online retailer Zalando and the US online shoe store Zappos offer free returns on merchandise important for customers. Distinctiveness – the benefit is not offered by other competitors. When the apparel manufacturer Under Armour started, their wicking fabric was innovative and superior to what was then available. Communicable – can the difference be easily communicated to and understood by potential consumers? Polaroid eyewear’s (www.polaroideyewear.com) claim of clearer and glare-free vision was easy to demonstrate visually on the company’s website and in its advertising. Price/Quality – buyers will be willing to pay based on whether they want to afford the quality. If the price point is higher than the competitors’, the perceived quality also has to be higher. If the price is the same, the quality has to be the same or better. If the quality is lower, the price has to be significantly lower than the competition in order to entice the buyer. Profitable – can the company create and price the difference to be profitable?

Let us now apply the concepts of segmentation and positioning to the case of Equity Bank. While banking as an industry has been present in Africa for decades, most consumer banks serviced customers who were affluent and urban. The bank’s MD and CEO James Mwangi observed that most rural Kenyans, including his own mother, did not have a bank account chiefly due to the fact that the nearest branch was 50 km away; the required minimum opening balance was out of reach for most rural Kenyans, and the cash withdrawal rules were very stringent. In effect, the banks had an inside-out focus rather than an outside-in one which may have enabled them to understand the plight of most of their potential customers. Unsurprisingly, fewer than 10% of Kenyans had a bank account at the start of the 21st century. Mwangi decided to segment the market based on geographic (rural), demographic (lower income, adults), benefits (convenience, access, and high frequency of small transactions to deposit and withdraw cash, pay bills, etc.), and psychographic (the desire to participate in the formal economy, have a trusted and safe place for one’s money). Equity Bank’s value proposition is based on several significant differences from traditional banks. Their use of an agency model allowed them to deploy 30,000+ small retailers as agents who could perform routine banking transactions for a commission, thereby broadening customer reach without significant capital investment. Their subsequent use of technology via the mobile banking app were important and distinctive benefits for their target consumers. Doing away with high minimum balances and creating affordable products offered clear value in terms of price/quality. Significantly, this bundle of benefits is hard for competitors to emulate partly due to first-mover advantages (tying

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agents and customers to Equity Bank) and high switching costs (moving accounts once customers start banking with Equity). The agents become the human face of the bank since the retailer-agents communicate with customers clearly without using banking jargon and demystify banking, especially for first-time account holders. Finally, this value proposition is profitable since using app-based and mobile banking reduces the need for high fixed-cost branches and salaried employees, which enables Equity to offer its products at affordable prices to its target market, who are generally less well-off than the traditional Kenyan banking clients who are wealthier and urban. In fact, this switch to a variable rather than fixed cost model has resulted in lower cost-to-income ratios over time, thereby allowing the bank to be profitable despite lower prices. This rural population with economic buying power is not unique to Kenya – some estimates suggest that over half the middle class across Ethiopia, Malawi, Mozambique, South Africa, Uganda, and Tanzania live in rural areas. This represents a huge potential market segment, often underserved.

Entrepreneurial versus traditional marketing Do entrepreneurs need to use different marketing tactics and practices than those employed by larger, more established companies? To answer this question, let us examine some of the characteristics of entrepreneurs as they relate to marketing. •

An entrepreneurial startup is likely to be undercapitalized, at least outside of the context of the “intrapreneur” initiative in a large organization. This implies that the small entrepreneurial endeavor is not going to compete on something like volume, or plan on significant cost reductions due to economies of scale as volume increases. Instead, they’re probably going to be looking for a more disruptive product to market. Any level of disruption comes in the context of what it is to be disruptive. The competitive environment, and even the larger scale politico-social environment, especially in regards to some places in Africa, would be of great interest. With this, one might try to understand not just the environment but the trends and, with each trend, a countervailing force. There would be, say, a set of dynamics based on the micro- and macro environments that can help an organization or an individual formulate an idea for a disruption, and, along with that, a tactical plan for execution.

Encouragingly for African startups, there are several examples from the United States and elsewhere of minnows taking on giants and succeeding, and not only in the hightech sectors where this is more common. For example, Dollar Shave Club’s (DSC) use of a humorous video, shot on a shoestring budget (although the script was written and honed over months), along with finding a South Korean source to supply blades at half the price, enabled DSC to take on the mighty Gillette. The company was sold to Unilever for US$1 billion in 2016. •

Given the likely financial constraints, marketing will have to be innovative and creative. The term “guerrilla” marketing is often used to describe entrepreneurial marketing tactics – these rely on unconventional, low-cost approaches that leverage surprise and unexpectedness to reach a wide audience, often because they go viral on social media. The effectiveness of podcasts and influencer marketing

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is another affordable avenue for startups and entrepreneurs since these media are often not only more affordable than conventional media such as TV and print, but are often also more impactful. The use of ad blockers is even making consumers immune to traditional digital advertising. Even large advertisers such as Emirates Airline found that mega-influencer Carey Neistat – who was paid nothing but given premiere status on the airline – generated over 50 million views on the posts he shared with his followers compared to 6 million views for a series of ads featuring the highly paid Hollywood star Jennifer Aniston. If the startup is smart in selecting its influencers – those whose followers match the intended target consumers – this can be very effective. Influencers with fewer followers (micro- and nano influencers) are surprisingly affordable. Also, since this type of marketing requires followers to “opt-in” in that the audience actively seeks them, the level of engagement is very high even if the reach may be lower than traditional media. The communication flow is two-way rather than the one-way flow where the message is forced on the audience. Another attractive aspect of influencer marketing, in addition to cost and engagement, is impact. While a US$2 return for every US$1 spent on advertising is considered a success, influencer marketing often returns 6–7 times spending (https://knowledge.wharton.upenn.edu/ article/new-marketing-royalty-rise-digital-influencers/). Among the mega influencers, African movie stars such as Genevieve Nnaji, fashionistas such as Chioma Onwutalobi, Afropop musicians, and athletes will have a strong connection with certain target audiences, but there are other less well-known influencers who are much more popular among their followers than traditional celebrities. What factors should the entrepreneur consider when selecting an influencer? • • •

Context: match between the influencer’s followers and the intended target audience Reach: number of followers Actionability: the influencer’s ability to persuade their followers to act

Other aspects to consider include how the influencer will be paid (flat fee, product compensation as in the Emirates example earlier, pay-per-click, pay-per-customer acquisition, etc.) and the metrics to measure success. While most marketers would like to see a sales increase, brand engagement, shares, web traffic, and other harder-to-measure measures such as brand awareness and likability should also be considered. •

•

What does the competitive environment look like? In any sector where this is likely to work at all, assuming that there is some legal protection for intellectual property (IP) and contractual obligations, it’s going to be an inviting market and possibly ripe for sudden and strong competitive forces. The mechanism by which the entrepreneur first found competitive advantage has to be quickly converted into a mechanism for maintaining or increasing that advantage. The same thing then goes with marketing communications and analyzing the effectiveness as such. There’s got to be a way in which the specific competitive advantage and value can be closely monitored, almost, to be in a way as singular and disruptive as the product is itself. While for established companies, much of the promotion “P” is about communicating to current and potential customers, startups, and entrepreneurs, in general, have to be able to communicate – pitch – their product/service ideas to others, often to prospective investors for funding. The overall marketing strategy is an integral

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part of the pitch since it has to present a clear, concise road map for the value proposition which will lead to customer acquisition, and the revenue that results. In order to be pitch-ready, the founder has to have thought of all the issues discussed earlier in this section – the target customer, the value proposition, and how to execute this in the context of the 4P/7P or SAVE framework. While funders are often the target for the pitch, so are customers, employees, and other stakeholders. At the conclusion to Part III, we provide a template for a “pitch deck”, a quick overview (usually on PowerPoint, Keynote, etc.) of your business plan that you can use when presenting to funders, customers, partners, etc. Some important lessons to draw for entrepreneurial marketing: startups taking on established and deeper-pocketed brands is never easy but the playing field has leveled in the 21st century, thanks to technology, globalization, and younger consumers living digital lives who therefore search for information, shop, and buy online. Direct-to-consumer marketing reduces the reliance on big advertising budgets, expensive manufacturing facilities, research and development expenses, and physical retailers to carry the products. Bigger companies often have vulnerabilities around their stale and unfashionable image, high prices, and a fuzzy value proposition. Startups that can deliver quality products at lower prices (due to global outsourcing) and a laser-like focus on connecting with the customer can take share away from corporate giants as DSC has shown with shaving products and Warby Parker with eyewear in the United States.

Marketing in Africa •

•

How do we understand consumers in the varied environments in Africa? It’s very difficult to analyze the national context culturally from an outsider’s perspective, because the calculus for needs and wants is much different under such circumstances. For example, the Morocco-based insurance company Saham Finances (acquired by the South African insurer Sanlam in 2018) realized the importance of giving local managers autonomy and freedom, and this resulted in Burkina Faso, one of the smaller and poorer countries in Africa, becoming one of their fastest growing markets as the country manager used local knowledge to successfully target underserved business customers. A further complication is that Africa is a continent with over 50 countries, and there are significant variations in many customer dimensions – income, ethnicity, religion, tribal, language, geographic – even within the same country. This makes the designing of marketing strategies particularly challenging in the African context. One lesson we can learn from large emerging markets such as China, India, and Brazil is that country-level strategies are not likely to be successful. Marketers need to understand consumers at a much more granular level, and make marketing tactics local, even hyper-local. In larger African countries such as Nigeria, Ethiopia, Egypt, Democratic Republic of Congo, South Africa, and Tanzania, there are huge regional differences in competition, income, consumer preferences, and retail channels. This implies that strategies may have to be crafted at the city or regional level. Once the customer can be better understood, one recognizes a unique circumstance of being customer-centric. Any value attached to that must come in its own context, and again within that web of trends which is likely to be different, perhaps radically so, in areas that aren’t really that far apart

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•

•

•

geographically. We know, for example, in Africa where so many of the countries and national boundaries were stitched together via post-colonial agreements rather than with any attention to cultural or ethnic affinities, these identities are often more powerful than national ones. While we discussed earlier the potential for technology to allow startups to disrupt their larger rivals, this impact has to be put in the context of access to technology. In larger African countries such as Ghana, Ethiopia, Nigeria, and Kenya, smartphone penetration is still quite low (less than 25% in most cases), as is access to computers and the internet. In most emerging markets, including China, reliance on online recommendations is much lower than in countries such as the UK and the United States. This factor coupled with the large number of first-time buyers for many products such as mobile phones, cars, and computers, less brand familiarity, and a culture of societal validation implies that word of mouth is very important. With the increasing usage of social media, harnessing this to influence recommendations from family and friends can often be more powerful than traditional media. Research from McKinsey & Co on wealthy Chinese consumers indicates that even for luxury products, word of mouth is not only increasing in importance as a purchase influencer but that recommendation from friends and family is the number one factor influencing purchase decisions for these products. While less price-sensitive and wealthy consumers exist in most African countries (the German luxury watchmaker A. Lange & Sohne, which handcrafts a few thousand gold and platinum watches annually, opened a store in South Africa in 2018), affordably priced products of good quality will still have huge appeal. As we saw in the DSC and Warby Parker examples earlier, good quality products at reasonable prices are a winning formula anywhere, perhaps more so in Africa. From a marketing standpoint, this means paying close attention to consumer needs, stripping features that add to costs but don’t add much to customer value. Sometimes this could mean setting an affordable price first and finding a way to profitably sell the product at that price, reversing the usual way marketers set prices – starting from costs and marking up. The Indian company Tata Motors decided that the market would embrace a car priced at ₹100,000 (approximately US$2000 when it was launched in 2008) and asked its engineers to design a car to meet that target price. It targeted first-time car buyers, many of whom were moving up from motorcycles. Through a combination of low labor costs, frugal innovation (or jugaad as discussed in Chapter 2), they were able to meet their price target and launched a car called the Nano. Although the Nano was later discontinued, the important lesson is that the essence of jugaad mindset is that everything starts with understanding customer needs and working back. The price is set based on customer feedback, and the design and deciding what features customers value and will pay or not pay for also relies on customer information. In that sense, it hews closer to the marketing notion of customer-centeredness. Prahalad and Hammond (2002) argued that if executives were willing to examine their preconceptions about the value of low-margin, high-volume business, they would see the immense potential of many emerging market customers at the “bottom” or “base of the pyramid” (BOP). Despite the recent economic growth in Africa, and the presence of wealthy consumer segments in most African countries, many people are on subsistence-level incomes and are economically vulnerable. However, these BOP consumers are a huge market, often overlooked as companies

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•

•

typically focus their marketing energies at consumers at the top of the income pyramid. The lessons learned by creating and marketing products at lower costs and affordable prices to BOP consumers (such as the frugal innovation discussed earlier) can be transferred to operations in economically advanced countries as well. As with the Tata Nano example earlier, ideally products often have to be designed with the BOP consumer in mind, rather than adapting existing products. Importantly, while many Africans look to Western brands, younger consumers are open to local brands that embody African culture and esthetics. Also, as Prahalad points out, they are not just consumers of daily necessities but they also buy televisions, mobile phones, and other appliances and, as we saw with the Equity Bank example, use banking services. Additionally, in Africa as elsewhere, BOP consumers are often concentrated in mega cities – such as Cairo, Lagos, KinshasaBrazzaville, Johannesburg – making it easier and cheaper to reach them. Although the margins may be low, the potential top-line revenues are high, making BOP consumers viable for innovative and courageous entrepreneurs and marketers. As we saw with the examples of Afrimarket and Equity Bank (Chapter 3) and from the discussion in Chapter 1, infrastructural challenges in Africa represent a significant hurdle for many African startups, especially those targeted rural consumers or those in less-densely populated regions. Although the “last-mile” issue (i.e., transporting products/services from the hub to the final destination) continues to challenge supply chains globally, it is a more acute problem in regions with poor infrastructure. Part of the reason for Afrimarket’s demise was that despite a desirable product mix and consumer acceptance, distribution became too costly. Investments made in cellular networks have made this easier for services such as banking and entertainment but physical goods distributors have to either focus on consumers in densely populated areas or find other innovative solutions. One of the more challenging aspects of being an entrepreneur in Africa has to do with the retail environment. It also provides great opportunities, attested to by the fact that many entrepreneurial ventures are in the domain of retailing. The structure of retailing in most of sub-Saharan Africa is similar outside of South Africa. It is characterized by the following: • • • • • •

A proliferation of retail outlets, most of them classified as small-sized convenience stores (i.e., mini-supermarkets, small grocery stores, kiosks, roadside stalls). Traditional open-air markets that offer a wide variety of goods from food to household items to clothing. The biggest ones consist of hundreds of small stalls jammed next to each other over a vast area. Prices in the open-air markets tend to be lower than in the traditional retail outlets. Most of the outlets are supplied by sub-wholesalers/super retailers and pay cash upfront in most cases. The bulk of local staple foodstuffs are sold in traditional markets. In most of West Africa, there is also a preponderance of street hawking, which plays a very important role in retailing. These hawkers sell almost every type of fast-moving consumer goods (FMCG) and are usually found at street corners and major traffic lights. They tend to cater to the lower-income and less-educated groups.

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•

• • • •

An increasing number of malls and department stores, many a result of FDI by South African firms expanding into the rest of Africa. These tend to mostly serve the higher-income and well-educated segments of the population but are not widespread. They tend to be found in the two or three largest cities in a country. A lack of capital for many of the operators in retail. Small margins as distribution channels tend to be long and their small sizes do not help them to gain bulk purchase discounts. Infrastructural challenges that make supply chains quite inefficient, thus raising costs of operations.

The dominance of the informal sector complicates the distribution function in retailing, but it also provides an opportunity for entrepreneurship and innovation. For example, poor road networks and traffic congestion in Ghana have led to a massive increase in the use of motorized tricycles and motorbikes for delivering goods to small businesses. It has made deliveries to them quicker and much cheaper since they do not have to rely on big trucks or vans. UNICEF, in collaboration with Zipline, has used drones to transport medical supplies in Rwanda and Malawi. Such technology also offers commercial possibilities that imply that poor infrastructure will no longer be an excuse for poor service. There are also opportunities for other innovative logistics solutions, discovering new channels, and applying e-commerce solutions. TrendWatching (May 2018) cites some examples of firms that have created solutions to overcome some of these challenges: • • • •

Sky.Garden, a Kenya-based mobile software service platform, enables small businesses and informal traders to offer their products online. Launched in 2017, it has over 3000 registered sellers and 23,000 plus products for sale. Xente, an online marketplace, was developed by Intelworld in Uganda to help over 50 Ugandan merchants selling various digital products. Sokowatch, a Kenyan mobile delivery network, enables small firms to place orders via SMS and receive them within 24 hours. This is possible because system alerts nearby delivery agents who work with big suppliers. Tupuca, a food delivery service, helps customers avoid lunchtime traffic by delivering meals directly to offices. Drivers provide their own motorbikes but are given backpacks and cell phones. In return, they receive a portion of the delivery fee. Between launch in 2015 and 2018, orders increased from 400 to 11,000 per month.

These e-commerce examples also show the potential for overcoming the challenges of promotion for African entrepreneurs. The promotional mix environment in many African countries is quite expensive. The primary modes are TV, print, radio, and billboards. Television is out of reach financially for many aspiring entrepreneurs. So are print and radio. The clutter of billboards in many African cities and towns casts doubt on their effectiveness. E-commerce and social media solutions provide less expensive and more effective approaches for entrepreneurs to get their messages out. •

We discussed the importance of people at the beginning of this section. Successful African entrepreneurs, such as Aliko Dangote of Dangote Industries, one of the most successful African and global companies, invests in proprietary training in

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technical and management skills since he believes that this is critical to Africa’s growth. Nadia Fettah, CEO of Saham Finances, and Fred Swaniker, the founder of African Leadership University, echo this sentiment, emphasizing the importance of talent development and management and the need to internally train managers to meet their exacting specifications in order to supplement or even sometimes replace the university education of their employees with shorter training programs to develop necessary skills rather than the traditional three- or four-year college degree. Given the frequent crises and shocks that are unfortunately common in emerging regions such as Africa, marketers and entrepreneurs have to learn how to adapt, and pivot when necessary, to be successful in such turbulent environments. Here is where having trained, experienced, and savvy people can be a major asset.

Summary Acquiring and retaining customers is the lifeblood of any startup or ongoing business. This section focused on the marketing imperative – the tools and tactics that can be used to achieve this by creating a compelling and clear value proposition, and capturing, communicating, and delivering this value. We discussed some of the factors that make entrepreneurial marketing different than that for a traditional, larger, and more established company and some aspects of the African environment that should be thought through when designing marketing strategies and campaigns.

Review questions 1 Pick a physical product and a service and explain how the marketing mix would differ and be applied in each case. 2 Select an idea you would like to take to market in your country. Identify the key consumer segments you think exist for that product. 3 Develop a value proposition for the product, applying the criteria discussed in this chapter. 4 How would you get the product to the consumer, keeping in mind the retailing and distribution challenges? 5 Keeping in mind the communication infrastructure (media availability, literacy, smartphone access, etc.), design a social media campaign for Polaroid Eyewear in your country.

References Prahalad, C. K. & Hammond, A. (2002). Serving the world’s poor, profitably. Harvard Business Review. 80(9), 48–57. TrendWatching (2018). The future of retail in Africa. https://trendwatching.com/quarterly/2018-05/ future-retail-africa/

6

Operations and supply chain management

Learning objectives: Upon completion of this chapter you will: • • • • • • •

Understand the significance of effective operations and supply chain management for business success Identify the primary decision areas in operations management Describe the series of activities in the supply chain Explain important considerations in location choice and capacity planning Explain the importance of appropriate process design in operations and identify the factors that influence process design decisions. Show how quality improvement increases productivity and profitability Apply selected approaches used to improve operations performance

Managing operations and supply chain management Entrepreneurs start new ventures to satisfy unmet needs in the market. For the new venture to survive and prosper, proper management of critical organizational functions including marketing, operations and supply chain, and finance is necessary. In this section, we focus on managing the venture’s operations and supply chain. The operations function is the engine that creates goods and services the venture sells to customers to generate revenues. Operations management is the efficient and effective conversion of a set of inputs to desired outputs at added value. Also called value chain management, operations and supply chain management (OSCM) involves managing the sequence of activities starting with acquisition of needed inputs from suppliers, converting the inputs to desired outputs, and delivery of the outputs to customers (Figure 6.1). Inputs consist of resources such as labor, equipment, energy, raw materials, and components. The inputs are converted to desired outputs utilizing an appropriate transformation process. The primary purpose of OSCM is to acquire the inputs needed to produce goods and services that consistently meet or exceed specified quality standards and deliver them to customers on time and at minimum cost. OSCM strives to continuously improve product and process quality to meet the ever-changing needs of the market. Successful achievement of OSCM objectives requires careful selection of suppliers, appropriate design of the production process, ensuring quality, efficient management of inventory and the supply chain, and ongoing improvement of the operations system. The operations function is omnipresent and ranges from performing simple chores such as making coffee or doing laundry to undertaking complex manufacturing, service,

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Figure 6.1  Operations and supply chains.

and construction jobs. The operations system may be a factory that transforms a set of inputs into finished goods according to design specifications, or a service delivery system that provides the desired service to customers. Distinctive capabilities in OSCM help increase productivity and improve quality and customer satisfaction. In turn, these strengths help improve the firm’s competitiveness and overall performance. OSCM capabilities service as a powerful competitive tool and are an important predictor of business survival and success (Tatikonda et al., 2013). Recent developments such as globalization and advances in technology have had a significant impact on OSCM. Globalization stretched supply chains far and wide across international boundaries and helped expand markets. Technological advances enabled rapid introduction of new products as well as new operations tools and techniques such as robotics and artificial intelligence. Proliferation of information and computer technology made e-commerce possible linking manufacturers, service providers, retailers, and customers across the globe on a real-time basis. Some emerging nations (e.g., India) have started developing new products and technologies that reflect the prevailing socioeconomic reality. Known by various names such as “jugaad” or “frugal innovation” (www.kbmanage.com) this approach considers resource scarcity an important element of new product development and seeks to develop low cost, high volume products, and processes customized to emerging nation environments (). The new products or processes developed may comprise breakthrough innovation or some adaptation of existing products and processes to suit the socioeconomic conditions prevailing in emerging nations. For example, in 2009, the Indian industrial giant, TATA Corporation—developed a small car called Nano with a target price in mind—the cost to the consumer at the time was not to exceed ₹100,000, about $1,980 (Colin, 2009). Frugal innovation is a viable concept that can enable entrepreneurs in resource-constrained environments like those in Africa to develop goods and services at a price their customers could afford. There are also signs that some African entrepreneurs are creating innovative technologies by leapfrogging the long time and high cost typically needed to develop new products and services. For example, as discussed in Chapter 3, Equity Bank in Kenya developed a convenient, affordable, and accessible mobile payment system

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that rivals those available in developed economies. Another Kenyan firm, Safaricom in partnership with Vodafone, developed an innovative financial services system called M-PESA that allows customers to manage their accounts easily using a mobile device. Customers can deposit or withdraw money, transfer funds, or pay for goods or services all using their mobile device. This financial service system has now expanded into Tanzania, South Africa, India, Afghanistan, and Albania (Chironga, Desvaux and Acha, 2019). African entrepreneurs should actively explore leapfrogging opportunities aimed at adapting existing technologies to their specific environment.

Major decision areas in operations and supply chain management Performing the OSCM function effectively requires making several important decisions. These key decisions are grouped into the following five areas: (1) capacity management, (2) process design, (3) quality management, (4) inventory management, and (5) supply chain management. 1 Capacity management: Capacity decisions start with selecting the right location for the business. Location choice is a strategic decision that has significant cost and revenue implications for the venture. In manufacturing, location impacts the cost of production and distribution and eventually influences the price paid by customers. In service businesses, location influences customer accessibility and convenience which, in turn, impact sales revenue. Lack of access to affordable locations is among the major constraints that inhibit starting new ventures in Africa (Mersha and Sriram, 2019). It is therefore important that both subjective and objective factors relevant to the business be thoroughly evaluated in selecting a location for the venture. These include: infrastructure (transportation, power, water, internet services, etc.); proximity to suppliers; proximity to customers; availability and cost of labor; cost of building or renting facilities; applicable laws and regulations; political stability; government incentives; taxes, administrative bottlenecks and community attitude. Once location is selected, an appropriate facility is built or leased to meet capacity requirements based on projected sales forecast. From an operations management perspective, “capacity” is defined as the “maximum output that can be produced per time period, or the maximum number of customers that can be served during a specific time period. Capacity decisions involve a trade-off between the cost of adding capacity and the opportunity cost of lost sales due to lack of adequate capacity. Capacity shortage could result in the loss of potential profits due to lack of goods or services to sell to customers. Wasting the venture’s scarce resources by carrying excess capacity also costs money. To illustrate, consider the hypothetical scenarios below: Restaurant A that has a 50-seat capacity was fully booked last Saturday and had to turn away 10 customers. By turning away the 10 customers, Restaurant A lost potential sales (and profits) that it would have earned if it had more seats. Now suppose that another restaurant, Restaurant B, has a seating capacity of 80 but the restaurant seldom serves more than 60 customers at a time. Restaurant B underutilizes its capacity by 25%. Leasing the unused space is a waste of scarce resources if there are no other compelling reasons for carrying the excess capacity (e.g., anticipated demand growth in the future).

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2 Process design: It involves determining how inputs will be transformed to desired outputs at minimum cost. Appropriate design of the transformation system is critical for the efficient production and delivery of goods and services. A host of factors influence process design decisions including projected volume, degree of product standardization, availability of funding, worker skill level, and others. Based on these factors, operations processes are grouped into three broad categories: Lineflows, job shops, and Projects. Line-flow processes are appropriate for production of standardized products in large quantities. Different forms of line-flow process are available. Continuous line-flow systems are used in process industries such as sugar or cement production, oil refineries, breweries, water bottling plants, and chemical plants. They are suitable for the production of highly standardized outputs in large volumes. Assembly lines are used to manufacture discrete items in large numbers using a standard production process although there may be some cosmetic differences among the products. Examples of assembly line production include appliances, electronics, shoes, and automobiles. Job shop processes are appropriate for producing a variety of outputs in small batches. This form of production is often based on specific customer order. Projects are used to create unique, one-of-a-kind products. Examples of project processes include starting a new business, building a house, and making a movie. Different process design criteria are used for services compared to manufactured goods although the overall operations objectives of cost minimization, flexibility, quality, and on-time delivery remain the same. An important factor to consider in service process design is the presence of the customer in the service facility and the probable direct encounter between the service provider and the customer. In most types of services, not only are customers physically present in the service facility but they may interact with service providers. In this type of business, it is important that service employees who come in direct contact with customers receive appropriate training both in technical and interpersonal skills. In the service business, the cleanliness, ambiance, and overall physical appearance of the facility is important since every aspect of the service process comprises a “moment of truth” that together determine overall customer satisfaction. To ensure that the system is functioning as designed and to identify further improvements, it is necessary to evaluate the operations system regularly. If a sequential flow process such as an assembly line is used, the bottleneck resource determines the overall capacity of the system. The bottleneck resource may be the slowest worker, workstation, or department in the process that produces the fewest number of items, or serves the fewest number of customers per time period. Uneven rate of output at different stations in the process causes long queues at the bottleneck station but creates idle time at the more efficient workstations. The slowest station in the assembly line determines the rate of output of the entire system regardless of how fast other stations or workers are. The production line is as fast as the slowest station, like a chain is as strong as its weakest link. Increasing system capacity requires increasing the capacity of the bottleneck station which can be achieved by adding an appropriate resource (a worker or equipment) to the bottleneck station or by combining some tasks that require less time to complete, if feasible. Committing the additional resources helps increase process efficiency, reduces idle time, and improves customer service.

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Figure 6.2  Service flow chart.

To illustrate, consider the following hypothetical example (Figure 6.2). A service is completed in four phases, and currently each phase is staffed by one employee. The flowchart shows the workflow and the average time required at each station. What is the maximum number of customers that can be served per hour based on the information given above? To answer this question, determine the capacity per hour at each station. Capacity per hour at each station = (Total available time)/ (Time at each station). Thus, service capacity per hour at each station is: 12 at A; 6 at B; 15 at C, and 10 at D. Station B is bottleneck and the maximum number that can be served at that station is 6. This is also the capacity of the system since the bottleneck station determines system capacity. To increase the number of customers served per hour, the capacity of the bottleneck activity should be increased. Different strategies can be used to achieve this objective. For example, one more worker can be added to perform Task B. This alleviates the bottleneck at Station B but now the bottleneck shifts to D, and system capacity will now increase from 6/hour to 10/hour—a 66.7% increase. It’s up to the management to decide if it is worth incurring the added cost of hiring one more worker to achieve the capacity increase. Management may also consider other options to boost efficiency. At times, significant efficiency improvements could be achieved simply by reconfiguring the tasks. Simulating different configurations may identify the most efficient process at lowest cost possible. It is therefore important that the entrepreneur regularly conducts thorough process flow analysis of the operations system to explore possible improvement opportunities. Answering the following key questions helps identify improvement opportunities in the operations system: 1 What is being performed at this station? 2 Who performs the task? (This will help if automating the task is essential, or if a different operator should be used, etc.) 3 Where and when is the task performed? 4 How is the task performed? (This may precipitate changes in work methods, tools, etc.) 3 Quality management: Various definitions of quality are available. Some of these include consistent, reliable, fast, defect-free, ‘doing it right the first time’, etc. A more common definition of quality is “customer satisfaction” or meeting customer expectations or requirements. Quality of goods is defined in terms of physical features and performance characteristics of the product. Quality of services is measured in terms of meeting customer expectations. Improving the quality of goods and services cuts waste, boosts productivity, increases market share, and improves profitability (Schroeder and Goldstein, 2018).

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Over the years, quality management has evolved from a focus on inspection to total quality management (TQM). The TQM approach to quality management is cross-functional in nature and requires that all functional areas of the organization are actively involved in the quality improvement journey. Operations play a particularly significant role in this effort. More recently, the six-sigma approach is used by many organizations to drive continuous improvement (CI). Six-sigma is a resultbased improvement system that seeks to achieve almost defect-free production and delivery of goods and services. Both goods quality and service quality are multidimensional. The following dimensions define the quality of goods: • • •

•

Quality of design: Is the new product designed to meet customer requirements? Quality of conformance: Does the quality of the finished product conform to design specifications, i.e., is the product produced as designed? Availability: How long has the product been able to provide normal use relative to the total life of the product, and how does this compare with competing products? Total life of the product is the length of time the product was available for normal use plus the time it was down or under repairs (downtime). Availability is influenced by quality of design and quality of conformance dimensions. Field service: Is after-sale repair service easily available when needed?

Quality of services: The intangible nature of services makes measuring service quality more difficult. Industry specific metrics for measuring service quality are available. A more generic service quality assessment approach called SERVQUAL (Parasuraman, Berry and Zeithaml, 1991) may be used to assess customer satisfaction with a specific service. The SERVQUAL method is used to evaluate customer satisfaction on each of the following five dimensions of service quality: • • • • •

Reliability: Ability to provide high quality service consistently. Responsiveness: Willingness to help customers and provide prompt response to customer concerns/questions. Tangibles: Adequacy and cleanliness of physical facilities. Assurance: Knowledge and courtesy of employees. Empathy: Caring and individual attention provided to customers.

For each dimension, customer satisfaction is measured in terms of a gap between the customer’s expected quality of service (E) and the customer’s perception of the quality of service received (P). If the gap score between perceived service and expected service (P – E) is negative, the quality of service is perceived to have fallen short of customer expectations, and suggests customer dissatisfaction with the service. If P – E score is positive, customer expectations are perceived to have been exceeded indicating satisfaction with the service. If P – E score is 0, it suggests that the customer is neither satisfied nor dissatisfied with the service. African entrepreneurs can apply this simple but useful approach to gauge customer satisfaction with the quality of service their venture provides. The walk-through audit (Bordoli, Fitzsimmons and Fitzsimmons, 2019) is another simple but useful approach that can be used to assess service quality and to identify areas that need improvement. As indicated above, customers often directly participate in the service delivery process, and their satisfaction with the service is

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influenced by several “moments of truth” experienced during the service process. The walk-through audit enables a systematic assessment of the service delivery process based on customer experience and helps identify any deficiencies observed by the customer at each phase of the process. In conducting the walk-through audit, trusted customers may be asked to give their assessment of each aspect of the service process. The entrepreneur and key personnel may also go through the service process mimicking the customer and document any deficiencies that they observe in the service delivery system. The deficiencies so identified should be targeted for improvement. Quality improvement increases productivity by minimizing rework and scrap costs as well as other forms of waste. Increased productivity, in turn, enables the entrepreneur to sell the product or provide the service at a lower price compared to the competition which helps boost sales revenues. Thus, improving quality helps increase the venture’s profitability and competitiveness. As can be expected, quality improvement is not cost-free. Cost-related costs are grouped into two categories: (1) control costs such as employee training and inspection that seek to prevent quality problems, and (2) failure costs such as the cost of rework, scrap, and warranty which are incurred to correct defects or to compensate customers for poor service or defective products. While improving quality costs money, emphasizing quality is cheaper in the long term. In his best-selling book titled Quality is Free!, Phillip Crosby (1979) showed that the benefits of investing in quality improvement efforts far outweigh the costs incurred in the long run. It has also been shown that emphasizing prevention is cheaper compared to correcting production defects or service errors and confirms the adage that “an ounce of prevention is worth a pound of cure.” Spending money to improve quality is a smart investment that pays for itself several times over. Successful entrepreneurs make great effort to understand customer requirements about a product and they go the extra mile to meet those requirements. Such an effort should start at the product design phase. The effort of Navalayo Osembo and her partner is instructive. When Kenyan entrepreneur Navalayo Osembo (Motylska, 2018) and her business partner decided to start a running shoe company in Kenya called Enda, they interviewed shoe designers and manufacturers to better understand important features of running shoes. They also interviewed world renowned Kenyan athletes to learn about key characteristics they look for in their running shoe purchase decisions. Osembo and her business partner had the athletes test prototypes of their shoes and used feedback they received from the athletes to improve the design of the running shoes. Once product design is finalized, the product may be assembled in the entrepreneur’s own facilities or it can be outsourced. Several factors are considered to determine which option is best. In-house production requires large initial capital investment to purchase equipment, hire and train workers, and build or rent required facilities. Proper maintenance of the equipment and facility upgrades can also be challenging. While outsourcing has the advantage of not requiring large upfront capital investment and offers greater flexibility in product design change as well as faster turnaround of orders, it has its own challenges, as Navalayo Osembo found out. Osembo decided to outsource production of the Enda shoes to a Chinese company but found that correcting some defective shoes that were produced thousands of kilometers away was not easy. Kaldi’s Coffee, a café chain based in Addis Ababa, Ethiopia, provides another example of the effort it takes to ensure quality

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in service businesses. The owner reported that she spends a large proportion of her time training workers on customer service (Clark, 2018). In general, quality focus tends to be rather lax in Africa, but this is changing as the above examples illustrate. Entrepreneurs doing business in the continent need to clearly understand the benefits of emphasizing quality. The burgeoning middle class in Africa is increasingly becoming quality conscious. African businesses can no longer ignore customer demand for quality goods and services. Customer requirements change regularly, and successful entrepreneurs monitor these changes closely and make necessary adjustments in their product offerings and service delivery. For example, when Castle Beer introduced a premier beer brand in Zambia, it became instant success thanks to the growing middle class in the country who look for better quality products (PMA Research, 2017). In view of the growing quality-conscious consumers in Africa, entrepreneurs in the region who diligently strive to meet or exceed customer expectations are likely to be rewarded handsomely. 4 Inventory management: Ordering and carrying some form of inventory is inevitable in most types of businesses. The Inventory management decision is typically concerned with determining what items to order, from whom, when, and how much. The primary inventory decision is figuring out what raw materials or finished goods to carry on hand to enable production of the finished goods or to meet customer demand, and how much. This decision has significant implications for business success. Having adequate raw materials inventory on-hand enables utilizing the venture’s productive capacity to produce the desired outputs. For manufacturers, no raw materials inventory means no production, and the downtime time costs of idle machines and workers can be horrendous. Similarly, wholesalers and retailers cannot make sales if they don’t have merchandise. Having no merchandise on hand would mean the venture will not be able to fill demand when due, thus missing the opportunity to earn profits. Thus, despite the costs incurred to acquire and hold inventory, it is crucial that the entrepreneur carry adequate raw materials and finished goods on hand. In developed nations, the economic order quantity (EOQ) model is used to determine how much inventory to order at a time. Under certain assumptions, this model shows the optimal quantity that should be ordered to minimize total annual cost of ordering and holding inventory. However, in resource constrained environments the EOQ model should be used with caution. Entrepreneurs operating in these environments determine how much to purchase at a time based on available cash and supply uncertainty. When cash is tight, they prefer to order small quantities at a time to preserve available funds and to increase inventory turnover (Tatikonda et al., 2013). When supply uncertainties and inflation are high and foreign exchange rates are volatile, they seek to purchase larger quantities (if they can afford it). Thus, the decision regarding order size is influenced more by resource availability and environmental factors like foreign exchange fluctuations and supply chain uncertainties. Of course, this situation varies by country, and entrepreneurs need to make inventory decisions based on the prevailing conditions in the country. 5 Supply chain management: Supply chain management encompasses the seamless management of all value-added activities from resource acquisition, transformation, and distribution of finished products to end users. Appropriate SCM supports

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value creation and ensures on-time delivery of goods and services where and when needed. It involves managing upstream activities and relationships with suppliers as well as downstream activities and relationships with customers (Figure 6.1). For a manufacturer, for example, upstream activities include the supply of parts, components and information needed for the production and delivery of goods and services, and downstream activities refer to the delivery of finished goods or services to wholesalers, retailers, and the final consumer. To ensure seamless flow of production and delivery across the supply chain, both upstream and downstream activities across the organization should be integrated through a well-designed logistics system. Logistics is a coordinated set of activities including transportation, storage, and information used to manage inbound flow of inputs as well as outbound flow of outputs. In Figure 6.1, only one “component manufacturer” receives raw materials suppliers from A and B. In many situations, however, there could be several suppliers of different raw materials and components. Component producers supply their outputs to the manufacturer. For the manufacturer, the components are one of the many inputs used to produce the desired output(s). For more complex products, the supply chain can be very long involving a series of inputs and outputs for each part or component used to assemble the finished product. Any disruption in the flow of materials along the supply chain impacts the timeliness and efficiency of delivering the finished product to the customer. Any disruption in the supply of parts or components could bring the production system to a complete halt and could lead to revenue loss as well as customer dissatisfaction. For new start-ups, such incidents could serve a severe and, at times, fatal blow from which they may not be able to bounce back. Building trusting relationships with partners across the supply chain helps strengthen supply chain reliability which benefits all parties involved. Infrastructure constraints in Africa—suboptimal transportation systems, sporadic power supply, cumbersome bureaucracy, and rampant corruption—further complicate supply chain and logistics management. Some innovative entrepreneurs have successfully responded to these challenges. Faced with frequent production disruptions due to power outage, the Dangote Group, the large industrial conglomerate based in Nigeria, started generating its own electric power. Kaldi’s, the popular coffee chain in Ethiopia, created its own company to ensure on-time delivery of coffee beans and milk that consistently met its stringent quality standards. In the previous section, we discussed how some companies in developing countries use “frugal innovation” to create bricolage-based products. Lorna Rutta and Bethlehem Alemu are noteworthy examples of African entrepreneurs who developed innovative products from waste (Iwuoha and Bokrezion, 2014). Lorna Rutta of Kenya founded EcoPost, a thriving business that manufactures fencing posts from plastic waste, and Bethlehem Alemu of Ethiopia founded SoleRebels, a company that produces quality footwear from used vehicle tires. SoleRebels shoes are now sold in over 40 countries around the globe. Some multinationals have modified their products in response to infrastructure-related supply chain management challenges in resource constrained environments (PMA Research, 2017). For example, Unilever, which operates in over 40 African countries, has developed margarine that does not require refrigeration. Coca-Cola, which operates in 50 African countries, uses returnable bottles. This helps

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make the product more affordable to consumers while also benefiting the environment. The innovative solutions mentioned above indicate that entrepreneurs in Africa can develop creative solutions to alleviate economic and structural impediments they encounter in the supply chain. Advances in information technology have had a huge impact in supply chain management across the globe. Ecommerce has enabled faster, cheaper, and more accurate exchange of information and goods, and has brought suppliers, manufacturers, wholesalers, retailers, and consumers far and near much closer together. In many parts of the world today, e-commerce has become the norm for Business-to-Business (B2B) as well as business-to-consumer (B2C) transactions. With a few exceptions (such as Afrimarket in its early days and Jumia), use of e-commerce is still at a rudimentary stage in most African countries. Most small businesses in Africa don’t even have websites (Iwuoha and Bokrezion, 2014) but this is changing at an accelerated pace. In view of the growing dominance of e-commerce in international trade today and the emerging young, techsavvy demographic landscape in Africa, African entrepreneurs who develop e-commerce and online technology capability will have strong competitive advantage.

Productivity measurement Tracking the venture’s own performance over time and comparing the results against the competition. Appropriate measurement of the venture’s performance at regular intervals helps track changes and helps identify potential areas of improvement. Different performance measures are used in business. In Chapter 4, we discussed the different approaches used to measure financial performance. In OSCM, various approaches are available for measuring capacity utilization, productivity, process flow, quality, and inventory, to name just a few. Below we present a brief discussion of productivity measurement. Productivity measurement is used to assess how well the venture is utilizing its scarce resources. Several factors impact productivity including the type and cost of inputs used, process efficiency, quality management, and type of production technology used, among others. Productivity is measured as the ratio of outputs to inputs as shown below: Productivity =

Outputs Total Value of  Outputs = Inputs Cost of  Inputs

Outputs are measured in terms of volume (or value) of goods or services produced. Input measures include cost or other metric pertinent to the input (e.g., number of hours, quantity of materials, etc.). A higher productivity ratio indicates better use of the venture’s resources. While different measures of productivity can be used, total factor productivity and partial factor productivity measures are common: 1 Total factor productivity (TFP): TFP is the ratio of the total number (or value) of outputs to the cost of all resources used to produce these outputs. TFP =

Total Number of  Outputs Total Value of  Outputs  or  Total Cost of  All Inputs Total Cost of  All Inputs

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TFP shows the total amount of resources consumed to obtain the output(s). In computing TFP, it is necessary to express the inputs used in terms of cost to enable adding together the costs of the different types of resources (e.g., raw materials, labor, energy) used in the production process. 2 Partial factor productivity (PFP): The purpose of computing PFP is to determine how much input of each kind was used to obtain the output(s). PFP is computed as shown below: Partial Factor  Productivity (PFP) =

Total Sales Cost  ( or Quantity )  of Each Input Used

For example, the PFP for labor and materials, respectively, is determined as: PFP for Labor =

Total Sales Total Sales  or  Cost of  Labor Labor Hours Used

PFP for Materials =

Total Sales Total Sales  or  Cost of  Materials Quantity of  Materials Used

The entrepreneur may first determine TFP to assess overall productivity performance, and then compute partial productivity for each factor to see which input is performing better and which is lagging. For example, suppose the TFP shows that the venture’s overall productivity this year has declined compared to last year. The entrepreneur would like to know the underlying cause for this decline. This could be due to a slump in total sales revenues this year compared to last year, or it could be due to an increase in the cost of some inputs. Computing TFP alone will not explain the cause for the overall decline in productivity. Determining PFP of each input for the two years will clearly show the relative performance of each input during the two periods. Identifying the factor that caused productivity decline would enable the entrepreneur to take necessary steps to reverse the decline. A productivity measurement example: a Suppose an entrepreneur operates three restaurants located in different parts of a large city. Table 6.1 below shows sales revenue generated from each location and the cost of labor, materials, energy, and overhead in each location. Table 6.1  Productivity measurement Location Average weekly sales Total labor cost Total material cost Energy cost Other overhead costs Total costs Source: T. Mersha.

A

B

C

$40,000 $5,500 $3,500 $1,250 $1,200 $11,450

$28,000 $4,200 $3,000 $4,000 $3,000 $14,200

$38,000 $4,500 $2,000 $3,200 $2,500 $12,200

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a

Calculate labor productivity of each facility. A 40,000/(5,500) = $7.27 B 28,000/(4,200) = $6.67 C 38,000/(4,500) = $8.44 The above results show how much sales was generated per dollar of labor input. b Calculate total factor productivity of each facility A B C c

40,000/(11,450) = $3.49 28,000/(14,200) = $1.97 38,000/(12,200) = $3.11 The results above show how much sales was generated per dollar of total input. Suppose the entrepreneur is considering closing one of the three restaurants. Which of the three facilities should be closed based on total productivity performance? Facility B should be closed because its total factor productivity is the lowest.

Continuous improvement The African entrepreneur today operates in a dynamic environment marked by constant change. The world economy is more integrated than ever before. Customer preferences and product features change frequently. Product life cycles have become shorter as newer and better products enter the market at a faster rate than ever before offering customers an array of attractive choices. To survive and thrive in this competitive environment, business ventures in Africa need to actively gauge changes in customer requirements and expectations and engage in sustained continuous improvement effort to respond to those changes. Continuous improvement (CI) is a systematic, data-driven approach that strives to achieve ongoing improvement in the organization’s processes and products to more fully meet customer needs and expectations. Sometimes referred to as kaizen, CI seeks to achieve performance excellence through a process of ongoing improvement in all aspects of the venture’s activities. CI is based on the belief that there is always room for improvement, and that entrepreneurs/managers should never stop searching for opportunities that may further enhance their venture’s performance. Successful implementation of CI results in reduced waste and rework, fewer mistakes and delays, more efficient use of scarce resources, increased customer satisfaction, and better achievement of desired goals and objectives. If properly implemented, CI can be a win-win-win for the venture, employees, and customers. Customer satisfaction occurs when products and services meet or exceed customer expectations. A critical element of the CI framework is a focus on understanding customer requirements and an unrelenting effort to meet or exceed those requirements. To promote performance excellence, CI uses performance improvement teams and empowers them to identify, analyze, and solve work-related problems. Improvement projects may be proposed by employees or may be identified by the administration through gap analysis in which actual performance is compared with the standard (or desired performance). Root causes to the identified problem are identified and evaluated, and the selected solution is implemented. When an improvement project has been satisfactorily resolved, the improved process becomes a standard procedure. The team then selects a new improvement project thus setting in motion an ongoing series of improvement initiatives.

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Summary OSCM creates value by acquiring supplies and other resources, transforming these resources into desired outputs using appropriate conversion techniques, and distributing the outputs to customers. Important decision areas in operations management include process design, quality management, capacity management, inventory, and supply chain management. Effective OSCM enables meeting customer requirements on time and at lower cost, improves quality, increases productivity and profitability, helps build operations flexibility to accommodate changing customer needs, and strengthens the venture’s competitiveness and success. Different approaches are used to measure the quality of goods and services. While recognizing that quality improvement costs money, this chapter stressed that the benefits of investing in quality improvement far outweigh the costs incurred. The chapter further stressed the importance of monitoring the changing needs and expectations of customers and the need to seek continuous performance improvement to stay competitive. Productivity measurement, process flow analysis, and the CI framework were presented as examples of improvement approaches entrepreneurs can employ to achieve ongoing performance improvement and success.

Review questions 1 Identify and explain typical decisions made by operations managers. 2 Explain how effective operations and supply chain management contribute to the venture’s success. 3 Proper process design is a key function in operations management. Explain what process design refers to and identify important factors that should be considered in designing an appropriate process. 4 Explain the two broad categories of quality related costs—control costs and failure costs. Why is it important for the entrepreneur to emphasize minimizing failure costs? 5 Explain how quality improvement strengthens a company’s profitability. 6 Define productivity and explain why the entrepreneur should care about tracking productivity performance over time.

References Bordoli, S., Fitzsimmons, J. and Fitzsimmons, M. (2019). Service Management: Operations, Strategy and Information Technology (9th ed.), New York: McGraw-Hill. Chironga, M., Desvaux, G. and Acha L. ( January, 2019). “Leadership Lessons from Africa’s Trailblazers,” McKinsey Quarterly. Clark, J. (2018). “Tseday Asrat: A Modern Twist on Ethiopia’s Coffee Culture”. In J. Maritz, How We Made It in Africa: Learn from the Stories of 25 Entrepreneurs Who Have Built Thriving Businesses” (1st ed), Cape Town. www.maritzafrica.com. pp. 13–19. Colin, B. (2009). The World’s cheapest car—Tata nano under $2,000. https://www.cars.com/ articles/worlds-cheapest-car-tata-nano-under-2000-1420663251857/ Crosby, P. (1979). Quality is Free, New York: McGraw-Hill. Iwuoha, J.-P. and Bokrezion, H. (2014). 101 Ways to Make Money in Africa: Lucrative Business Ideas, Inspiring Success Stories, and Interesting Business Opportunities for Forward Thinking Entrepreneurs, www.africa101book.com.

Operations and supply chain management 115 Mersha, T. and Sriram, V. (2019). “Gender, Entrepreneurial Characteristics and Success: Evidence from Ethiopia,” Thunderbird International Business Review, Vol. 61, No. 2, pp. 157–167. Motylska, I. (2018). “Navalayo Osembo: How to Make a Kenyan Running Shoe”. In J. Maritz, How We Made It in Africa: Learn from the Stories of 25 Entrepreneurs Who Have Built Thriving Businesses” (1st ed), Cape Town. www.maritzafrica.com. pp. 66–75. Parasuraman, A., Berry, L.L. and Zeithaml, V.A. (1991). “Refinement and Reassessment of the SERVQUAL Scale,” Journal of Retailing, Vol. 67, No. 4, pp. 57–67. PMA Research (2017). “Overcoming Supply Chain Challenges to Expand in Africa”, https://www.pma. com/Content/Articles/2017/08/Overcoming-Supply-Chain-Challenges-to-Expand-in-Africa Schroeder, R. and Goldstein, S.M. (2018). Operations Management in the Supply Chain (7th ed.), New York: McGraw-Hill Education. Tatikonda, M., Terjesen, V., Siri A., Patel, P. and Parida, V. (2013). “The Role of Operational Capabilities in Enhancing New Venture Survival: A Longitudinal Study,” Production and Operations Management, Vol. 22, No. 6, pp. 1401–1415.

7

Managing networks and teams*

Learning objectives: upon completing this chapter you will: • • • •

Understand the importance of social networks for entrepreneurship in Africa Understand the differences between “strong ties”, “weak ties”, and structural holes, and explain their implications for African entrepreneurs Explain the influence of individual characteristics and the environment on social networks Understand stages of team development

Networks Traditional entrepreneurship research and theory development has looked at individual differences and personal characteristics of entrepreneurs; however, in more recent years, there has been a recognition that entrepreneurs rely on contacts within their social networks and teams to achieve success. There is no question that the personal networks of entrepreneurs are critical to the entrepreneurial process. Johannisson (1990, p. 41) describes entrepreneurs’ personal networks as the “most significant resource of the firm”. This may be particularly true for African entrepreneurs as most startup ventures across the African continent are small and often operate within the informal economy (Khavul et al., 2009). More than 97 percent of all African businesses have fewer than 10 employees (Manu, 1999), and the majority of these small ventures remain unregistered and unlicensed, and typically do not pay taxes (Pretes, 2002). They operate within the vast informal business sector that ranges from about 30 to 60 percent of GDP depending on which African country one studies. By comparison, the informal economy makes up 9 percent of GDP in the United States (see Khavul et al., 2009). The World Bank has reported that 66 percent of all employment in sub-Saharan Africa is contained within the informal economy. To be clear, the informal economy is not synonymous with illicit economic activity. It most often includes unregistered vending of food or products on street corners and unlicensed transport services. These ventures rely on word-of-mouth, advantageous locations, and labor from within the entrepreneur’s personal network to survive. Kirzner (1979) suggests that the central role of the entrepreneur is to find and exploit opportunities by taking advantage of economic disequilibria. This is done by recognizing or knowing things that others do not. Kirzner (1979) also points out that entrepreneurs do not have to possess specific knowledge themselves, they may be able to recognize how other people’s knowledge, experience, and expertise can be harnessed

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and employed in a new configuration for profit. Thus, social encounters and network contacts may be important factors in understanding how the entrepreneurship process can be successfully navigated. The importance of social networks to successful entrepreneurship has become clearer in recent years, and it is common for entrepreneurs pursuing new venture creation to rely on informal network contacts (e.g., family, friends, and businesspeople) more than formal network contacts (e.g., bankers, accountants, and lawyers) as sources of information and resources. Early-stage entrepreneurial activity involves high levels of uncertainty, but information is a valuable resource that can be used to reduce uncertainty. Stinchcombe (1990, p. 7) noted that “what is precarious at one time becomes predictable at another time because of new information”. However, no economic actor has perfect information with which to make rational choices and decisions; individuals are limited in their ability to process and store information which results in bounded .rationality (Simon, 1976). Entrepreneurship arises from the exploitation of disequilibrium created by the unequal access to information by different market participants, but no economic actor has perfect information with which to make rational choices and decisions. An entrepreneur’s social network can help expand the boundaries of rationality by allowing access to knowledge from which to assess and determine a course of action. Through social network ties, a good business idea/opportunity can be identified, screened, and assessed, and then, if appropriate, acted upon. In addition, social networks provide access to resources that are critical to firm formation, survival, and success. Network analysis considers the relational interactions between individuals, groups, and organizations (Burt, 1984; Granovetter, 1985), and it captures the emergent processes of organizing and new venture creation. From social network theory perspectives, weak ties (Granovetter, 1973) and structural holes and social frontiers (Burt, 1992) within a network may be indicators of accessibility to information that can help a potential entrepreneur recognize an opportunity and secure information, startup funding, and human capital that directly leads to successful new venture creation. Weak ties are casual acquaintances that require little time or energy to maintain the relationships (as opposed to strong ties). A friend of a friend or a casual business contact would be considered a weak tie. Granovetter (1973) argued that these “low maintenance” individuals are often the source of unique information and resources. Further, Burt (1992) argues that it is not just the strength of the tie, but rather the number of “structural holes” within the network. By structural holes, he is referring to non-linkages within a network. For example, a group of four friends, all of whom know each other and spend all of their time together, would have no holes within their network (no non-linkages). However, an individual with three friends, none of whom know each other, would have three holes (non-linkages among all three of the individual’s friends). Theoretically, the individual in the second example has access to more information because his/her friends are more likely to have contact with other people (i.e., information sources) outside the immediate network. Aside from the density of the network, as indicated by the number of structural holes in the network, Burt (1992) also points out the theoretical importance of social frontiers within the network. Social frontiers exist between all contacts within social networks. The more different two network ties are to each other in terms of demographic characteristics (gender, race, religion, etc.), the wider the social frontier and the more likely the exchange of unique information and access to unique resources.

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Given the fact that many African entrepreneurs operate smaller ventures outside of the formal economy, the importance of social networks is likely to be even more heightened. In this section, social network characteristics such as the strength of ties and the number and types of structural holes are discussed. The strength of weak ties There is a limit on the number of close friends and family contacts one may interact with because of the maintenance costs associated with more intimate relationships. It takes time to develop and maintain close relationships (i.e., strong ties), and without the effort of regular communication and interaction, a strong tie could be lost or become a weak tie. Think of close friends from one’s childhood days. Very few of our best friends from our primary school days remain close contacts over time because most of us lose touch with our best friends from our early years. However, it is possible for individuals to have many casual contacts, or weak ties, within their social networks with little required interaction or relationship management. Work associates, classmates, distant relatives, friends of friends, and many others make up one’s weak tie network. In his classic paper on the strength of weak ties, Granovetter (1973) argues that weak ties act as “bridges” to information sources not necessarily contained within an entrepreneur’s immediate (strong-tie) network. In fact, Granovetter (1973) points out that because an individual does not interact with weak ties regularly, it is likely that weak ties provide more unique information than strong ties. We choose to build strong relationships with people like ourselves, who share similar life experiences and share the same world view. Strong ties are close friends and family members who often have access to the same information as ourselves. However, weak ties are more likely to be different on a wide variety of demographic factors such as education, socioeconomic status, age, gender, religion, etc. They often provide links to different types of knowledge not otherwise known to ourselves. Thus, access and interaction with weak tie sources of information may be critical for opportunity recognition and resource acquisition. A potential entrepreneur who only interacts with a small group of tight-knit friends and family members (strong ties) has less chance of learning valuable information that can lead to entrepreneurial success than an entrepreneur who mines information from the broader network of weak ties in his/her social network. One practical example of how the strength of weak ties can be operationalized is through the use of crowdfunding websites such as Kickstarter. Nigerian entrepreneur Bapajide Ipaye transitioned from his job as an IT professional to his passion of designing and producing high-quality and stylish footwear through a Kickstarter campaign that provided his initial funding. He raised almost US$24,000 through online weak ties through the crowdfunding platform in 2015. This allowed him to produce his first batch of Keexs sneakers (see Keexs.com). In less than four years, Mr. Ipaye has had sales grow to about US$500,000 as he has created a global brand that remains socially conscious as it works to address poverty in Nigeria. Entrepreneurship does not take place within a vacuum and it is unlikely for an individual entrepreneur to have all of the knowledge and resources on his/her own. It is also unlikely that close friends will be able to provide everything necessary for success. The fact is, one can have a large number of weak ties relative to strong ties, and tapping into the broader community of weak ties can be the key to success.

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Strong and weak ties combined While there is clearly strength in weak ties as Granovetter (1973) has pointed out and as discussed above, for many African entrepreneurs, strong ties are also important. Weak ties are critical for identifying unique entrepreneurial opportunities and to acquire resources necessary for larger ventures. However, given that most African entrepreneurs operate micro ventures with low sales and few employees, the importance of strong ties becomes even more important. Strong relationships usually develop between people who have a lot of interaction between them, most notably family members and close friends. In his review (Granovetter, 1982) of the strength of weak ties argument, Granovetter pointed out that while weak ties provide access to unique information and resources, strong ties “have greater motivation to be of assistance and are typically more easily available” (p. 113). Close contacts, friends, and family members have ways of interacting, patterned roles, and patterned exchange relationships which overtly or covertly regulate interactions among exchange partners. Because of this fact, strong ties are more likely to trust one another. In a strong-tie relationship, there is an emotional bond between the parties, and as such they are more likely to offer advice and provide information and resources. For smaller ventures like those operating and often founded in Africa, startup capital needs are not particularly onerous and may be available through strong ties alone. Ms. Bethlehem Alemu grew up in a poor suburb of Addis Ababa, Ethiopia. In 2004, she raised several thousand dollars from family members to create the eco-friendly footwear firm SoleRebels (solerebels.com). From humble beginnings, she has been able to grow her firm into a multi-million-dollar global powerhouse firm with sales in 50 countries. For her efforts, she was named among the 20 Youngest Power Women in Africa in 2011 by Forbes magazine. Along the same lines, billionaire commodities trader and investor Mr. Aliko Dangote built his fortune by starting with a $1400 loan from his grandfather. Several decades later, Mr. Dangote is now one of the richest individuals in Africa. Access to formal investment capital (both debt and equity) is not as prevalent in Africa as it is in economically developed countries; thus, African entrepreneurs are likely to be more reliant on people who know and trust them (strong ties) for seed and early-growth capital. The use of strong ties for seed capital may be enough for most African entrepreneurs to start their microenterprise. However, it should be noted that if an entrepreneur deals with one or only a few strong ties, his/her firm may become overly reliant on that (those) tie(s) for information and resources. However, weak ties within the entrepreneur’s social network is more likely to provide unique information that can provide new financial opportunities, greater financial and human capital resources, and acts as a hedge against becoming overly reliant on few strong ties. While both strong and weak ties are important and can offer relevant information or provide valuable resources to a new venture, each type of tie can also offer different benefits. Potentially, there is an ideal mix of both strong and weak ties which can result in the maximum number of good entrepreneurial opportunities. Entrepreneurs who use both types of ties have the best of both worlds –quantity from weak ties and quality from strong ties. Strong ties can provide more personal information which can be trusted and reduce the need to do follow-up research, and can be a source of early seed capital. Weak ties, on the other hand, can be greater in number and can thus offer more opportunities and greater access to capital. They also provide more unique information and protect the entrepreneur from becoming too reliant on limited strong-tie sources.

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Given the differences between the economies and the types of entrepreneurial firms found throughout most of Africa and the United States or most of Europe, it is likely that strong ties may be more important for African entrepreneurs. That said, the ideal mix of ties may be different in different industries and in different countries depending on the economic conditions and size of the informal economy within a given country. Structural holes One issue with strong and weak ties is that not all social contacts are easily identified within the dichotomy. Some ties are not necessarily strong or weak but somewhere in the middle. Burt (1992) explained his concept of the importance of “structural holes” within networks following a rationale similar to the weak ties argument. While similar and related, it is distinct in that one does not need to assess tie strength but to look at the social structure of the social network. For most people, their closest friends or relatives (strong ties) will all know each other, but casual acquaintances (weak ties) will remain anonymous to the “inner circle” of friends. Yet, the casual acquaintance is more likely to provide unique information. This is due to the fact that an individual who has a group of friends who all know each other will have multiple access points to the information known by each friend – if one friend does not reveal a particular bit of information, another one will. Conversely, with casual relationships there is likely to be only one connection between individuals, and the loss of this connection will completely eliminate the possibility of information exchange ever taking place. Thus, Burt (1992) argued that it is not the actual relationship (strong or weak) between contacts, but rather the “space” between contacts that predicts access to unique information and resources. Defining the space between nonredundant contacts as “structural holes”, he showed the potential benefits and importance of the holes within a network. To clarify what structural holes are, Figure 7.1 contrasts a network filled with structural holes with one that is not. To understand the theory behind structural holes, let us assume all people in the world can only know three other people. We can see that both Entrepreneur 1 (E-1) and Entrepreneur 2 (E-2) have direct relations with only three contacts (A-1, A-2, and A3), but E-1 has access to more information because of the prevalence of structural holes. (Holes separate E-1’s alters and E-1 and all of the A’ alters.) The benefits of structural holes become clear, E-1 theoretically can receive information from nine contacts, while E-2 is limited to only three. In addition, E-2 will be exposed to redundant information. Even if E-2 loses a direct tie with any contacts, he/she will still theoretically have access to the same information, only now some information will be through indirect channels. While a larger social network can offer more information, if the network is dense (everyone knows everyone else), the entrepreneur will be exposed to redundant information. Theoretically, the loss of one of the entrepreneur’s contacts will not significantly affect his/her access to information. However, when an entrepreneur is connected to a network which contains many structural holes, he/she will have access to a much more expansive and diverse amount of knowledge. This can give the entrepreneur a competitive advantage in terms of recognizing and taking advantage of opportunities and accessing a broader array of resources – both human and financial – by exposing him/ her to more nonredundant information and resources.

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Figure 7.1  Hole-rich vs. dense social networks.

The most important structural holes to consider are those that can be found between the entrepreneur’s immediate contacts (A-1, A-2, and A-3). In a highly clustered or dense network without structural holes, we would expect to find close connections between the immediate contacts because close ties usually know the other close ties of an individual. In a more extreme case, such an arrangement usually results in a smaller, more limited network where every contact is tied directly to every other contact. In contrast, a hole-rich network allows for indirect and sparse information chains spanning the broader boundaries of non-redundant contacts. This is often the case because social network contacts who do not know other contacts of an entrepreneur (representing structural holes) are often weak ties who offer links to unique information. Network density, diversity, and social frontiers As described above, “dense” networks that have few structural holes will limit the amount of information entrepreneurs receive partly because such networks typically contain less diversity. Burt (1992) stressed that structural hole effects are most pronounced between actors on a social frontier. The frontier is “any place where two social worlds meet, where people of one kind meet people of a different kind” (Burt, 1992, p. 132). He further pointed out that “individuals who live on a social frontier are more likely to live by their entrepreneurial wits than are individuals in socially homogeneous environments”. Going back to Figure 7.1, if E-1’s contacts differ on such demographic factors as age, race, gender, education, etc., the social frontiers on which they operate will be wider. The end result is that there is a greater probability of more unique information and resources being passed between contacts. Ultimately, the level of density (fewer vs. greater structural holes) and the heterogeneity within the social network are correlated with performance outcomes. Greater numbers of structural holes (i.e., lower network density) and greater heterogeneity (wider social frontiers) are likely to offer greater benefits to entrepreneurs.

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Again, for African entrepreneurs who are likely to found and operate small firms with few employees, often within the informal economy, the information and resource advantages of having social networks with many structural holes and with contacts across wide social frontiers can be especially important. For a startup entrepreneur who is operating a small firm, just one or few social network contacts may be all that is needed in order to succeed. Prior to undergoing the new venture creation process, African entrepreneurs should take time and map out their social network contacts who they are consulting with and who they plan to rely on for their would-be venture. If they are operating within very dense networks (i.e., no or few structural holes) and lack demographic diversity among their contacts (i.e., narrow social frontiers), they should take time to seek out other contacts who can help expand their access to information and resources. Taking time to build the “right” network can be the difference between success and failure.

Social networks: Individual/environment interface Successful entrepreneurship results from a mix of skill and luck. Further, there are factors that are controllable (e.g., business planning, industry experience, education) and uncontrollable (e.g., environmental conditions, economy, social values, competition) for entrepreneurs. Ultimately, the composition of one’s social network is influenced by two elements: the individual characteristics of the entrepreneur and the environment in which he/she lives and works (see Figure 7.2). From an individual characteristics’ standpoint, an outgoing, friendly person who is open to developing relationships without regard to race, religion, or gender is more likely to have a large and diverse group of contacts in his/her social network than is

Figure 7.2  Social networks: The individual/environment interface.

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an introverted sexist and/or racist individual. One can largely control these individual characteristics. For example, one can choose to earn a graduate degree, which would allow an individual to develop relationships with other highly educated individuals. Job selection and the choice of working within a particular industry can expose an individual to other individuals within that industry. These individual factors and the personal background of the entrepreneur will impact the types of people who fall within a network. On the other hand, the environment is uncontrollable, but will also help to determine the types of people who make up the social network. For example, poor economic conditions could limit job prospects and the possibilities of gaining industry experience. Working and living in an upper middle-class suburban area will lead one to interact with individuals who have higher socioeconomic status than those who live and work in poorer enclaves. Being an ethnic minority in an area in which the majority strongly relates to one another can impact relationships. For most individuals, the social network will come from the intersection of individual characteristics and environmental conditions. That is, the composition of an entrepreneur’s social network is an indicator of one’s environmental context and individuality. However, for those who are able to better manage their network and build relationships across demographic social frontiers, more information and resources will be available. In fact, having these broader types of contacts can have obvious benefits to entrepreneurs in that they can help address the uncertainty of uncontrollable factors and directly improve the chances for success of a new venture. Jason Njoku’s Nigerian heritage and upbringing combined with his education at University of Manchester came together perfectly as he co-founded IrokoTV in 2011, which Forbes magazine identified as the “Netflix of Africa”. A serial entrepreneur by nature, Mr. Njoku started a wide range of ventures that failed; these included several web-based firms, a magazine, and a t-shirt business. Building on those experiences, Mr. Njoku saw an opportunity in securing the exclusive online distribution rights of Nigerian (Nollywood) movies. Having the idea and the vision, but lacking startup capital, he tapped into his network and got US$150,000 in initial seed capital from a friend from college, Bastian Gotter. Mr. Gotter received 50 percent equity in the firm and together they moved to Lagos and built up a catalog of over 5,000 Nigerian movies that they have made available for on-demand online download. Njoku and Gotter came from very different backgrounds. Njoku is black and was raised by a single mother with four other siblings. Gotter is white and came from an upper-class background. The friendship that they developed at University of Manchester was the key to making IrokoTV possible. They bridged a wide social frontier and successfully combined Njoku’s knowledge of Nigerian movies and Gotter’s financial resources to create a powerful media company that has raised more than $40 million in venture capital (VC) from formal VC firms from around the world.

Entrepreneurial teams Many entrepreneurial stories in popular press articles tout the virtues of the “lone wolf ” entrepreneur venturing into the unknown with little more than ambition and an idea. But the reality is that many successful entrepreneurs form teams to bring new products and services to market. The creation of entrepreneurial teams to found new ventures is closely related to the importance of social networks and in trying

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to increase access to information and resources. The benefits of working together with a team of startup entrepreneurs can be seen in the partnership between Jason Njoku and Bastian Gotter discussed in the previous section. Entrepreneurs who work together with team members can bring complementary skills together and expand their levels of information and resources both individually and with their broader combined social network contacts to achieve success. Take for example, a restaurant that is started by three individuals. If one partner is an experienced chef, one specializes in front-end customer service, and another partner has significant savings, the three team members may be more likely to succeed than if any one of the entrepreneurs tried to start a restaurant on his/her own. This is what happened when Domini Mensah, Prince Boakye Boampong, and Jesse Arhin Ghansah came together to found OMG Digital in 2012. The rapid growth in the popularity of smartphones occurred when the three co-founders were in college. However, based on their personal experience, they found that there was not enough interesting content that directly appealed to them or their generation of young Africans. Recognizing the growing need and the opportunity for their venture, they became content aggregators targeting web stories and information for African millennials. With millennials making up one third of the population of Africa, and the rapid spread of smartphones, they became known as the “Buzzfeed of Africa” with over 5 million unique users per month. Together, they worked on their business plan, raising money from angel investors and VC firms, the technology, and content delivery. Sharing the workload is an important aspect of team-based entrepreneurship. Having team members who share a vision and who are working toward meeting strategic goals often allows new firms to establish themselves quicker than those founded by individual entrepreneurs. In addition, having social support from others who are also dealing with the psychological ups and downs of new venture creation and ongoing management of the firm can be especially useful. Obviously, there is the increased possibility of internal conflicts as two or more team members must share in decision making and responsibilities and come to some mutual agreement on strategic goals, governance structures, profit sharing, and exit strategies. Tuckman and Jensen (1977) described the five stages of effective team behavior. The following is a brief summary of their five stages: Stage 1: Forming – Individuals come together to form a team in order to achieve some goal (e.g., successfully found and operate an entrepreneurial venture). Stage 2: Storming – During the early period of the team’s lifetime, the team members (i.e., entrepreneurial founders) will argue as they deal with conflicts since they establish roles and responsibilities. Stage 3: Norming – As the roles and responsibilities become routine and accepted, they become the norms of the organization (i.e., the way things get done). Stage 4: Performing – The acceptance and adherence to norms allow the team to operate effectively as the members of the team work cooperatively to achieve their goals. Stage 5: Adjourning – At some point, all teams come to an end and there should be agreement on exit strategies and how power should be transitioned to others if the team is to continue.

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For entrepreneurial teams to work and achieve success, they must be able to progress through each stage. The time to complete each stage will differ for different teams. The size of the team, diversity of its members, and industry in which a firm operates all impact the time needed for each stage. Certainly, some teams working on startups are not able to resolve their differences in the storming phase, or build a constructive organizational culture and achieve efficiency in the norming stage, but when done well it can be the key to success. Entrepreneurial teams are created through the social networks of entrepreneurs. Not all friends and family members can effectively work together, but going into business with friends and family members can help reduce mistrust and conflict. The key is clear communication and honesty about professional roles and responsibilities, as well as realistic and shared agreement about the expected business relationships. Friends and family members have ways of interacting that are informal and may not be conducive to successful entrepreneurship. For example, when two brothers start a business together there is a risk that the older brother may feel that he has authority above the younger brother based on familial interactions. This may be fine if that is what was agreed upon up front, but if the younger brother is working harder at the venture or has more technical knowledge it could create conflict. Before going into business with friends and family, it is critical that expectations and the roles and responsibilities are clearly agreed upon. To the extent possible, it is best to formalize these expectations/relationships and commit agreements to writing to avoid confusion.

Summary African entrepreneurs tend to operate small ventures, often within the informal economy. However, whether the goal is to operate a small business or to build a global brand, the importance of social network contacts cannot be overstated. For the small corner vending firm, the social network may provide labor or security. For an unlicensed transport/car service, individuals in the entrepreneur’s social network may be critical to promotion efforts to secure new clients through word of mouth. And for a web-based technology entrepreneur, the social network may yield investors to secure enough working capital to grow the business. As discussed in this section, entrepreneurs should understand the strength of weak ties and the related concept of having greater numbers of structural holes within one’s network. For an entrepreneur with such a network, they are more likely to access unique information and resources. It is highly unlikely for an entrepreneur’s strong ties to be able to provide all of the resources and to have all of the information necessary to achieve success with a new venture. In addition, finding contacts across broad social frontiers can also open doors to unique information and opportunities, so trying to build bridges across a wider demographic group of individuals should be the goal of individuals pursuing entrepreneurship. The African population is very young. Just over 50 percent of the continent’s population is younger than 19 years, with just under 30 percent of the population made up of millennials. Taken together, nearly 80 percent of the population of Africa is younger than 38 years old. For much of the continent, the millennial and post-millennial population are growing up tech savvy, and serving the needs of this youthful population has opened up many technology-related entrepreneurial opportunities. While teen and

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millennial entrepreneurs may be better able to identify the needs and desires of their peer group, many of these entrepreneurs do not have the capital or knowledge to capitalize on the entrepreneurial opportunities they recognize. This is where the social network and teams come in. As discussed in this section, an entrepreneur’s social network is a critical source of new venture ideas and opportunities, as well as human and financial capital resources necessary to take advantage of an opportunity. The structure and characteristics of one’s social networks can expand the boundaries of knowledge and facilitate the exchange of information and resources. From the three major perspectives discussed above – weak and strong ties, structural holes, and network diversity – individuals with wide and diverse social networks, rich in structural holes, and who interact with many weak ties intermixed with some key strong ties are best suited to achieve success with new ventures.

Review questions 1 Explain the concept the “Strength of Weak Ties” and explain why they are often more important than “Strong Ties” in one’s social network. 2 The number of Strong and Weak Ties is related to the number of “Structural Holes” in one’s social network. Describe how Structural Holes and Weak Ties are similar. Describe how they differ. 3 If you were to try to raise money through a crowdfunding website, how would Weak Ties and Structural Holes within your social network help you? Consider the case of the Nigerian sneaker company, Keexs. 4 IrokoTV was founded by two entrepreneurs who came from very different backgrounds – they bridged wide social frontiers. What does this concept mean and how does it benefit entrepreneurs?

Note * This chapter was written by Dr. Robert P. Singh, Professor of Management, Earl G. Graves School of Business and Management, Morgan State University, USA.

References Burt, R. S. (1984). Network items and the general social survey. Social Networks. 6: 293–339. Burt, R. S. (1992). Structural holes: The social structure of competition. Cambridge, MA: Harvard University Press. Granovetter, M. (1973). The strength of weak ties. American Journal of Sociology. 78(6): 1360–1380. Granovetter, M. (1982). The strength of weak ties: A network theory revisited. In P. V. Marsden and N. Lin (Eds.). Social structure and network analysis. Beverly Hills, CA: SAGE. Granovetter, M. (1985). Economic action and social structure: A theory of embeddedness. American Journal of Sociology. 91(3): 481–510. Johannisson, B. (1990). Economics of overview – guiding the external growth of small firms. International Small Business Journal. 9: 32–44. Khavul, S., Bruton, G. D., and Wood, E. (2009). Informal family business in Africa. Entrepreneurship Theory and Practice. 33: 1219–1238. Kirzner, I. M. (1979). Perception, opportunity, and profit: Studies in the theory of entrepreneurship. Chicago, IL: University of Chicago Press.

Managing networks and teams 127 Manu, G. (1999). Enterprise development in Africa: Strategies for impact and growth. In K. King and S. McGrath (Eds.). Enterprise in Africa: Between poverty and growth. (pp. 107–120). London: Intermediate Technology Publications. Pretes, M. (2002). Microequity and microfinance. World Development. 30(8): 1341–1353. Simon, H. A. (1976). Administrative behavior, 3rd edition. New York: Free Press. Stinchcombe, A. L. (1990). Information and organizations. Berkeley, CA: University of California Press. Tuckman, B. W. and Jensen, M. A. C. (1977). Stages of small-group development. In W. E. Natemeyer and J. T. McMahon (Eds.). Classics of organizational behavior, 3rd edition. (pp. 241–248). Long Grove, IL: Waveland Press.

Appendices to Part III Business plans and pitch decks

Entrepreneurs are often asked for a business plan when applying for bank loans or when attempting to attract funding, from investors and other sources, for starting and/ or growing their businesses. As discussed in Chapter 5, a pitch deck is an overview of the key elements of the business plan, usually in the form of a concise PowerPoint or other similar presentation. We integrate the material presented in Part III to provide templates of a business plan and a pitch deck that you can use and adapt to suit your situation and needs. Business plan template Business plan content 0

Executive Summary

1

The Problem

2

Your Solution

3

Your Venture

4

The Market

5

The Competition

6

Your Value Proposition

7

How You Will Sell

8

Your Operations

9

Startup Costs

From biz model canvas Do this after you have written your entire plan draft Define the problem that you intend to solve and explain why it is a significant opportunity A detailed description of your product/ service and how it solves the problem you have identified Your business model - how you will make money, how your venture is positioned in the industry, your metrics for success The number of people who have the problem, what they currently spend on this or an analogous problem Your principal competitors who you will take market share from The product/service value you will sell, what price you intend to charge, the value you customer receives, and your unfair advantage Your plan to inform, convince, and sell to customers. Explain your customer segments and channels of distribution. Your plan to create your product or service, distribute it so customers can buy it and collect money from them What you expect your costs to be until you make your first sale

Problem Solution Feasibility Analysis Key Metrics

Unique Value Proposition

Customer Segments Channels

Cost Structure Continued

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Forecast Financials

11

Your Expected Risk

12

Appendix

From biz model canvas Your expected financial projections for Years 1–3. Include your costs, revenue streams, and gross margin Explain the risks your venture may face and what you can do to mitigate this risk Information that supports the arguments in your business plan but is not essential reading

Cost Structure Revenue Streams

Source: Sunny Sanwar.

An example of a financial forecast Category Net revenues Cost of goods sold Gross margin Faculty development and staff travel General and administrative Equipment and building maintenance Student support (financial aid) Administration Equipment acquisition Debt service Student bad debt Real estate and associated utilities Other Total operating expenses Operating margin Plus change in prepared tuition Plus change in salary and benefits payable Net cash flow Cushion for business interruption Investment requirement Source: David Lingelbach

Year 1 −35,000 90,000 −125,000 0 3,900 0 0 0 25,000 0 0 30,000 2,890 61,790 −186,790 0 7,398 −179,392 −17,939 −197,331

Year 2

Year 3

570,000 180,000 390,000 3,900 3,900 0 0 50,000 10,000 0 1,710 30,000 6,951 106,461 283,539 0 14,796 298,335 29,834 328,169

570,000 180,000 390,000 3,900 3,900 0 0 50,000 10,000 0 1,710 30,000 6,951 106,461 283,539 0 0 283,539 28,354 311,893

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  Figure AIII.1  Continued

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  Figure AIII.1  An Example of a Financial Forecast Source: Sunny Sanwar.

Part IV

Maturity

8

Next steps

Learning objectives: upon completing this chapter you will: • • • • • • • • •

Understand growth challenges faced by entrepreneurs in Africa Identify internal and external growth strategies Examine the advantages and disadvantages of each type of growth strategy Understand the benefits and constraints of using franchising and licensing Understand the types of entrepreneurial failure Understand key strategies to limit entrepreneurial failure Understand possible reasons that may lead entrepreneurial exit Understand the environmental factors in Africa that contribute to entrepreneurial exit due to failure Understand the costs and benefits of entrepreneurial exit

Managing growth and expansion Starting a new business in Africa is no simple task, but achieving profitability and sustained growth of the new enterprise is even more challenging. Even in more business-friendly environments, such as the United States and Canada, about 50% of new business startups fail within five years (Otar, 2018). Compared to developed nations, new businesses failure rates are higher in Africa and other developing regions (Ahmad and Seet, 2009). In Botswana, for example, a study showed that over 80% of new SMEs failed in five years and only 2% of new business startups were able to grow (Temtime and Pansiri, 2004). While entrepreneurs in developing regions face a different set of challenges compared to those in developed regions, African entrepreneurs generally encounter similar obstacles to venture growth as those faced by entrepreneurs in other developing regions (Alemayehu and Van Vurren, 2017). These obstacles include limited access to finance (Lingelbach, de La Vina, and Asel, 2005; Wang, 2016), poor management (Temtime and Pansiri, 2004), and unconducive business and economic environment (Sriram and Mersha, 2010). In Africa, managerial and technical skills that provide competitive advantage for venture growth are also in short supply (Forkuoh et al., 2016). A recent survey of one thousand entrepreneurs from six African countries commissioned by the Omidyar Network Africa identified the following critical constraints that inhibit growth and expansion of African ventures (Douglas, 2012). 1 Funding to support enterprise growth is either unavailable or too expensive. Of those who participated in the survey, 84% of early stage and 70% of growing enterprises reported difficulty to get funding.

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2 Inadequate worker skill level and limited availability of business support expertise. 3 Poor infrastructure–transportation networks, electric power supply, and internet connectivity are both poor and unreliable. 4 Corruption and inefficiency is prevalent in most African countries. To avoid the high startup costs and administrative bottlenecks, many entrepreneurs (62% in the survey) chose not to formalize their business ventures. Not formalizing the venture has adverse impacts both to the government and the entrepreneurs: the government loses potential revenues from licensing fees and taxes, and entrepreneurs who operate informally may be forced to forego potential growth opportunities. Despite these challenges, some African entrepreneurs have recorded impressive growth. The following section discusses generic business growth and expansion strategies with a focus on those more commonly pursued by African entrepreneurs. Growth and expansion strategies Almost all new business ventures start small. Entrepreneurial firms achieve business growth and expansion by taking advantage of their distinctive competencies and their knowledge of the market. Successful venture growth creates economies of scale advantages, helps boost sales revenues and profits, and benefits the community and the larger economy in addition to the owners. Not all growth initiatives lead to successful outcomes, however. Poorly planned and ineptly managed growth and expansion could have disastrous consequences for the venture. The additional cost of funding growth as well as the added complexity of running a larger enterprise, if not at least matched by increased revenues, could have a disastrous effect on the venture’s performance and could threaten its very survival (Barringer and Ireland, 2010). Careful assessment of potential growth opportunities with a focus on those areas where the entrepreneur has product and market knowledge improves the probability of success (Hisrich, Peters, and Shepherd, 2010). Growth and expansion strategies pursued by ventures are grouped into two broad categories: (1) internal and (2) external strategies. Internal growth and expansion strategies Internal or organic growth strategies primarily use their own profits to achieve venture growth. Internal growth strategies are of four types: market penetration, market development, product development, and diversification. 1 Market penetration strategy: In using this strategy, the firm strives to boost sales of its existing products through aggressive marketing and by improving product and service quality. As demand for the product increases, operations capacity and efficiency are increased. Required capacity expansion may be achieved either by expanding the current facility or by building additional facilities at different locations. The lower unit cost of production achieved due to economies of scale enables offering the product at a more competitive price which helps increase market share. Market penetration is one of the most common expansion strategies used by African businesses. 2 New market development strategy: The entrepreneur sells its existing products in new markets or to new customers. The entrepreneur also develops new use of existing products. This may include:

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• •

•

Identifying new customers for the product or service: A restaurant starts a catering business for off-site events or starts offering take-out service. Restaurants may add entertainment after peak dinner time during weekends. Developing new use for existing product(s) and adding new features to current products: Cell phones were initially developed to place and receive calls. They are now used for multiple purposes. Similarly, creative African entrepreneurs who operate in resource-constrained environments may think of some new use of their current products. Expanding into new market territory: In response to increased demand, the firm can do business in larger market territory from its current facility or open additional sales/service outlets in new locations, including international markets. Geographic expansion is one of the common strategies used by African entrepreneurs. To successfully manage the venture’s business across larger national and international markets brings added complexities and must be approached carefully. In particular, cross-border expansion involves understanding different cultures, laws, and customer preferences. Thus, the decision to enter a new market, particularly in a foreign country, should be based on careful evaluation of the subjective and objective factors prevailing in the country and the venture’s managerial and financial capacity to successfully run the business in the new environment.

The number of African enterprises that have expanded into other markets in Africa or beyond is not overwhelming, but there are a few success stories. For example, Austin Okere founded Computer Warehouse Group (CWG) in Nigeria in 1992 to sell Dell computers. His financial services operation has now grown to a US$130 million a year business and has expanded outside Nigeria (to Ghana, Uganda, and Cameroon). Nadia Fettah built a small local insurance company that started in Morocco to a leading insurance company that operates in 23 countries in Africa (Chironga, Desvaux, and Leke, 2019). The May 9, 2016 issue of Knowledge@Wharton magazine reported that Bourbon Coffee, a gourmet coffee shop in Rwanda and the nation’s first multinational enterprise, has several locations in Kigali, Washington, DC, and Boston. Ken Njoroge of Kenya and Bolaji Akinboro of Nigeria co-founded Cellulant, a digital payments system in Nairobi, and fifteen years later, they are operating in eleven African countries (Maritz and Probyn, 2018). As mentioned earlier in this book, Aliko Dangote started his business in Lagos selling staples such as sugar and rice to consumers. Currently the Dangote Group is a large conglomerate that operates in 14 African countries and successfully competes against major multinationals. Its diverse businesses include processing and distribution of cement, sugar, salt, flour, pasta, fertilizers, beverages, oil, and natural gas. 3 New product development strategy: Based on the entrepreneur’s market knowledge and experience, new products that cater to the identified needs of customers are introduced. For example, a coffee distributor adds coffee filters or coffee creamer. In Africa, there are many small businesses that started out as a bar and later added meals. A Namibian entrepreneur, Twapewa Kadhikwa, started as a hairdresser but later introduced a line of hair care products which became the main income earner for her business (Musariri, 2018). Such product enhancements and introduction of new products are necessary to stay competitive, particularly in markets where product life cycles are relatively short.

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4 Diversification strategies: The entrepreneur uses diversification strategy to develop new products for new markets in addition to serving the current customer base. In due course, the new product or service addition may generate a sizable share of the venture’s revenues. Entrepreneurs in Africa and other developing regions operate in an environment marked by limited resource availability and greater political and economic uncertainty. To manage potential environmental risk, they resort to diversification strategy by engaging in different types of businesses (Lingelbach, de La Vina, and Asel, 2005). Many African entrepreneurs use this strategy to boost their venture’s revenues and also as a hedge against sales decline due to unforeseen disruptions in their main line of business. Entrepreneurial firms use three types of diversification strategies – forward vertical integration, backward vertical integration, and horizontal integration. To understand how forward and backward vertical integration work, refer to Figure 6.1. As discussed, inputs such as raw materials and components are acquired from different suppliers. Additional value is created by processing the inputs, and the outputs so obtained are sold to wholesalers who, in turn, sell the merchandise to retailers. Final users of the product purchase the product from retailers. Forward vertical integration occurs when a firm expands in the direction of the market. In the scenario described above, this occurs if the firm starts distributing the product directly to retailers or customers instead of using wholesalers/retailers to supply its outputs. Consider the following example: A shoe manufacturer in Kenya designs and manufactures shoes using finished leather, sole, foam cushion, and other materials that it acquires from different suppliers. It sells its products in bulk to wholesalers located in different regions of the country, and the wholesalers distribute the shoes to retailers. Suppose the shoe manufacturer decides to bypass the wholesalers and starts distributing shoes to retailers directly. This is an example of forward vertical integration. Backward vertical integration occurs when the firm moves toward the supply source. In the shoe manufacturing example, suppose the manufacturer starts producing sole and foam cushion parts required for the production of the shoes in its own facilities instead of purchasing them from suppliers. That will be backward vertical integration since the manufacturer is moving toward the source of supplies. Horizontal integration occurs when the firm creates a different item that complements the existing product (Hisrich, Peters, and Shepherd, 2010). The shoe manufacturer producing a shoe-shining kit will be an example of horizontal integration. External growth strategies External growth strategies use relationships with third parties to increase organizational size and revenues. Commonly used external growth strategies include franchising, mergers, acquisitions, joint ventures, and licensing. 1 Franchising: In effect, franchising enables franchisees to operate a business concept developed by the franchisor in accordance with a contractual agreement between the two parties. The franchise agreement allows the franchisee to become owner-operator and agrees to provide the service as specified in the franchise contract. Failure to adhere to the stipulations of the agreement by the franchisee is a good cause for the termination of the franchise agreement. Franchisees take great care to operate the business as stipulated in the agreement since losing the franchise contract is often financially devastating to the franchisee.

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Franchising benefits both franchisors and franchisees (Bordoloi, Fitzsimmons, and Fitzsimmons, 2019). Benefits to the franchisor include rapid expansion without committing own resources; economy of scale advantages for advertising and purchasing; and enabling growth without hiring many internal managers. Franchising also brings significant benefits to the franchisee which include the following: risk of failure normally associated with starting a new business is reduced; having a product already known to customers reduces promotion cost; the franchisor often engages in national promotion campaign which further benefits the franchisee’s business; required training provided by the franchisor on all aspects of the business including record keeping, quality management, and customer service ensures consistency and enhances performance; acquiring supplies for the entire franchise from reliable source in large quantity reduces cost due to economies of scale; and the franchisor’s extensive expertise, experience, and market knowledge immensely benefits the franchisee. The franchise agreement spells out product and service specifications, and the franchisor dictates the terms of the agreement. Typical provisions included in the franchise agreement include the following: • Strict adherence to the product design, the delivery process, the quality standard, and operating procedures • How much franchise fee to be paid by the franchisee and when • Management responsibility for its facility • Required attendance of training sessions • Royalty fees to be paid by the franchisee • The franchisor’s right to inspect the facility frequently Failure to adhere to the stipulated provisions may result in the termination of the franchise agreement resulting in huge loss to the franchisee. The franchise agreement may include some requirements that may not be acceptable to the franchisee. It is therefore imperative that the franchisee clearly understands the contents of the franchise agreement. Often, a major point of contention in franchise agreements is the degree of autonomy the franchisee has regarding internal operating procedures including the accounting system, source and type of supplies, and pricing. If the franchisee feels very strongly about some of these issues, the best time to negotiate is before signing the franchise agreement. Franchising is relatively new in most African countries although it is popular in some countries, particularly South Africa, Nigeria, and Kenya. In 2018, the Franchise Association of South Africa (FASA) reported that the sector generated South African Rand 302 Billion (about US$2.03 billion) and employed 300,000 people (https:// smesouthafrica.co.za/5-of-SAs-best-performinghome-grown-food-franchises/). About 22% of South Africa’s franchises are in the food sector. Some homegrown South African franchises have found success beyond their home turf. For example, Nando, a restaurant chain founded in 1987 by two South African entrepreneurs, Robert and Fernando, not only grew rapidly in the country but also quickly expanded to other parts of the world, including the United States. Reports citing CNBC Africa indicated that Nando now has over 1,000 outlets in 30 countries across five continents. Nigerian franchises are mostly from South Africa, USA, and Western Europe and include transportation, movies, logistics, coffee, petrol stations, medical care, educational services, and restaurants. Franchises also thrive in many economic sectors in Kenya. 2 Licensing: This strategy enables the entrepreneur to “rent” its established brand or intellectual property to other firms (Mariotti and Glackin, 2013). Licensing arrangement

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benefits both parties: the licensor who owns the brand or intellectual property is able to boost sales without investing own resources and without losing ownership of the brand. The licensee who rents the brand benefits by the opportunity to use or sell a well-known brand. Intellectual property rights including patents, copyrights, and designs are produced by others under this arrangement. Many consumer products in the apparel and shoe industry that are sold under recognizable brands are often produced by other manufacturers under licensing agreement. In the near future, it is expected that licensing will grow significantly in Africa. A survey of 40 major apparel companies showed that East Africa could become an important apparel production hub if the business conditions improve (Berg, Hedrich, and Russo, 2015). 3 Growth through mergers, acquisitions, and joint ventures: Different approaches can be used to achieve growth and expansion through vertical or horizontal integration. In internal growth strategies, we saw how a venture can grow through vertical integration by producing supplies that it used to buy from suppliers, or by performing downstream tasks such as wholesale or retail itself. Alternatively, the venture may use acquisitions, mergers, or joint ventures as a growth strategy. 4 Acquisitions: When an acquisitions strategy is used, the venture may integrate backward by taking control of the firms that used to supply parts and components used in the production process, or it may integrate forward by taking control of the firms that used to distribute its outputs to retailers and consumers. Acquisitions often enable faster growth and provide access to new markets thus helping to cut costs and boosting profitability. The down side of acquisitions is that it inevitably expands the scope of operations which could weaken management control and operations focus. It also adversely impacts organizational culture, product quality, and operations efficiency (Barringer and Ireland, 2010). The pros and cons of a prospective acquisition should be carefully examined since all acquisitions may not be right for the venture. Growth through acquisitions is not uncommon in Africa. Usually, it is the larger, well-established firms that acquire the smaller, less-known companies. This occurred in the brewery industry in East Africa which led to greater consolidation of the industry. 5 Mergers and joint ventures: A merger occurs when two firms pool their resources together to form a new organization. The merger may be with a competing company or with a noncompeting firm. The synergy created through the merger often benefits both companies. A joint venture, in contrast, is created when two or more companies agree to collaborate on a specific project. Each party contributes an agreed upon portion of the resource or cost needed to complete the project and shares the benefits as agreed. In a joint venture, the companies maintain their organizational independence and they collaborate only in completing the specific project. Upon the completion of the project, the joint venture is terminated. Forming a joint venture with local or foreign firms is a common practice by African enterprises, particularly on large projects.

Entrepreneurial failure Entrepreneurs fail. A lot. The smart ones learn from their failures and build better new ventures. The others? Not so much. •

Aspiring entrepreneurs need to have a clear view of upfront about how they will respond when they or their startup fail. Because one or the other is likely, especially if you decide to pursue more than one new venture.

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• • •

Most studies of entrepreneurship focus on success, not failure. Despite that, we have a decent body of knowledge now on entrepreneurial failure. Some of it even comes from Africa! Entrepreneurial failure can be divided into two levels: the failure of individual entrepreneurs, and the failure of startup firms. Let’s look at individuals first. Nabil Khelil is a professor in the faculty of economics and business administration at the University of Caen Normandy. In 2016, he published an insightful study on entrepreneurial failure, based on data from 105 failing entrepreneurs in Tunisia. His research identified five profiles of the failing entrepreneur: •

• • •

•

The confused (11.4% of the entrepreneurs Khelil studied): younger, educated at the university level in an area unrelated to their startup, inexperienced, and driven by “push” factors such as unemployment, a weak social support network, and forced exit due to insolvency; The supported at arm’s length (27.6% of failing entrepreneurs): younger, inexperienced, mobilized social network, motivated by prestige and social status, high locus of control; The megalomaniac (20% of failing entrepreneurs): younger, overestimate their experience, high self-efficacy, hiding an individualistic orientation despite self-perception of social network, motivated by need for social recognition; The dissatisfied lord (21% of Khelil’s sample): best economic performance, motivated to achieve ambitious goals yet no entrepreneurial satisfaction despite high entrepreneurial orientation, more innovation-oriented, risk-taking, and proactive, often pursue ambitious investment strategy, rely on social networks, or; and The big-time gambler (20% of the sample): squander all of the financial resources to save their new ventures, low entrepreneurial satisfaction, strongly committed to their startups.

Every failed entrepreneur is different. Which one are you? Because you WILL fail. Artinger and Powell (2016) asked a related question about individual entrepreneurs: why do “inexperienced, underfunded people continue to engage in risky behavior that is widely known to fail?” They found both statistical and psychological explanations for this behavior. Statistically, startups involve high levels of uncertainty, so entrepreneurs are bound to make random errors that produce excess (or under-) entry leading to failure. Psychologically, entrepreneurs are more prone to excess entry due to factors such as overconfidence (see also next section on “Exit”). They recommend that potential entrepreneurs focus more on the external realities of competition in their particular startup space, and less on their abilities and aspirations. In other words, analysis matters. This jibes with Malcolm Gladwell’s 2010 article in The New Yorker, which argued that the best entrepreneurs are the best analysts of market opportunities and risk management. But how best to think about entrepreneurial failure as an entrepreneur? McGrath (1999) argued that real options thinking offered one path forward. Such thinking emphasizes managing uncertainty by pursuing risky outcomes but investing only when conditions are favorable. Effectuation scholars have extended and refined this idea by advancing the idea of affordable loss, where entrepreneurs invest (money or time) only what they have already written off in their mind. They also suggest that entrepreneurs need to more clearly define failure for themselves. Is it bankruptcy? Is it an initial public offering (IPO)? Is it quitting? Somewhere in between all of these?

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Turning now to the failure of new ventures (rather than the failure of individual entrepreneurs), the literature is not so clear. In his bracing 2008 book, The Illusions of Entrepreneurship, Scott Shane identified a host of factors that increased the likelihood of startup success (see the Survivor Startup Checklist in Chapter 3, which summarizes this research and that of others). By extension, NOT doing these things increases the odds of failure. It is worth highlighting here one of Shane’s key findings: industry selection matters a lot. Many entrepreneurs are destined to fail, because they pick industries with high failure rates. Those industries vary to some extent by location, so you would be well advised to find reliable data on business failure by industry for your location. But, it is also worth considering that the myths about entrepreneurial failure are out there too. In the United States, at least, the five-year failure rate for new ventures was recently measured at 55%. But what happens when new ventures fail? Final thought on failure for African entrepreneurs – Many African cultures have a low tolerance for failure of any sort. If entrepreneurship is to flourish on the continent, how can we change that?

Entrepreneurial exit1 Nearly everyone has heard about a successful entrepreneur who started with little more than a dream and hard work to beat the odds to become an overnight success. We see them on TV or read about successful entrepreneurs in the popular press. We may know friends or family members who have done it. With all of these positive cues in the environment, it is natural to want to emulate these entrepreneurial “heroes” and to think, “Why not me?” This is likely a major driving force in why many individuals choose the path of entrepreneurship with dreams of fame and riches. However, the reality of achieving entrepreneurial success remains challenging. In fact, when one considers the heightened chances for failure, the risks entrepreneurs must accept, and the long hours they must endure, it is somewhat surprising that a significant percentage of the global population chooses to pursue entrepreneurial ventures. Statistics based on entrepreneurs in the United States show that about 50% of new venture startups fail within five years of formation (U.S. Small Business Administration Office of Advocacy, 2014). There has been remarkable consistency in this failure rate, as it has remained fairly constant over the last several decades (Cader and Leatherman, 2011; Singh, 2008). For the 50% that do survive, most do not achieve significant financial success. Less than 1% of all startup ventures become million-dollar ventures. This is not necessarily surprising as some entrepreneurs choose to pursue lifestyle ventures that do not have the goal of becoming significant financial success stories. Rather, they are created and operated with the goal of simply providing a solid revenue stream for the business owner. The definition of “failure” is fairly broad and it should be noted that failure does not necessarily mean bankruptcy or that the new venture startup cannot break even or even generate a profit. In many cases, entrepreneurs start firms that simply do not meet their expectations. They may be profitable, but not profitable enough to justify the ongoing time, effort, investment, and commitment to keep the business open (Headd, 2003). Thus, there are times when failure is not due to a business being forced into closure, but rather, the result of an entrepreneur consciously choosing to close a less-than-optimum business. So, entrepreneurial exit may be due to firm failure or the closure of a firm that is underperforming even as it may be generating a profit. One other condition that can

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result in a firm’s entrepreneurial exit is that it may be acquired by another (usually larger) firm. The acquisition would result in the firm no longer being in business as an independent venture. Obviously, this latter type of exit is a sign of success, but it does remain an exit. Following the Chapter 1 discussion of the environmental conditions on the African continent that support the propensity for an increased rate of entrepreneurial exits, the potential benefits of exits, in terms of promoting entrepreneurial learning, will be explored in this section. There are unique qualities, such as the large population of young people and the robust informal market across the African continent that make firm exits more common. Voluntary exit from the market can be the stepping stone to a better entrepreneurial startup that can lead to success, as the entrepreneur can learn from past experience and apply it to a new venture. Environmental conditions in Africa that increase entrepreneurial exit propensity As discussed in Chapter 1, Africa has great potential as an emerging market, but entrepreneurs face many unique challenges across much of the continent. Issues with poor infrastructure impact communications and limit consistent power supply and transportation options. There is limited capital as banking and private equity options remain underdeveloped to finance new ventures. Political instability and corruption are common throughout many African nations. Globalization has allowed foreign firms to invest in Africa taking advantage of cheap labor and driving local/African-owned businesses out of business. There are also challenges for women as gender bias plagues much of the population. While these all represent major challenges to economic development, the continent has seen rising entrepreneurship and this helps to encourage growth by promoting and developing the untapped potential of the African people. According to United Nations figures, about 60% of the African population is under the age of 24 years old. The youthful and growing population – particularly in urban centers – presents unique challenges as well as opportunities for economic advancement. The Brookings Institution found that 15–24-year-old individuals make up nearly 40% of the working age population; however, they make up about 60% of the unemployed across the continent. This is a major reason that young Africans see entrepreneurship as a career option, because it is a necessity given the limited job prospects within established firms. Add to this fact that young, working age Africans have limited access to capital for new ventures, it is not surprising that there are so many small businesses operating within the informal economy. Further, these conditions, as well as the other challenges described above, give rise to the rapid entry and exit into markets by so many young entrepreneurs forced to try to earn a living. Entrepreneurship shapes economies and advances societies through economic growth and job creation. But not all entrepreneurship is the same and the reasons for, and results of, new venture creation differ in mature economies when compared to developing economies. In developing economies, job prospects for much of the population are poor and entrepreneurs are likely to pursue need-based opportunities and create ventures simply to provide subsistence for themselves (the “push” and “pull” motivations and necessity vs. opportunity entrepreneurs are discussed in previous chapters). These opportunities often emerge in the informal economy. Whereas in mature and developed economies where employment options are plentiful, the decision to become an

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entrepreneur is more likely to be undertaken to pursue a promising entrepreneurial opportunity – one that can lead to significant financial gain. Toward this end, Acs et al. (2004) found that the percentage of entrepreneurs pursuing opportunity-based entrepreneurship is positively related to per capita income. That is, as per capita income increases, opportunity-based entrepreneurship increases. These opportunity-based entrepreneurial ventures are more likely to operate within the formal economy and require more significant financial resources to allow for firm founding. In the developing economies found across much of the African continent, the fact is that entrepreneurship can be found in the many small firms that operate within the informal economy (Nagler and Naudé, 2014). More than 97% of all African businesses have fewer than ten employees (Manu, 1999), and the majority of these small ventures remains unregistered, unlicensed, and typically do not pay taxes (Pretes, 2002). Davis et al. (2014) reported that 44% of Africa’s rural households operate non-farm informal ventures. These enterprises employ fewer than five employees (Haggblade, Hazell, and Reardon, 2010), but are extremely important as they contribute 15% to the household income of these entrepreneurs. Nagler and Naudé (2014) found that informal enterprises among rural Africans are common because these households need to find ways to cope with economic uncertainty. Throughout much of Africa, there is very little in the way of a social safety net, so Africans must find ways to protect themselves from such things as economic shocks caused by health issues or regional violence. In fact, for those households that are found within short distance to markets, it is not uncommon to find successful entrepreneurial operations. In addition, many of these ventures are seasonal ventures which may sell agricultural products such as surplus fruits and vegetables. This type of seasonality creates a structural incentive for the regular process of entry and exit into the marketplace. Taken together, research on developing economies and the fact that many African entrepreneurs pursue informal ventures suggest certain processes and realities. More specifically, African entrepreneurs who tend to be young, operate within a business environment that offers many informal entrepreneurial opportunities. Factoring in that these opportunities often do not require significant financial resources, these entrepreneurs may find themselves in situations that allow them to abandon ventures quickly in order to pursue other opportunities that they perceive as more promising. As discussed earlier, there is also the possibility of creating a successful venture that is then sold off to another, usually larger, competitor. There are many examples of successful ventures founded by young African entrepreneurs that were acquired by larger, more established firms. For example, in 2014, Saya Mobile, a mobile chat app founded in Ghana by Robert Lamptey and Badu Boahen was acquired by Kirusa, a multinational mobile social media company in the United States. Also, in 2014, Kenyan mobile tech startup, Dynamic Data Systems, was acquired by the much larger Kenyan firm Safaricom, which allowed Safaricom to enhance features and its capabilities to send money around the world. The terms of these two deals were not revealed, but were significant. In a deal that was announced, Apple purchased Nigerian mobile directions app firm, HopStop.com. The $1 billion acquisition made its founder, Chinedu Echeruo very wealthy. In reading the online profiles for all of these entrepreneurs, the common thread is that they were young and saw emerging technology-based opportunities that they were able to capitalize on and then exit with significant financial gains for themselves. They have all gone on to other startups/new ventures having gained significant entrepreneurial knowledge with their earlier ventures. The point is that entrepreneurial

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exits are often a stepping stone to other future ventures and successes. This is further explored in the following section. Benefits of entrepreneurial exits Entrepreneurial exits often provide significant benefits to the entrepreneur (Hessels et al., 2011). Most notably an exit can be a great entrepreneurial learning experience which can lead to a more successful future entrepreneurial engagement. Serial entrepreneurs – those individuals who found numerous businesses – develop their own personal human capital through their entrepreneurial experiences. By engaging in the founding, formation, managing, and harvesting of firms, these entrepreneurs are able to learn from mistakes and hone their abilities and entrepreneurial skills, which makes them more likely to be successful in the future (Westhead et al., 2005). DeTienne (2010) also points out that entrepreneurial exits do not just offer benefits for individual entrepreneurs, but also for the industries and economies in which they operate. The exit of incumbent firms often stimulates the entry of new, more productive firms that replace them. In fact, new venture creation on the part of entrepreneurs who have experienced entrepreneurial exits are often better suited to recognize opportunities, understand customer and market needs, as well as resource requirements to meet those needs. The skills these entrepreneurs have as a result of their prior experiences may also give them the confidence to succeed (Shrader et al., 2000). A good example of this type of serial entrepreneur is Jason Njoku, co-founder of IrokoTV, which Forbes magazine identified as the “Netflix of Africa.” Mr. Njoku started more than ten ventures before he was thirty years old. Most of these failed, but he used his experiences and knowledge that he gained by operating his wide range of ventures, including several web-based firms, a magazine, and a t-shirt business, to build up his entrepreneurial knowledge. He then took this experience to recognize the opportunity to establish a movie streaming service that specializes in Nigerian movies (Nollywood movies). He secured the online digital rights to over 5,000 Nigerian movies that his firm has made available for on-demand online download. Contrary to the idea that entrepreneurial exits are a negative factor, African entrepreneurs should embrace them and use them as a source of entrepreneurial learning. Economic and environmental conditions throughout most of the continent support individuals entering and exiting ventures on a fairly regular basis. Seasonality of agricultural products, geopolitical unrest and conflict, migration and population displacement, growing urban populations, and rapidly emerging technologies all provide conditions favoring entrepreneurial entrance and exit on a regular basis. Given the realities about entrepreneurial exits in Africa and the benefits that may be derived, it is important to understand what factors that would-be entrepreneurs in Africa should focus on. This is further explored in the next section by focusing on how it may impact the important concept of entrepreneurial self-efficacy, while also helping to control the pitfalls of overconfidence. Entrepreneurial self-efficacy and managing overconfidence As discussed in Chapter 3 and Section 5, to be successful, an entrepreneur must have high self-efficacy (Bandura, 1997). Entrepreneurial self-efficacy is the belief that one has the skills and abilities to successfully found and operate a new venture. In fact, research

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has consistently found a strong positive relationship between self-efficacy and performance outcomes (Bandura, 1997; Stajkovic and Luthans, 1998). It is hard to imagine an entrepreneur investing time and resources into a venture when he/she does not believe it will be successful or does not believe in his/her capability to make it happen. However, there is a fine line between the benefits of believing one can successfully found a new venture and the pitfalls of overconfidence. For African entrepreneurs who often operate within developing economies and within informal sectors, the process of entry and exits can be an important factor in managing both self-efficacy and overconfidence. Fischhoff, Slovic, and Lichtenstein (1977) define overconfidence as the tendency to exaggerate the extent of what one knows is correct. By nature, human beings often tend to be overconfident and overly optimistic, and we often overestimate our abilities relative to others. On a related note, people often believe they can control situations that are largely governed by chance (Langer, 1975), and regularly overestimate the probability of favorable outcomes as a result of their actions (Dunning, Meyerowitz and Holzberg, 1989; Weinstein, 1980). When we achieve successful outcomes, we believe them to be the result of our personal abilities, but we attribute failures to external issues such as bad luck (Wortman, Costanza, and Witt, 1973). Being able to realistically analyze and determine key success factors for an entrepreneurial venture is critical. The process of entering and exiting markets gives African entrepreneurs more opportunities for learning about entrepreneurial processes and assess their own abilities and performance. This can help them better understand what works and what does not work in the market and economies in which they operate. The average person thinks of him/herself as “above average,” (Alicke, 1985; Brown, 1986; Dunning, Meyerowitz, and Holzberg, 1989; Weinstein, 1980). This is obviously not possible in reality, yet these findings hold true across all walks of life, including entrepreneurs who have been found to demonstrate higher levels of overconfidence than managers (Busenitz and Barney, 1997). The literature has also found that entrepreneurs often overestimate their decision-making abilities (Busenitz and Barney, 1997), and the chances for firm success (Cooper et al., 1988; Singh, 2008). Successfully founding a new venture requires knowledge in a number of functional areas such as marketing, finance, accounting, and strategic planning. Given the complexity and the lack of clearly defined tangible measures for success, it is not surprising that research has found that entrepreneurs often suffer from overconfidence. It should also be noted that overconfidence is not unique to any one country, as studies have found overconfidence to be a common trait among entrepreneurs in many countries (Koellinger et al., 2007; Tipu and Arain, 2011). The gap that is often found between financial expectations at firm founding and actual performance is an indicator of overconfidence. Self-efficacy is important, but too much self-efficacy can make one overconfident. Consistent with this idea, although most people believe themselves superior than their peers and have great confidence in their abilities, academic literature has consistently found that one’s own assessment of personal knowledge and abilities is only modestly correlated with objective performance. The latter is particularly true when a task is more difficult to achieve. This has clear implications for entrepreneurship, because new venture creation and achieving success is usually a fairly complex process. Based on research, we know that most entrepreneurs do indeed suffer from overconfidence and we also know that most entrepreneurial ventures will ultimately fail and/or fail to achieve the expected return on investment. Thus, it is likely that overconfidence

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is a significant factor that leads to firm failure/underperformance. This would suggest that being able to maintain a realistic perspective and protecting against overconfidence would greatly benefit entrepreneurs and other stakeholders (e.g., employees and investors) in their ventures. This is where entrepreneurs who are practiced in the art of founding and exiting ventures are better able to understand the challenges of entrepreneurship (e.g., many young African entrepreneurs who slip in and out of ventures). They may be able to better recognize opportunities, assemble the required resources to take advantage of an opportunity, and to also know when an opportunity is no longer worth pursuing. Their personal experiences with founding and exiting is likely to give them confidence that they can start a venture, but temper that confidence such that it does not shift to the negative and morph into a debilitating level of overconfidence. Entrepreneurs obtain knowledge and hone the skills they need to be successful through industry experience. By graduating from “the school of hard knocks,” an entrepreneur can better understand the economic realities of competing within an industry. Industry experience has been found to be important for identifying more and better entrepreneurial opportunities (Singh, 2000). Research has also found a positive relationship between prior industry experience and firm performance. With experience, one should gain self-efficacy, but it also allows one to gain a more realistic perspective of an industry which may help to reduce overconfidence. In addition, entrepreneurial activity does not occur in a vacuum. Instead, it is embedded in cultural and social contexts, and within webs of human networks that are both social and economic. Size and interconnectivity of an entrepreneur’s network significantly affects new firm performance. Working within an industry is the best way to build a relevant and useful social network within that industry that can be tapped to assist in new venture creation. Being able to interact with knowledgeable human capital and go outside oneself may force the entrepreneur to think through aspects of new venture creation that he/she may otherwise just assume is correct. It can help entrepreneurs keep a realistic perspective which is supported by the fact that overconfidence has been found to diminish when the firm has external investors. Again, this is where the process of entry and exits can really help an entrepreneur better prepare themselves for success. They can build a social network of contacts that may be able to help them navigate the challenges of entrepreneurship. Ultimately, overconfidence in knowledge refers to the entrepreneur’s view that he is more knowledgeable than is truly the case. This can lead to a tendency to overestimate the correctness of an original estimate and cling to it, or simply excessive certainty about one’s command of the relevant facts of the situation (Busenitz and Barney, 1997). It is far more likely that an entrepreneur with industry experience will understand the risks and possible rewards of a potential venture better than one who does not have industry experience. Network contacts that can act as a sounding board can also be tapped to provide advice and constructive criticism. A healthy dose of reality provided by industry experience and interactions with other knowledgeable contacts within one’s social network can play an important role in preventing an entrepreneur from being overconfident. Ultimately, the problem with overconfidence is that it increases the likelihood of error (Dunning et al., 1990). Overconfidence and hubris can lead to errors in judgment and negatively impact strategic decision-making (Mehrabi and Kolabi, 2012). The result of overconfidence is that entrepreneurs who suffer from it are more likely

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to invest, found, and continue to operate firms that have little chance for success. They also often compound the problem by “throwing good money after bad” even as evidence mounts that it is a bad venture idea. At best, their firms are likely to suffer from financial underperformance relative to expectations at founding, and at worst may result in outright failure. Again, since we know that most entrepreneurs fail and there is a body of research that supports the notion that entrepreneurs tend to be overconfident, it is logical to believe that many entrepreneurs fail because of their overconfidence. Toward this end, entrepreneurs who are overconfident are more likely to underestimate risk (Hayward et al., 2006) and they often fail to understand the resource requirements for their ventures (Shane and Stuart, 2002). Further, entrepreneurs often fail to recognize that certain tasks are beyond their control. These conditions make them more prone to failure because of the disconnects between reality and entrepreneurs’ understanding of reality. Being confident that one can accomplish a task is important for success (Bandura, 1997), but too much or too little confidence can be problematic. That is, having no confidence or, as has been discussed, suffering from overconfidence can lead to a higher rate of firm failure than for those who maintain more healthy levels of confidence. There is a positive relationship between industry experience and success. For entrepreneurs who have little to no industry experience, they will likely lack confidence in the potential for their venture, or more likely, if they are confident in the potential of their venture, they will suffer from overconfidence. Knowing when to exit a venture and having done so in the past can give entrepreneurs, such as the many young, African entrepreneurs who do this, real advantages and experiences that allow them to maintain self-efficacy without extending into the pitfalls of overconfidence.

Summary This chapter identified the benefits and challenges of growth and expansion of new ventures. Internal and external strategies used by ventures to achieve growth and expansion are identified and briefly discussed. Entrepreneurs using internal growth strategy use their own resources to grow their business while external growth strategies are achieved by forming relationships with third parties. External growth strategies take different forms including franchising, acquisitions, mergers, and joint ventures. Franchising is not widely used in most African countries although it is popular in some countries, particularly in South Africa, Nigeria, and Kenya. Growth through vertical integration helps increase market share and profits, but the expanded scope of operation could lead to dilution of product and market focus. In charting future growth and expansion for their venture, strategy entrepreneurs should carefully weigh the pros and cons of each strategy. As discussed in this chapter, given the economic conditions across much of Africa and the significant numbers of young unemployed workers, entrepreneurial activity through the creation of small, minimally funded informal business ventures is fairly common. These smaller ventures are relatively easy to start and easy to exit from if they do not become sustainable, better opportunities emerge, or they are able to achieve success and can be sold off to larger acquisition partners. Entrepreneurship research that looks at exits often focuses on firm failure; however, exits and even firm failures can be stepping stones toward future success. Recognizing that there is a fine line between being confident and being overconfident, there is no

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intention to suggest that one needs to be “cured” of the urge to start a business. Rather, many would-be entrepreneurs and stakeholders in their businesses would benefit from being more aware of the pitfalls that can result from the false sense of confidence that many entrepreneurs feel. Industry knowledge comes from the experience and insights gleaned from working inside an industry. For individuals who have created new ventures and operated as entrepreneurs, there is a learning process. Even negative outcomes from exits can also result in entrepreneurial learning and offer new insights into what it takes to be a successful entrepreneur. Entrepreneurs who have exited earlier ventures may be able to avoid costly mistakes and critical errors in a second, third, or any subsequent future venture. In addition, this knowledge can enhance self-efficacy and control overconfidence allowing for better analysis and realistic, fact-based decision-making when engaging in entrepreneurship.

Review questions 1 Identify major constraints that hamper growth of new enterprises in Africa. 2 New ventures may use different internal growth strategies. Identify and explain two commonly used internal growth strategies used by African entrepreneurs. 3 Explain the pros and cons of seeking growth through diversification. 4 Franchising is increasingly becoming popular in Africa. What are the benefits of using franchising for: (a) the franchisor, and (b) the franchisee. 5 What type of failing entrepreneur profile do you most closely identify with? Why? 6 How do you define failure as an entrepreneur? 7 An entrepreneurial exit does not necessarily mean that an entrepreneur’s business could not generate a profit and was forced to close. Explain why an entrepreneur may choose to exit from a profitable venture. 8 What factors and/or conditions exist among African entrepreneurs and the business environment across much of the African continent that make exits more commonplace than in the United States? 9 Jason Njoku, co-founder of IrokoTV, founded more than ten ventures before the age of thirty and before achieving success with IrokoTV. Explain how these exits helped him achieve his ultimate success.

Note

1 This section was written by Robert P. Singh, Professor of Management, Earl G. Graves School of Business and Management, Morgan State University, USA.

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152  Maturity U.S. Small Business Administration Office of Advocacy (2014). “Frequently asked questions about small business”. Retrieved from http://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf Wang, Y. (2016). What are the biggest obstacles to growth of SMEs in developing countries? An empirical evidence from an enterprise survey. Borsa Istanbul Review, 16(3), 167–176. Weinstein, N. D. (1980). Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 58, 806–820. Westhead P., Ucbasaran D., Wright M., & Binks M. (2005). Novice, serial, and portfolio entrepreneur behaviour and contributions. Small Business Economics, 25(2), 109–132. Wortman, C. B., Costanza, P. R., & Witt, T. R. (1973). Effects of anticipated performance on the attribution of causality to self and others. Journal of Personality and Social Psychology, 27, 372–381.

Part V

Special topics on African entrepreneurship

9

African women entrepreneurs*

Radioxity media When Esther Kemi Gbadamosi graduated from her undergraduate program in Agricultural Engineering in 2006, she had no idea she would be starting a business in the independent film industry two years later. At the time, her interests were varied. But as an only child, she had a responsibility to support her mother in the administrative planning and running of her school. Starting a business was definitely not going to be straight forward. But in 2008, Radioxity Media was born in Nigeria out of Esther’s interests in photography and cinematography. She began by spending the first couple of years training, watching video tutorials, and covering events for friends and family. To reach the current staff strength of 12 full-time and several part-time employees, she hired interns with virtually no prior experience in filmmaking and trained them in the areas of scriptwriting, storyboarding, acting, cinematography, editing, animation, motion graphics, and sound design. For Esther, the decision to venture out on her own into filmmaking was met with some initial resistance from her family; they wanted a more prestigious career path. The risk involved was also enormous, and a robbery that led to the loss of some of her equipment in 2018 proved to be quite discouraging. However, as she noted, “My first response was to recover my spirit. I believe you just have to keep moving in spite of the challenges.” Having lost about six laptops which were used for work, a camera and lenses, phones, and other valuable equipment during the robbery at gunpoint in the studio, several of her original employees lost interest in working with her and left, resulting in the departure of over 10 of the employees, leaving the current 12 behind. With funding primarily sourced from her personal savings and some bailout from her family members, her resilience has paid off in 2019. She has now won three international filmmaking awards including the Independent short awards for best female director, was nominated for the best documentary at the Lake International Pan African Film Festival, Semi-Finalist at the African Animation Awards, and has emerged with 12 official selections. Clearly, Esther had to surmount challenges to reach this level of success. Why was she so driven to succeed? What factors motivated her to be so resilient against all odds?

Introduction In 2008, the African Union declared 2010–2020 the African Women’s Decade (United Nations, n.d.). Following this declaration, several attempts have been made to provide support for African women entrepreneurs. This section discusses the motivations,

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challenges, and opportunities of African women as they set out to own and manage their businesses. Given the differences in cultural, economic, and other contexts that are peculiar to Africa, women entrepreneurship in Africa significantly differ from the western world. According to the World Bank Director of Strategy and Operations for Africa, Diariétou Gaye, Africa is the only region in the world with a larger female to male entrepreneur ratio (The World Bank, 2008). This is surprising, considering that African women entrepreneurs face challenges that their male counterparts do not have to deal with. The following sections detail some of the peculiarities of the African context and their implications for African women entrepreneurs.

Peculiarities of the African context Africa is the second most populous continent, accounting for about 20% of the world’s population. It is also the second-largest continent by landmass area, and arguably has the richest concentration of natural resources. Despite these significant facts, most of the available entrepreneurship literature focused on developed economies such as Europe and North America until recently, resulting in the prevalence of western perspectives in entrepreneurship theories and literature (see Chapter 2 for a more detailed discussion of Western versus African perspectives). While these perspectives are not totally inapplicable, research and evidence abound that show several differences between the developing and developed world, and even between men and women. This is even truer in the case of Africa, where several differences abound between countries within the same region and between men and women. It would, therefore, be both inaccurate and unwarranted to characterize all African countries as being essentially homogeneous. Of the 54 countries in the region, 46 have been categorized as Sub-Saharan Africa (SSA); hence the focus of this chapter will be on SSA. Countries such as South Africa, Libya, Tunisia, Kenya, and even Rwanda do not fit the general definition of African countries as underdeveloped. Just as it is inappropriate to portray all African countries as one, it is also inappropriate to portray all African entrepreneurs as homogenous – particularly when it comes to the role of African women. According to Okeke-Uzodike (2019), African women are poorer, have less education, and less access to jobs and opportunities. Consequently, there is a need to understand the context within which African women start, manage, and exit their businesses relative to their Western world counterparts, or even their male counterparts on the same continent. The World Bank estimates the number of women aged 15–64 in SSA at about 29.5 million for the year 2019. This number is slightly higher than that of men in the same age group (29.1 million); yet more women than men are believed to become entrepreneurs in Africa. This differentiates Africa from all other continents, where the number of male entrepreneurs is usually higher than female entrepreneurs. Considering the marked differences in opportunities available to males and females of all ages in Africa, this is quite surprising. Based on World Bank data, females in Africa are more likely to be out of school, yet twice as likely to be contributing family workers. Males are more likely to own an account at a financial institution, save money, proceed to tertiary institutions, and twice as likely to be employed as women in agriculture and industry, whereas women are more likely to be employed in services. Additionally, only 29% of

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firms report female participation in ownership, whereas a mere 15% report having top female managers. The cost of business start-up procedures and the time required to start a business are around the same for men and women, yet far more women end up being self-employed than men in SSA. These figures show that against all odds, women are engaging in entrepreneurship in Africa. However, the higher levels of involvement of African women in entrepreneurship must not be taken to mean that women entrepreneurs in SSA are necessarily doing better than their male counterparts. This section, therefore, examines the differences between male and female entrepreneurship in Africa, as well as the challenges that intending and nascent women entrepreneurs have to overcome to be successful on the continent.

Motivations and opportunity recognition/risk perception Given findings that many entrepreneurs in low-income economies operate under extreme poverty and the very high rates of unemployment in the region, it is important to examine the real motivations for women entrepreneurship in Africa (Eijdenberg, 2016). Research suggests that women are either pushed or pulled into entrepreneurship (see Chapter 3 for a general discussion of motivations). Push factors are defined as conditions under which people become entrepreneurs primarily as a result of economic necessity and their dissatisfaction with their previous work conditions, while pull conditions engender an enabling environment where women start their own business for reasons such as independence, creativity, and socioeconomic status (Adams et al., 2017). Esther Gbadamosi’s motivation for starting her business was a combination of both pull and push factors. According to her, she had a desire to tell stories to inspire others. But considering that the economy in Africa is not friendly toward those who have no financial standing and women entrepreneurs sometimes find themselves being the meal ticket for others, it is impossible to rule out the push factors. In her own words, “the motivation to start was based on pull factors. But the motivation to keep going involved push factors. And I think that many women entrepreneurs in Africa who were pulled into their businesses have also realized that the business has to be both fulfilling and lucrative to be sustainable.” In a study of South African women entrepreneurs, Fatoki (2014) found that push factors were more significant motivators of the women’s entrepreneurship than pull factors. Adom (2015) supports this view that women entrepreneurs are necessity driven even in SSA, which may partly explain the reportedly higher number of women entrepreneurs on the continent. Perhaps this is a direct result of the economic challenges associated with many countries in the region. Although African women are generally industrious, their desire to engage in entrepreneurship has in recent times been further accentuated by economic hardship and high levels of unemployment. For African women, engaging in entrepreneurship does not only assist in boosting family income but also contributing to the development of national income. Several women identify entrepreneurship as a means of getting food on the table and consequently, pursue it as a lifelong career. Women entrepreneurs in Ghana and Uganda are also known to be less risk-averse than their male counterparts in the same region (Ackah et al., 2019). According to

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Benzing & Chu (2009), the opportunity to increase income emerged as the strongest motivator for starting a business across three countries in Africa; however, women entrepreneurs were less motivated to create a business as a legacy or for external validation than their male counterparts. The aforementioned facts, however, appear to be correlated with education levels and/or family income. Several women from wellto-do families who venture into entrepreneurship after getting a first degree tend to do so more out of pull factors than push factors. The likes of Mo Abudu, Divine Ndhlukuka, and Tara Durotoye have demonstrated that African women who are well educated and exposed can recognize opportunities in and venture into nontraditional sectors to succeed in them. A look at successful women entrepreneurs in the region suggests that regardless of their motivation, women who venture into business in the region can be successful.

Funding A major difference between African women entrepreneurs and their Western counterparts lies in the area of funding. Most women entrepreneurs in Africa tend to prefer informal sources of capital that come with low risk and usually yield low returns. On one hand, this is due to a lack of knowledge of the available options for accessing loans and grants. However, some women have stated that the bureaucracies associated with the process make it so cumbersome that they avoid it altogether. On the other hand, some women who tried to access bank loans have also met with very high levels of discrimination, which will be discussed later in the chapter. Below are the sources of funding that African women entrepreneurs tend to resort to (see Chapter 4 for a discussion on entrepreneurial financing). Personal savings Many women tend to save up for a while toward starting and running their own ventures. While this is usually a good way to raise capital, it can be quite limiting, as the business tends to be limited in size to whatever amount of savings the women were able to set aside. However, this option has been used by many African women and continues to be the most popular source of capital for women in the region. Family investment In some cases, women are able to raise capital from their families and friends. Considering that most countries in Africa are collectivistic in nature, friends and families tend to support each other where possible. This source has an edge over the personal savings option in terms of the possibility of raising more capital. However, it sometimes proves to be unreliable, as some family members are either unwilling or unable to help. It is also limited in most cases to microbusinesses. Community initiatives Women in the region still tend to engage in community initiatives such as the contributory thrift saving scheme which requires them to contribute a certain amount for a specified period, while the bulk money is given to one contributing member per period

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on a rotation basis. In Nigeria, this is known as the Ajo system and is prevalent among coworkers in offices, people in communities, and even traders. Like the other two methods mentioned earlier, this also has no associated interest rates or additional cost of capital. Depending on how many participants are involved and how much is being contributed, this could be a good way to raise more capital than the other informal methods. Loans Although loans are available to women in Africa, the majority of those who apply for the loans are denied on the basis that they either failed to qualify or failed to demonstrate that they had a viable business plan. Female entrepreneurs in Africa face monumental challenges in accessing loans for various reasons ranging from sociocultural factors, illiteracy, stereotyping and bias of financial institutions, location limitations, and networking challenges, amongst others. While the banks tend to suggest that women in the region tend to have less developed business plans, there are other factors that may account for the low level of loan access given to the women. A big contributing factor is the lack of collateral. Due to cultural norms that require properties to be handed down to male children upon the death of their parents, women are hardly ever able to own property that suffices to serve as collateral when requesting loans. The systematic discrimination against females in the region also has a snowball effect on the entrepreneurial activity of women, including their access to loans.

Challenges There are a number of unique challenges that African women who pursue entrepreneurship must deal with and overcome. These are discussed below. Discrimination and gender bias/stereotypes A typical example of women entrepreneurs who have had to overcome discrimination is Sibongile Sambo. Having been denied a job with South African Airways because of her height, she went on to start her own aviation company. In SSA, this and other kinds of discrimination are typical. Until recently, the potential and actual contributions of women entrepreneurs in SSA to the family and national economy have been underestimated due to sociocultural factors, negative stereotyping of women, and biased opinions of society and lending agencies. Although there now seems to be a gradual improvement in the way women entrepreneurs are perceived in SSA, much needs to be done to improve these perceptions. According to Sanusi (2012), “The contribution of women to economic development is well documented. Yet there exist several barriers to the full optimization of women’s economic potential. These range from cultural to religious, traditional and legal discrimination amongst others. Access to finance is often cited as one of the major factors impeding the growth of women-owned businesses in developing countries…”

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In Nigeria for example, and in most of Africa, there is the negative perception that a woman’s role is confined to childbearing and to the kitchen and that women are the weaker sex. This myopic view of women greatly affects the way society views them in particular jobs. They are expected not to be able to carry out these jobs, not due to their lack of skills, education, or professionalism but on the basis of societal classification of jobs into male and female categories. This typical societal attitude in Nigeria affects the attitude of the financing institutions toward women too. Most financing institutions require collateral for loans sought and women entrepreneurs especially find it difficult to fulfill this requirement for different reasons. With the exception of some ethnic groups like the Akan in Ghana and Cote d’Ivoire, Sub-Saharan African countries are majorly patriarchal and patrilineal in nature. In other words, men in these societies possess uneven power as compared to their female counterparts; they predominate positions of political leadership, moral authority, social privilege and control of property since inheritance and descent is by the male lineage. In most cases, women are not allowed to own land or inherit property even from their parents. As a result, several communities have customary laws that impose conditions that make women’s access to land only through male relations and the women are regarded as property who cannot own property themselves (Olubor, 2009).. Therefore, the required collateral for loans which in most cases is evidence of property ownership is not easily available to women. Discrimination also limits the potential of the women entrepreneurs in SSA when it comes to gaining contracts. Most potential contract awarding organizations are headed by men, and due to the perception that women are weaker than men, many organizations tend to prefer to award contracts to businesses that are owned by men. As Esther Gbadamosi pointed out, even where the woman entrepreneur’s competence to execute the contract is not in doubt, there is an additional hurdle she has to contend with. “I was once told that even though my presentation was better than the men’s and I appear to be way more competent, it would be in my best interest to not be awarded the contract! According to the customers, the rigor associated with filming and shooting in that terrain was not designed for women. Can you imagine that?”, she said, half laughing, half angry. Discrimination is quite prevalent in the African context as there are no explicit laws that protect women entrepreneurs from such discriminations. Some women entrepreneurs have figured out a way to circumvent the issue of discrimination regarding contract awards by partnering with a male who attends meetings and negotiates contracts on their behalf. Illiteracy Illiteracy is another factor that limits the female entrepreneurs in SSA. In this sense, she is unable to read, write, or understand the legal and nonlegal documentation, as well as the technical and complex procedures required for processing loans by the financing institutions. For the African woman entrepreneur, illiteracy most times is not the result of personal choices but is imposed on her by economic and cultural circumstances. Due to cultural reasons, most African parents perceive male children to be of greater value than their female counterparts; therefore, where there is a need in some families

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to choose between educating the male or female child, there is hardly any hesitation to go for the male child, as investing in the education or otherwise of a female child is often viewed as a waste of resources; the justification proffered for this reasoning is that the female child will eventually get married and leave the family. Male children are therefore prioritized, as they are seen to carry on the family name. The female child is usually given out for marriage as quickly as possible to relieve the financial burden of childcare from her family. For instance, in Nigeria, 44% of girls are married before they attain the age of 18 and 18% are married before they are 15 years old (www.girlsnotbrides.org/; Girls not brides, n.d.). Unfortunately, this creates a loop of poverty for the female child, as she is forced into the responsibilities of adulthood prematurely and education is no longer a priority. In the long run, this limits their economic opportunities in life either to take up paid employment or develop skills that will make them loan-worthy as entrepreneurs. Lack of/insufficient information about microfinancing options As discussed earlier, the reasons behind the choice of traditional female sectors among SSA women entrepreneurs include a lack of information. Many women entrepreneurs in SSA, especially those in the rural areas, are not aware of the services and opportunities available to them, or cannot access them, as most of the financing agencies are located in the urban areas. In countries like Nigeria, poor infrastructure such as erratic power supply means that many are unable to access media sources that could alert them to available opportunities. Additionally, due to the high level of illiteracy among several African women, many are unable to use the internet and other technology-enabled devices that would open up potential doors of opportunities to them. Also, the cost of getting this information (measured in terms of money, time, and energy) may be high due to family responsibilities (Sanusi, 2012). The resulting effects of ignorance of available opportunities and financial options available suggest that many women entrepreneurs are limited in their opportunity recognition and exploitation efforts. Bureaucratic processes Coupled with the lack of knowledge and discrimination issues aforementioned, women entrepreneurs in SSA have to contend with bureaucratic processes in setting up their businesses, accessing loans, and getting contracts. Even in the urban areas where the financing institutions are located, many women entrepreneurs do not access the available resources. The Central Bank of Nigeria and the Bank of Industry have an initiative that allows only women to access some capital for their business, yet many women do not take advantage of the scheme. Even with opportunities for lower interest rates, many women in the region fail to access loans. According to a report by the Center for International Private Enterprise (Frost, 2018) on women economic empowerment in Nigeria, a major reason cited for this is that “many women entrepreneurs do not apply for business loans because the application process is confusing and cumbersome, and the process of accessing these loans is opaque and bureaucratic.” Clearly, this is a ripple effect of lack of formal education, and those who desire to empower women financially must take into cognizance the need for education and training on how to manage their businesses.

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Inadequate/poor infrastructure World Bank reports show that SSA is lagging advanced economies with regards to infrastructure. For example, the total rail line route (in km) for SSA as of 2018 is 59,634 compared to 211,409 in Europe and 280,349 in North America. Also, only about 45% of SSA residents have access to electricity. Invariably, this will impact the choice of businesses that women entrepreneurs can venture into, and their operations. Heavy reliance on the use of generators to provide electricity results in higher overhead costs for women entrepreneurs in the area. The region also lacks good roads, making it difficult to transport products from place to place. High levels of insecurity in countries like Nigeria due to militant insurgency have also resulted in increased cost of transportation and goods. Also, given the low level of secure internet servers in the region (735 per 1million people) as reported by the World Bank, women entrepreneurs are limited in their access to online information.

Performance of female-owned enterprises in Africa According to Zwilling (2010), women entrepreneurs are generally known to start businesses to better balance their work and family lives, and this has been the explanation for the smaller sizes of women-owned businesses. Data provided by Global Entrepreneurship Monitor (GEM) (Bosma et al., 2019) also shows that business discontinuance is highest in SSA. Particularly, women were found to struggle with lower profitability than men in the same region, and even when compared with their counterparts in developed regions. They also reported that only 6% of Sub-Saharan African women entrepreneurs are internationally oriented, with only 18% of that number stating their offerings are innovative. Although both men and women entrepreneurs in Africa face challenges regarding access to capital, the additional hurdles that women entrepreneurs face such as discrimination and lack of collateral has resulted in lower profits for their businesses (Gaye, 2018; The World Bank, 2008). However, Diariétou suggests that in addition to the conditions governing access to capital, African women’s business performance is highly impacted by the choice of the sector and the need for more relevant training. African women tend to restrict themselves to sectors that are known to be traditional femalefriendly due to a lack of information and other social factors. This traditional choice of sector has been challenged by certain women entrepreneurs though. For example, Ibukun Awosika, and Moni Fagbemi are known in Nigeria in the furniture industry as trailblazers. Awosika ventured into the industry at a time when many women and even men considered it a daunting venture (Awosika, 2009). Kofo Akinkugbe has also proved that women can be successful in traditionally male sectors with her e-payment, telecoms, and e-identification company called Interface Technologies. In Zimbabwe, Divine Ndhlukuka has also shown her prowess in the security industry through her successful company called Securico. As the first certified security company in Zimbabwe, Securico boasts of over 3,000 employees and a revenue of over $13 billion. Folorunsho Alakija, Nigeria’s richest woman and one of the few black billionaires in the world, has also made a name in what would be considered an unconventional industry for women – the oil industry. Other women who have

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succeeded in traditional women sectors are Nigeria’s Tara Durotoye of House of Tara (cosmetics); Adenike Ogunlesi of Ruff ‘n’Tumble and Oyinade Aje (fashion industry). Mo Abudu of EbonyLife TV has also shown that women can be successful contenders in the media industry.

Opportunities Despite the several challenges that women entrepreneurs in Africa must contend with, there are a number of opportunities that are available to them to start and run their ventures. Among these are the following: Growing use of internet and mobile phones The World Bank estimates mobile cellular subscriptions at 77 per 100 people in SSA. With this growing use of internet and mobile phone use in Africa, there are more opportunities available to women entrepreneurs in the region. While this does not automatically translate into business growth, it does create opportunities for increased marketing and sales, and possibly, internationalization. It remains to be known how much the women are exploiting these opportunities, as most Africans tend to use their devices for social connections rather than commercial purposes. International opportunities In addition to government and NGO-led efforts, certain avenues for funding from external sources also create opportunities for women entrepreneurs. A notable case is Ayodeji Megbope, CEO of No Leftovers, who was denied funding by Nigerian banks on the basis that she did not have the required collateral but was eventually funded by international sources such as the Goldman Sachs Foundation. Goldman Sachs started the Launch with GS initiative with the aim of investing $500 million in women-led companies and investment managers. Growing campaign for locally made materials There has also been a huge campaign for the use of locally sourced and locally made products in certain parts of Africa, such as Nigeria and Ghana. Advocates of the African brand have emphasized the need to embrace African-made products to create more jobs, attract investors, and project Africa as a force to reckon with in certain industries. Such an outlook also opens doors of opportunities to women entrepreneurs to enter into both traditional and nontraditional sectors. For example, more Nigerians now use the traditional fabric and textile to make work-clothes, a trend which would have been considered ridiculous in the past. This promotion of African-made products is a serious threat to the deeply rooted mindset that foreign brands and products are superior to locally manufactured ones. The hair and fashion industry have seen major shifts in this regard, as many people are now comfortable wearing handbags, shoes, and clothes made in Africa.

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Policy implications From a policy standpoint, there is a lot that the government can do to help women entrepreneurs in Africa. From providing access to education, removing discriminatory policies, and bureaucratic processes, to providing basic amenities like good roads and reliable power supply, they can provide both tangible and intangible support to women entrepreneurs. Women entrepreneurs can benefit from government interventions that increase their access to funding and remove discriminatory barriers from their paths. Governments of African nations must also seek to provide training and support with nonfinancial aspects of business. Recognizing that support can sometimes be intangible could go a long way in increasing the participation and performance of these women in business. They can also offer training and support in the areas of business plan, grant, loan, and proposal applications. Agencies that support women in these areas need to be setup and encouraged to have a visible presence where the women need them the most. This will go a long way in boosting the women’s chances of success, and consequently, the economy as a whole.

Practical implications for women entrepreneurs in Africa Beyond changes in government policies, certain personal factors could increase the odds of success for women entrepreneurs in Africa. First, it is important to seek knowledge in the area of their business. Reading and networking with those who have succeeded in the business must be taken seriously. Networking provides women with opportunities to access information regarding various aspects of their businesses. It also creates avenues for them to hear stories of how others overcame their challenges and help them avoid potential pitfalls. Additionally, women can learn how to write business plans and proposals (see Chapter 4) – or hire an expert to do it for them – and make pitches (see Chapter 5 for a more detailed discussion). Through networking efforts, they are also more likely to be aware of relevant initiatives that can support their businesses (Kimbu & Ngoasong, 2019). Those who are interested in high-growth entrepreneurship must learn about those who have gone before them (Kimbu & Ngoasong, 2019). Arguably, women have more to benefit from networking than they have to lose.

Conclusion This section has highlighted the unique situation of women entrepreneurs in Africa – a unique population characterized by high necessity, high participation rates, low fear of failure, yet low performance (Halkias et al., 2009). Particularly, their motivation, challenges, performance, and opportunities have been discussed. While some may argue that men are also impacted by the factors discussed, reality and research both show that gendered differences do occur. As rightly noted by Halkias and her associates, it is imperative to consider gender issues when contemplating strategies to improve the private sector in Africa or improve Africa’s competitiveness (Halkias et al., 2009). Barriers related to gender not only hinder economic progress but slow down society. Intending and nascent entrepreneurs need to be aware of the gender-related barriers they will need to overcome in Africa, but such knowledge need not deter them;rather, it should propel them to work harder at their business and make a difference while doing so.

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Note * This chapter was written by Yemisi F. Awotoye, School of Business Administration, Gonzaga University, USA and Tracy A. Lelei, Department of Social Sciences, University of Dundee, UK.

References Ackah, C. G., Aikins, E. R., Sarpong, T. T., & Asuman, D. (2019). Gender differences in attitudes toward risk: Evidence from entrepreneurs in Ghana and Uganda. Journal of Developmental Entrepreneurship, 24(01), 1950005. Adams, S., Quagrainie, F. A., & Klobodu, E. K. M. (2017). Women’s entrepreneurial orientation, motivation, and organizational performance in Ghana. Small Enterprise Research, 24(2), 189–205. Adom, K. (2015). Recognizing the contribution of female entrepreneurs in economic development in sub-Saharan Africa: Some evidence from Ghana. Journal of Developmental Entrepreneurship, 20(01), 1550003 Awosika, I. (2009). The “girl” entrepreneurs. Xulon Press, Maitland, FL. Benzing, C., & Chu, H. M. (2009). A comparison of the motivations of small business owners in Africa. Journal of Small Business and Enterprise Development, 16(1), 60–77. Bosma, N., Hill, S., Ionescu-Somers, A., Kelley, D., Levie, J., & Tarnawa, A. (2019). 2019/2020 Global Report. Global Entrepreneurship Monitor. https://www.gemconsortium.org/report Eijdenberg, E. L. (2016). Small business growth in East African least developed countries: unravelling the role of the small business owners. PhD dissertation, Vrije Universiteit Amsterdam. Fatoki, O. (2014). Factors motivating young South African women to become entrepreneurs. Mediterranean Journal of Social Sciences, 5(16), 184. Frost, M. (2018). Women’s economic empowerment: Supporting women entrepreneurs in Nigeria requires improved access to finance. Retrieved from https://www.cipe.org/blog/2018/11/29/ womens-economic-empowerment-supporting-women-entrepreneurs-in-nigeria-requiresimproved-access-to-finance/ Gaye, D. (2018). Female entrepreneurs: The future of the African continent. The World Bank, 11, 29. Girls not Brides, n.d. Child marriage around the world: Nigeria. Available at https://www.girlsnotbrides. org/child-marriage/nigeria/ Halkias, D., Nwajiuba, C., & Caracatsanis, S. (2009). Business profiles of women entrepreneurs in Nigeria: The challenges facing a growing economic force in West Africa. African Journal of Business and Economic Research, 4(1), 45–56. Kimbu, A., & Ngoasong, M. (2019). Why Africa’s women entrepreneurs struggle to grow – and how to help. Available at http://theconversation.com/why-africas-women-entrepreneurs-struggleto-grow-and-how-to-help-108688 Okeke-Uzodike, O. U. E. (2019). Sustainable women’s entrepreneurship: A view from two BRICS nations. Journal of International Women’s Studies, 20(2), 340–358 Olubor, J. O. (2009). The legal rights of the vulnerable groups vis-a-vis customary practices. A paper delivered by Justice Olubor, President Customary Court of Appeal, Edo State at the Refresher Course for Judges and Kadis from 23–27 March 2009. Available at: http://www. nigerianlawguru.com/articles/customary%20law%20and%20procedure/THE%20LEGAL%20 RIGHTS%20OF%20THE%20VULNERA BLE%20GROUPS%20VIS%20-%20A-VIS%20 CUSTOMARY%20PRACTICES.pdf. Accessed 25th July 2019 Sanusi, L. S. (2012). Increasing women’s access to finance: Challenges and opportunities. A paper presented at the second African Women’s Economic Summit, Lagos, Nigeria. Available at https://www.cbn.gov.ng/out/speeches/2012/gov_increasing%20womens%20access%20to%20 finance_120712.pdf The World Bank (2008). Female entrepreneurs: The future of the African continent. Retrieved from https://www.worldbank.org/en/news/opinion/2018/11/29/women-entrepreneurs-the-futureof-africa

166  Special topics on African entrepreneurship United Nations. (n.d.). The African women’s decade: Grassroots approach to gender equality and women’s empowerment (GEWE). Retrieved from https://www.un.org/en/africa/osaa/pdf/ events/2018/20180315/TheAfricanWomen.pdf Zwilling, M. (2010). Men vs women entrepreneurs: Here are the facts. Available at https://www. businessinsider.com/battle-of-the-sexes-do-men-or-women-make-better-entrepreneurs-2010-11

10 Entrepreneurial opportunities in real estate development*

Introduction Africa’s rapid population growth and intense urbanization places a significant stress on its cities and infrastructure, but it also creates opportunities for real estate development entrepreneurs. (Knight Frank, 2018, p. 6). Africa’s population is rising at a faster rate than that of any other global region. The African population has doubled in the past 30 years to over 1 billion and the United Nations forecasts that it will reach 4 billion by 2100—40% of the global population (Knight Frank, 2016, p. 2). The other global regions are expected to have slower growth rates and an increasingly aging population. Jeff D. Opdyke (International Living September 2019) points out that Africa has the youngest population in the world. The median age in almost 40 African countries is under 20—and even in the country with the oldest-aged population in Sub-Saharan Africa, South Africa, the median age is less than 25. The African birth rates are double the world average. The 600 million Sub-Saharan Africans are having about 42 million children a year. The United States and Europe with the same number of people are producing 7 million. Africa will account for 40% of the world’s population growth through 2030, an increase of 520 million people while the Western numbers are stable or declining. Africa will have a working age population of 1.1 billion—greater than that of China and India. Urbanization of the continent is driving the need for property development. The urban population is increasing by 15 million each year as people migrate to the city from rural areas. The United Nations estimates that the overall urbanization will increase from the current 40% to over 50% by 2040. There are four cities with over 10 million people: Cairo, Lagos, Johannesburg, and Kinshasa. These primate cities contain 20% of their country’s population. The top 20 cities in the country contain an additional 14%. The fastest growing cities of Africa are mostly within Sub-Saharan regions outside South Africa. An increasing number of the Sub-Saharan cities will become mega cities with populations over 10 million. Global Cities Institute project that Lagos, Kinshasa, and Dar es Salaam will be the three largest cities in the world at the end of the century. There is already a great pent up demand for property development in these urban areas and it is only going to increase. For example, the estimated housing demand in Africa is 51 million units—17 million in Nigeria alone (Bah et al., 2018).

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Real estate development entrepreneurs Real estate development entrepreneurs are needed to meet the demand for property. A continued theme in real estate development throughout the ages is entrepreneurship. It is in the developer’s DNA. Adam Smith, the father of economics, defined the factors of production as land, labor, and capital. Therefore, entrepreneurs are the people who combine these factors of production, so that the value of the product is worth more than the total cost of production. This is what developers do. Each real estate development is an entrepreneurial endeavor that involves risk taking with the expected commensurate rewards. (Kohlhepp and Kohlhepp, 2018). Real estate property development is a process, and the developer coordinates one or more of the stages of the property development process. The process has multiple stages: (1) Land banking—acquiring unimproved land. (2) Land packaging—obtaining government approvals for possible development. (3) Land development—constructing horizontal infrastructure (roads, water system, sewer). (4) Building development—vertical improvements to construct the building. (5) Building operation—operate the completed building, manage revenues, and expenses. (6) Building renovation—make improvements on existing buildings where the use remains the same. (7) Property redevelopment—renovate buildings for a new use. At each stage of the process, the developer coordinates the completion of eight tasks: acquisition, financing, market studies/strategy, environmental studies, government approvals, physical improvements, transportation/accessibility, and sales/disposition. The same process is used for all product types—retail centers, office buildings, apartments, etc.—with some variation. The real estate development industry is generally classified into two types: (1) income property that is leased to the user: residential apartments, retail space, office space, and industrial facilities. (2) for sale property that is sold to the end user after it is built: single family homes, condominiums, subdivided land. The type has major implications for the financing and management of the project. Internationally, development is done by different types of companies and institutions, both public and private. Peiser and Hamilton (2015) say that in the US, homebuilding is done by small builders and tradesmen who build fewer than 10 homes per year. The share of homes built by the 10 largest US homebuilders, most of whom are publicly traded, was about 24% in 2009. Income property is a different story. Larger participants, mostly privately held companies, develop most commercial and industrial projects. The key issue is the amount of equity and debt required. Projects that require US$20-$30 million or more tend to be developed by developers with access to institutional financing—developers with successful experience and significant net worth. Smaller private developers can compete successfully against large national players for most projects in local markets where they have a strong record and relationship with local stakeholders, community groups, and officials. Large projects (over $50 million in United States) including planned communities, regional shopping centers, and major office buildings are developed by major regional, national (or international) players with institutional financing from pension funds, insurance companies, and endowments. In Rwanda, the home building industry has a structure somewhat like the one in the

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United States in terms of having types of companies and institutions, both private and public (International Finance Corporation, 2019). Real estate entrepreneurs operate at the international, national, and local levels. In Africa, property developments are divided into formal and informal. The formal developments adhere to the regulatory processes and standards while the informal developments are less diligent in following the rules. The focus in this chapter is on the formal sector. The first section looks at the international and national level developers; the second, examines Real Estate Investment Trusts as an indicator of the property market viability; the third, identifies market constraints and land registration; the fourth, new towns as a way of circumventing development constraints, and the final section describes how a local-level real estate entrepreneur can develop a project.

African international/national developers Formal real estate development in Africa during the colonial and immediate post-colonial era was done by the government. The real estate development situation changed after the 1980s with structural reforms and economic recovery reforms introduced in Africa by the World Bank and the International Monetary Fund (IMF). Structural changes introduced a more market-oriented approach and connected Africa with the international economy. After this, private investment in formal real estate development began to make inroads (Baffour Awuah et al., 2015). In terms of large projects, the African development industry comprises sophisticated national and international institutions (government, quasi government, and private forprofit firms.). Michael O’Malley, an office and shopping center developer in Nigeria and Ghana, says that commercial property development is fraught with challenges, such as uncertainties related to land ownership, slow legal systems, inadequate infrastructure, and high building costs. Books on international real estate investment describe a reluctance to invest in Africa as recently as 20 years ago (Hines, 2001). Yet, large developers have been able to deal with the situation. The large-scale private developer/investors in Africa are for the most part foreign companies who invest alone or with a local firm as a partner. According to Knight Frank (2018), Sub-Saharan Africa has several international investors, some are described below. UK-based emerging market specialist Actis started its first Sub-Saharan fund in 2005. (Actis, 2020). It was a pioneer entering the market largely ignored by global property funds. Actis was founded as a spin-off from CDC Group (formerly Commonwealth Development Corporation), an organization established by the UK government in 1948 to invest in developing countries in Africa, Asia, and the Caribbean. The Actis management team acquired 60% ownership of CDC’s emerging market investment platform in 2004 and the remaining 40% stake was sold to Actis in 2012. Actis’s first two funds were involved with some major properties in countries such as Ghana, Kenya, Nigeria, and Tanzania. Actis developed the Ghana Accra Mall project. They managed the development process, invested equity, and raised the debt to finance this US$36 million project. The mall opened in 2008. Actis exited the project selling interests in the Accra mall in 2012 to South African developer Atterbury and financial services group Sanlam. In 2015, Actis established the largest mall in Nigeria’s capital Abuja–Jabi Lake Mall (27,000 sq. m.). In another example, Actis acquired three office

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blocks from Capital Properties in Dar es Salaam, Tanzania in 2007. Actis redeveloped the property by increasing the office space and adding retail space. In March 2013, the Capital Properties project was sold to Sanlam. Actis raised US$500 million for its third African property fund in 2016. This was the largest amount ever raised for a private real estate fund focused on Sub-Saharan Africa outside South Africa. It is interesting to note that the arrangement included a commitment from the Government of Singapore Investment Corporation (GIC). There are more entrants in the market and more competition than for the earlier Actis funds. Many of these new funds are South African controlled funds (often registered in Mauritius). South African investors invested in the rest of Africa as part of a trend of investing in foreign markets as a hedge against a weak rand and weak economy. A South African firm, RMB Westport, created in 2008 as a joint venture between Rand Merchant Bank and Westport property group was acquired in 2019 by Growthpoint Investec African Properties. (GIAP). GIAP also acquired Achimota Retail Center in Ghana and Manda Hill Shopping Center in Zambia. GAIP has an asset base of US$500 million and a presence across several Sub-Saharan African countries with the majority in key cities in Ghana, Nigeria, and Zambia. There are also Middle Eastern investors. They prefer large-scale development projects over direct properties. UAE firm Eagle Hills’ backed the $18.5 billion Centenary City project in the Nigerian capital of Abuja. The master plan calls for an urban center, a central business district, museums, art galleries, hotels, commercial space, and residential district. A residential project “the Grove” is under way with 200 units of 5-bedroom houses. Front Range, a UAE-based developer, and Centenary City PLC are co-developers (Villa Afrika Realty, 2020c). Chinese institutions are invested in the financing and construction of infrastructure projects throughout Africa. In addition, the Chinese build large-scale real estate projects including Shanghai Zendal’s Modderfontein New City, near Johannesburg, and China’s state owned AVIC mixed use Two Rivers development in Nairobi. Also, China International Trust and Investment Corporation (CITIC) Construction signed a contract to develop social housing in Mozambique in July 2019—35,000 units and the required infrastructure. Worth noting is that China State Construction Engineering Corp received a $3 billion contract from Egypt to build a new central business district in Cairo which will have Africa’s tallest skyscraper. The examples described indicate the national/international interest in developing large-scale projects. Knight Frank (2018) says transactional activity is limited by the lack of investment grade product and the lack of transparent information (except for South Africa). The yields from transactions (2015–2016) were in the 7–9% range for the typical investment-grade asset in the most attractive Sub-Saharan markets. These were among the highest yields for investment grade prime assets. With this type of performance, developers like Actis and GIAP will, overtime, increase the inventory of investment grade properties that will meet the international institutional investors requirements. There are some investors reluctant to invest in large African projects. Rather than making direct investments in properties, these global investors may prefer to follow the path of GIC and Grosvenor by investing in funds created by established local investors (Knight Frank, 2018). These national/international players are large well-capitalized entrepreneurial firms. In addition, they offer training and networking opportunities for potential

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entrepreneurs. And, they are customers for entrepreneur-owned small/medium-sized firms for products and services.

Real Estate Investment Trusts The large-scale entrepreneurial endeavors are impressive, but is there a role for other less well-capitalized players in the industry? Real Estate Investment Trusts (REITs) offer a way to participate in the commercial real estate market. REITs companies are companies that own and often manage a portfolio of mortgages and/or properties. REITs allow investors – large institutions, smaller investors, and individuals – to invest in portfolios of mortgages or large-scale properties through the purchase of shares. The shareholders earn a share of the income stream produced by the investment portfolio (Center for Affordable Housing Finance in Africa, 2017, p. 4). REITs are not only a way to develop properties, but they can serve as an indicator of effective and efficient property markets. They are for the most part publicly traded organizations. Many REITs also do some development and some take risk in acquiring and renovating or repurposing properties. Their financial distribution requirements (90% of taxable income) mean that REITs prefer to buy completed income properties. REIT legislation has existed in African countries since 1994 and the number of registered REITs are Ghana (1), Nigeria (4), Tanzania (1), South Africa (30), Kenya (1), and Morocco (1). Rwanda has legislation but no registered firms. South Africa with 30 registered firms has adopted the REIT structure more enthusiastically than the other countries. REITs in Africa must meet different national legislative requirements and different regulations in terms of management style, minimum investment in real estate, ability to develop properties, leverage, minimum dividend pays out, and corporate income tax exemption. (Center for Affordable Housing Finance in Africa, 2017, pp. 25–48) REITs have been only marginally successful within many of the African countries that have established the legislation. (Center for Affordable Housing Finance in Africa, 2017, pp. 48–50). The researchers interviewed several real estate investors and found that several critical enabling conditions need to be in place before REITS can do well.

Necessary conditions for REITs •

• •

REITs need to have a substantial property portfolio before listing. In order to grow investor returns, REITs need to continue purchasing/developing properties once they are listed. This can only occur in a property market with substantial quality existing property stock and the existence of capable developers to add to the stock. Legislative and regulatory context requiring appropriate landlord and tenant legislation, and appropriate REIT legislation defining tax and financial requirements. Institutional strength of the country and its property markets. Robust property rights and accurate records of title deeds. Also, accurate and reliable property valuations as well as property market transparency.

As mentioned previously, REITs are not the only way to develop properties, but they can serve as an indicator of effective property markets. For REITs to perform, the property market must produce more investment quality projects. To produce more

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quality projects, the development process must be more efficient and effective. To be more effective and efficient requires efficient land acquisition—the first step in the development process. Making land available for development by unlocking land markets is perhaps the major issue that needs to be resolved. There are certain challenges and opportunities related to the provision of land and infrastructure in Africa’s urban communities.

Land markets in established cities Bah et al. (2018, pp. 151–154) say that there are challenges to making land available that currently confront the formal development sector in Africa: poor land governance, weak property rights, and tenure security due to the multiplicity of land tenure regimes. African governments need to play the major role in land markets. The uncertainty in the land tenure rules and enforcement of property rights have an impact on land formalization and land delivery. Property rights are needed for land tenure security required for a functioning land market, mortgage financing, and private investment in property. Delivering large-scale development and infrastructure is expensive in terms of longterm finance. The resources needed go beyond what African government budgets can afford. There is the need for innovative financing to provide for land and infrastructure. This means bringing in private capital through public-private partnerships. This would require the enforcement of property rights, appropriate legal and regulatory framework, security of land tenure and ownership, well-functioning financial systems, and adequate information and transparency systems. Central governments would have to put in place required policies and well-functioning local governments. Governments need to adopt and enforce simple regulatory frameworks and land governance systems. These would require well-equipped land administration to deliver land reform. Also, governments would have to make sure that infrastructure planning was coordinated with urban development policies to avoid the cost of retrofitting poor urban planning. Dealing with the established socio-economic-political-cultural issues tied to land tenure stymied the land market in cities. Obeng-Odoom and McDermott (2018) were examining the issue of property valuation, registration, and land tenure. They say that, in Ghana, 78% of land is controlled by customary norms – chiefs, families, and clans – and is generally not registered. In addition, 22% is owned by the state. It appears that urbanization created great pressure on governments. As a result, governments in many African countries have decided to shift from being the providers of services to encouraging private sector development/investment of the property and infrastructure by creating new towns (Keeton and Nijhuis, 2019, p. 224).

New towns avoiding stalemate Femke van Noorloos and Marjan Kloosterboer (2018) say that new property investments in Africa’s cities are on the rise and they often take the form of entirely new cities built from scratch as comprehensive planned self-contained enclaves on the edge of existing cities. Or, they are city centers that are rebuilt into entirely new cities. The new cities are privately developed, and they are in countries with different political-economic environments.

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van Noorloos and Kloosterboer (2018, p. 1227) have created a classification scheme to help identify the different types of new towns. They are cross-classified by purpose of the town and by spatial location and connection to existing cities. • •

The first category is the Purpose of cities: new capital, lower/middle-class housing, higher-class housing and commercial development, mixed use (technology, residential, commercial), special economic zones (mostly industrial). The second category is Spatial location and connection to an existing city: independent city, satellite city, city within existing city/suburb, and total restructuring in existing city. For example, Abuja, Nigeria’s capital city as of 1991, would be classified as an independent/capital city. Ghana (Accra) Apollonia city would be classified as higher-class housing and commercial development/satellite city.

van Noorloos and Kloosterboer identify three types of investment schemes for new towns: state to state funding, hedge funds and other short- and long-term private investment, and public-private partnerships. Several African new towns received state-to-state funding from China primarily through the state-owned CITIC. The new capital city of Egypt will be built with China State Construction Engineering Corporation. In addition, Angola has several satellite towns financed by Chinese banks oil backed loans and constructed by Chinese state backed construction firms. Private investors like Rendeavour, the urban development branch of Renaissance capital, a western style, Russia-based investment bank, has several new city projects in Africa. Also, Energyx Nigeria Ltd. was created to manage the privately funded Eko Atlantic City, by the Chagoury Group, a West African company with partners including the Bank of Nigeria, the first City Monument Bank and other national and international private investors. Examples of public-private investments financed by the domestic government and managed as a public-private partnership: Konza Technology City in Kenya; Also, Equatorial Guinea’s new capital. In addition, there is Kigamboni City, Tanzania, a public-private partnership with Kigamboni Development Agency. The authors point out that the construction of new cities is not new, but the scale, extent, and the drivers behind them are different as is the interest of international property companies. (van Noorloos and Kloosterboer, 2018, p. 1228). They say that new cities can be described as large-scale private real estate investments that are largely built from scratch, are independent, self-sufficient and include a wide range of urban services. New cities are converting and privatizing land for residential, commercial, and technological uses generally for the upper and middle class.

Developing in Abuja New towns offer a more efficient and effective place for property development. How can an entrepreneur build in such an environment? Abuja, the capital city of Nigeria, is in the center of the country in the Federal Capital Territory (FTC). It is a New Town, a planned city built mostly in the 1980s. It replaced Lagos as the capital in 1991. One reason for building the new town was to take the urbanization pressure off Lagos. The urban area (city and adjacent suburbs) population in 2006 was 776,298. The city grew by 140% between 2000 and 2010 making it one

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of the fastest growing cities in the world. Abuja’s population in 2020 is 3,277,740 (UN World Urbanization Prospects). The metro area is estimated to be 6 million. The city was built in a neutral territory with the idea of bringing different ethnic groups, tribes, and religions together without offending any group with pre-existing informal land tenure rights (Haas, 2019). The land acquisition process and the process of joint venturing with a builder describe the initial stages of the development process for an entrepreneur who wants to create a project in Abuja. The procedures described are based on material from a local Nigerian real estate firm (Villa Afrika, 2020a). Land acquisition Land for development/investment use is purchased from either the government or the private sector. All the land in the FCT, including Abuja, belongs to the Federal Government of Nigeria. The FCT Minister acts for the president of Nigeria on land matters. The FTC Minister heads two agencies that oversee land management in Abuja, The Federal Capital Development Agency (FCDA) and Abuja Geographic Information Systems (AGIS). The FCDA is responsible for the overall development of Abuja. They manage design, planning, and construction of the city. They are responsible for the overall quality control of the urban development. AGIS manages land administration in Abuja—issuing Certificates of Occupancy, issuing Rights of Occupancy, providing text and graphical data (land records, satellite images, aerial photographs), property search and land verification, land allocation applications, revenue collection, and other related services. FCDA Land is allocated by the FCT Minister with AGIS acting as the administrators of the process. There are six area councils in the FCT-Abaji, Abuja Municipal, Bwari, Gwagwalada, Kuje, and Kwali. At one time, the land under the control of these area councils were allocated by their particular chairmen, but now this responsibility has shifted to the Minister. Therefore, the only way to legally acquire FCDA or Area land in Abuja is to apply directly to the FTC Minister. Some land in the FTC can be considered under government acquisition while some is classified as government “committed”. Government “committed” land is reserved for government purposes and is not for sale—it is land for roads, airports, etc. Government acquisition land is designated for future use. Most of this government land is in underdeveloped places that are sparsely populated. Since these lands are not “committed”, one can purchase them if one goes through the proper channels and makes an application to AGIS. The government land requires a longer process and public land offers fewer choices since you are allocated land that may not meet your needs. Acquiring FCDA or Area Council Government land requires one to apply to AGIS. AGIS has the power to grant or refuse the application. The process requires showing personal documents and filling out an application, providing a description of general use (e.g., commercial/mixed use) and a description of specific use (hotel, school, etc.). The preferred location and the size of the plot can be stated on the form, but this is not required. AGIS requires that application payments are made through select banks. After this, there is the formal application to AGIS with additional personal documents. If the application is accepted, you receive an acknowledgement slip to claim any land that may be allocated to you.

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A successful application means you receive statutory Right of Occupancy. The Right of Occupancy is an offer to the land allocated. This should be perfected to a Certificate of Occupancy that gives you full ownership and rights to the land. The Right of Occupancy can be revoked, and land can be taken without compensation. With a Certificate of Occupancy, you are compensated if land is taken. The Certificate of Occupancy process can be begun at the AGIS office. Buying Land on the Private Market: Private land is land that has been previously allocated and registered to a private individual or organization. Private land is easier to acquire, and there are more locations to choose from—including more developed land and land with infrastructure. The process of buying land on the private market is faster than buying government land. • • • • •

•

• •

•

First, identify a property to buy. This is usually done with a real estate agent. Inspect the property and verify the documents provided by the seller. Have the property inspected, including the neighborhood, infrastructure, soils, and the size of the lot. A surveyor should check the plot characteristics. Land that has a Certificate of Occupancy is preferable. A property lawyer should check the legal documents. AGIS should be checked to make sure the lot is real and that it is registered in the AGIS database. The legal search will check the land use purpose (commercial, mixed use) and see if there are any outstanding claims/bills on the property. Check for the Deed of Assignment in the AGIS file. The Deeds of Assignment/ Conveyance is critical—this is the agreement that shows evidence that a seller has transferred all rights, title, interests, and ownership in the land to the buyer. Since the land has been owned for a period, there will be a series of buyers and sellers in a chain of transactions. You need to verify that the current owner is the true owner. Have a professional surveyor to examine the property and give you a valuation. If everything checks out, negotiate and pay the purchase price. Several documents will be signed, and you will receive the Deed of Assignment. Sale of this land is a private transaction. An amount is agreed upon and paid. Then an application is made to AGIS to transfer title ownership (Certificate of Occupancy or Right of Occupancy) to the buyer. Once the ownership has been transferred to you, perfect your title on the land with the government. This shows that you own the land, and notifies any future buyer of the property who conducts a legal search of the land registry records. A lawyer will assist in this, you will need the Deed of Assignment, Statutory Right of Occupancy, and a survey plan.

This is a description of the ideal land acquisition process. Things can go wrong. Nwuba and Nuhu (2018) describe challenges to land registration in Kaduna State in Nigeria in the Northwest geopolitical zone. Land markets there are dominated by the private sector. The authors surveyed real estate professionals and lawyers about the land registration process where they represented clients with residential property. They found that the level of registration is low (30%) for the residential landowners. The reasons given are as follows: lack of understanding of the importance of land registration; high costs of registration relative to the cost of land; and poor record keeping, lengthy process, corruption, and delays in processing registration. Registration in Abuja for

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investment property should have higher compliance and hopefully be more efficient. The use of real estate professionals and lawyers should make the process go smoothly. Joint ventures Real estate joint ventures between landowners and real estate builders are a good way to get into the real estate business (Villa Afrika, 2020b). In a typical joint venture in property development, the landowner contributes his land towards the project and the builder is responsible for the approvals, construction, and marketing. Landowners outsourcing these expenses to an experienced builder reduces risk and increases the potential rewards since the profit is higher for a finished building than for raw land. The financial return can be structured in different ways. The landowner could receive an upfront payment, a share of the revenue earned, or portion of the developed property. The builder gains because he does not have to pay for the land before the sale of the property. His upfront costs are greatly reduced. Plus, the project can start sooner. The deal structure (profit sharing agreement) needs to take several things into consideration. The highest and best use for the property based on the market competition, the various costs to build the structure, land costs, other costs, and expected returns, are calculated and an agreement can be made. A partnership agreement is required that states that the partners plan to develop a piece of land into a real estate property (retail, offices, residential) where the two parties share the developed property. Typically, landowners receive between 20 and 50% of the project. Legal issues It is important for the landowner to give the builder permission to develop his land by using a power of attorney. The appropriate approvals from the government must be obtained. Also, fees for building permits, providing infrastructure will be required. When it comes to real estate joint ventures, working with an estate agent or other real estate professional is a way to find a deal. Landowners looking for builders or builders looking for landowners, real estate professionals have the network and contacts. In sum, the joint venture is a good way to create property developments in Africa. It can work out well for both parties financially—and for the entrepreneur new to the development business, it is a good way to learn the different aspects of the business.

Summary Selwyn Blieden, head of African coverage, commercial property finance at Barclays Africa group, forecasts the next steps for shaping Africa’s urban landscapes, saying that property innovators have taken the first steps by constructing malls, hotels, and office buildings that are impressive. However, Blieden (2017) argues, this is just the first step. Fully functioning cities require a market-oriented property system for residential, commercial, and industrial development and professional infrastructure with appropriate real estate skills and services. The question Blieden asks is as follows: In the future, who will design, build, manage, maintain, and fund the many different commercial developments that Africa’s cities demand?

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The answer according to Blieden is that a local property ecosystem must emerge to take over from where the large, mostly foreign, private equity-funded pioneers have left off. Africa’s urban centers need all the components of a property market working systematically to sustain a system to avoid “urbanization without growth” or “poor country urbanization”. A well-functioning property system could enable orderly, planned constructive growth. This type of system would encourage investors giving reason to believe that investments made now would still be around 20 years from now and that their loans will be repaid. Blieden says that when it comes to financing, property markets across Africa will rely increasingly on African sources of funding. Funding from foreign sources is in short supply and is unevenly spread. Barclays research found that between 2003 and 2016 only 2 of the top 10 African cities that received significant inflows of foreign real estate investment were in Sub-Saharan Africa. They were Lagos in Nigeria and Johannesburg in South Africa. The other 8 were all in North Africa. There are African investors with the ability to fund the property market. An effective property ecosystem is needed for them to do so. At this point, there are voids in the system that need to be addressed: First, there is a need for significant participants, owners, and developers with a formal business structure. Second, there needs to be a well understood contracting mechanism between sector stakeholders, such as lessors, lessees, owners, and contractors Third, inappropriate urban planning regulations and inadequate urban services deter foreign real estate investment and economic growth in some areas. The lack of reliable data is a problem in many Sub-Saharan countries. Investors need to have data (demographic, pricing, and property index) to assess the risk of the investment. Fourth, a weak regulatory environment hurts efficient planning, approvals, and property transfers. Barclays Africa research showed that property markets in Africa are diverse—some grow above 20% and others zero. The markets face challenges but there are opportunities as well. E. Lenka Dewa, Managing Partner of Las Vegas-based WSN GlobAf Asset Management and an investor-developer in Africa says (in a personal conversation with the author in July 2020) that a more robust African real estate investment and development market needs: (1) an enabling environment (land tenure reform and optimization, regulation, safety and security, digital and smart cities, sustainable community centers, export/special economic zones), (2) patient capital and related risk management innovation, for example, local African pension funds mobilizing alternative financing methodologies working with the Africans in the Diaspora, (3) sustainable economic growth which enables job creation to fuel the buying power of the population. Lenka estimates that Africa needs about US$100+ billion annually for backbone infrastructure investments and developments (primarily education and healthcare) over the next 10 years. He thinks that this creates an opportunity for teaming up with local partners in public private partnerships, using local and international capital to build sustainable community centers. Lenka optimistically believes that “if you are a creative problem solver, this is a creative opportunity”.

Note

* This chapter was written by Michael A. Anikeeff, retired professor, Carey Business School and former chair of the Edward St John Department of Real Estate, Johns Hopkins University, USA.

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References Actis. 2020. “About Actis.” www.act.is Baffour Awuah, K.G., Hammond, F., Lamond, J., and Booth, C. 2015. “Ghana: Impact of land use planning on real estate development return in a developing world context.” In G. Squires and E. Heurkens (Eds.). International Approaches to Real Estate Development. 123–136. New York: Routledge. Bah, E.M., I. Faye, and Z.F. Geh. 2018. Housing Market Dynamics in Africa. London: Palgrave Macmillan. doi: 10.1057/978-1-137-59792-2 Blieden, S. 2017. “Moving Africa’s Property Industry Beyond the Pioneering Phase.” www. howwemadeitinafrica.com Center for Affordable Housing Finance in Africa. 2017. “Residential REITS and Their Potential to Increase Investment in and Access to Affordable Housing Finance in Africa.” Main Report Keeton, R., and S. Nijhuis. 2019. “Spatial challenges in Contemporary African New Towns and potentials for alternative planning strategies.” International Planning Studies. 24(3–4): 218–234. doi: 10.1080/13563475.2019.1660625. Knight Frank. 2016. “Shop Africa 2016.” KnightFrank.com/Research Knight Frank. 2018. “Africa Report 2017/18.” KnightFrank.com/Research Kohlhepp, D.B., and K.J. Kohlhepp. 2018. Real Estate Development Matrix. New York: Routledge. Haas, A.R.N. 2019. “African Countries Keep Building New Cities to Meet Rapid Urbanization Even if People Won’t Live in Them.” Quartz Africa. https://qz.com/africa/1740068/africancountries-keep-building-cities-to-meet-rapid-urbanization/ Hines, M.A. 2001. Investing in International Real Estate. Westport, CT: Quorum. International Finance Corporation. 2019. “Creating Markets in Rwanda.” World Bank Group. Nwuba, C.C., and Nuhu, S.R. 2018. “Challenges to land registration in Kaduna State, Nigeria”. Journal of African Real Estate Research. 3(1): 141–172. doi: 10.15641/jarer.v1i1.566. Peiser, R., and D. Hamilton. 2015. “United States from small private market local entrepreneurs toward sophisticated enterprise.” In G. Squires and E. Heurkens (Eds.). International Approaches to Real Estate Development. 23–44. New York: Routledge. Obeng-Odoom, F., and M. McDermott. 2018. Valuing Unregistered Land. London: Royal Institution of Chartered Surveyors (RICS). van Noorloos, F., and M. Klooster. 2018. “Africa’s new cities: The contested future of urbanization.” Urban Studies. 55(6): 1223–1241. doi: 10.1177/0042098017700574. Villa Afrika Realty. 2020a. “Guide to Buying and Registering Land in Abuja.” www.villaafrika.com Villa Afrika Realty. 2020b. “Joint Ventures in Property Development.” www.villaafrika.com Villa Afrika Realty. 2020c. “Abuja Construction & Real Estate–2020.” www.villaafrika.com

11 Understanding entrepreneurs A focus on youth*

OYO Rooms When he was 18 years old, Ritesh Agarwal founded Oravel Stays, which was intended to be the Indian version of the home-sharing portal AirBnB (Chanchani). While running Oravel Stays, he stayed at over 100 bed-and-breakfasts and noticed a lack of affordable hotels in India that live up to a certain, standardized quality. Thus, he came up with the idea of setting up a hotel chain called OYO Rooms. When he first started pitching OYO Rooms to venture capitalists, however, getting investments was not easy. Venture capitalists (VCs) didn’t understand the premise of his business and thought Ritesh was too young and, hence, not smart enough to start his own company. OYO Rooms now has over 45,000 standardized rooms across 160 cities (Modgil).

MnM clothing line Rahma Bajun, is the 29-year-old founder and Creative Director of MnM Clothing Line, a popular clothing brand in Tanzania that produces affordable clothes, wallets, and accessories for men and women using the popular East African Kitenge fabric. Before she started MnM, Rahma did some policy work for the Tanzanian government which involved understanding the primary concerns of young people living in Tanzania, and it was through this work that she discovered that many young people were faced with unemployment. This research, and her passion for design and fashion, led her to want to support young people in some way and be able to say that she “has employed one Tanzanian youth, or ten, or twenty” (Lagosian). Additionally, she noticed that there was a common misconception that African prints are only meant for those who can’t afford other clothing (Lagosian). Therefore, she began to study the fashion industry in Tanzania, and created the MnM Clothing Line in 2016, with the aim of producing high quality African print clothes and other items, and bringing back the love of African prints to Tanzanians (Gist). The company has 7 full-time employees and sells its products across East Africa (Nsehe).

What makes a good entrepreneur? Entrepreneurship and Psychology are two fields that place human beings at their core. There are certain concepts and theories from psychology that inform one’s understanding of entrepreneurs. This section aims to answer the question: what makes a good entrepreneur? More specifically, it explores what personality traits might determine the success of an entrepreneur.

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Over the years, research on the topic has investigated two things. First, the specific traits that motivate people to become entrepreneurs and, second, the traits that help entrepreneurs maintain the path they are on. The focus of this research has primarily been on individuals who have established high-growth ventures. However, recent work has broadened the definition of “entrepreneur” to include varying groups of people such as those who have set up small or medium-sized businesses and even students in an entrepreneurship class (Kerr et al. 281). Similarly, this chapter will explore personality traits across several categories of entrepreneurs. Before delving into the central question of this chapter, “what makes a good entrepreneur?”, it is important to first understand what personality traits are. Personality traits are people’s “characteristic patterns of thoughts, feelings, and behaviors”. Traits are considered to be consistent and stable which means that these patterns tend to persist over time and across different situations (Diener & Lucas 893). A few personality traits that have most commonly been investigated in association with entrepreneurship are entrepreneurial self-efficacy, achievement motivation, risk propensity, the big 5 personality traits, and creativity. Entrepreneurial self-efficacy Entrepreneurial self-efficacy (ESE) is defined as an “individual’s cognitive estimate of his or her capabilities to mobilize the motivation, cognitive resources, and courses of action needed to perform tasks and roles aimed at entrepreneurial outcomes” (Chen et al. 296). ESE has been positively linked to several entrepreneurial outcomes such as intent to start a venture or likelihood of investing money in new ventures (Newman et al. 410). For example, a study conducted in 2014 examined whether the positive link between an entrepreneur’s creativity and firm innovation is moderated by ESE. Results showed that higher ESE strengthened the impact creativity had on process innovation (Ahlin et al. 112). ESE also has a positive impact on enterprise performance, as shown in a study conducted by Hallak et al. (594). Researchers have attempted to gain a more nuanced understanding of ESE by examining its subdimensions. These subdimensions are marketing ESE, innovation ESE, management ESE, risk-taking ESE, and financial control ESE. However, there is negligible evidence of the impact of these subdimensions on entrepreneurial behavior. Research so far has shown that the five subdimensions of ESE contribute individually to firm performance. For example, in a study conducted by Cumberland et al. (14), the results indicated that ESE innovation, ESE management, and ESE financial control are significant in increasing firm performance. In general, high ESE is an important trait for entrepreneurs to possess as they face numerous challenges and uncertainties while running their businesses. A high ESE is essential to enhance their ability to deal with these challenges (Chen et al. 301). On the other hand, a low ESE causes entrepreneurs to doubt their abilities, which can hinder the performance of entrepreneurs and their businesses. Ironically, too high self-efficacy can result in overconfidence, the dangers of which can complicate exit, as discussed in Chapter 8. Achievement motivation/Need for achievement In Chapter 3, we discussed push and pull factors as external motivators. Henry A. Murray and David McClelland are two theorists who pioneered research into achievement

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motivation at the individual level. Murray in his Explorations in Personality (1938), defined the need for achievement, (nAch), or achievement motivation, as “a desire or tendency to overcome obstacles, to exercise power, and to strive to achieve something difficult as well and as quickly as possible”. David McClelland furthered this definition and characterized nAch as “the wish to find solutions to problems, master complex tasks, set goals, and obtain feedback on one’s level of success”. These definitions allow for a large number of activities to be considered as “achievement motivated”. However, there are two crucial aspects of achievement motivated behavior. One, nAch implies comparing one’s current performance either to one’s previous performance or that of others. Two, one’s drive to perform must emanate from within oneself (Brunstein & Heckhausen 137). Achievement motivation has been strongly linked to entrepreneurial behaviors. A study conducted by Collins et al. (109) found that individuals who pursued entrepreneurial careers displayed higher achievement motivation as compared to those who chose to pursue other types of careers. There is also a significant positive correlation between achievement motivation and entrepreneurial performance. Achievement motivation is positively related to entrepreneurial persistence as well. This implies that achievement motivation is an essential trait for entrepreneurs to possess so they can remain on their chosen path despite inevitable risks and difficulties (Wu et al. 936). Risk propensity Risk propensity is a trait characterized by “an increased probability of engaging in behaviors that have some potential danger or harm but also to provide an opportunity for some benefit” (Botella et al. 529). Entrepreneurs are often considered to have a higher risk propensity than non-entrepreneurs. While this is mostly true, literature shows that risk propensity differs depending on the phase the venture is in. Nascent entrepreneurs, according to one study, are more risk-averse than non-entrepreneurs (Xu & Ruef 351). However, a qualitative study by Landqvist & Stålhandske (44) showed that experienced entrepreneurs displayed a higher risk propensity in a work setting as compared to managers, i.e., non-entrepreneurs. This is possibly because entrepreneurs can easily assess the risk following a decision due to their existing experience of having to deal with consequences first-hand (Landqvist & Stålhandske 45). Risk propensity among entrepreneurs is often mediated by other personality traits. To begin with, achievement orientation has been found to correlate positively with risk propensity. This implies that the higher an entrepreneur’s achievement orientation, the higher his/her propensity to take risks (Tang & Tang 459). Additionally, risk propensity is moderated by ESE. Densberger (459), through a series of qualitative interviews with entrepreneurs, was able to conclude that risk propensity is driven by high ESE. In other words, it is a high ESE that allows entrepreneurs to take risky decisions as they believe they have the capability to deal with any consequences (Densberger 460). The opposite is also true: people who report a higher propensity to take risks judge themselves to be more capable of performing entrepreneurial tasks (Zhao et al. 1269). The big 5 personality traits The Big 5 Model (introduced in Chapter 3, expanded here) defines personality across five dimensions: openness, conscientiousness, extraversion, agreeableness, and neuroticism.

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Historically, the big 5 traits have been closely linked to both career choice and work performance (Kerr et al. 290). Descriptions of the 5 traits are as follows: •

•

• • •

Openness to experience (O): People who are open to experience usually possess characteristics such as “imagination, unconventionality, autonomy, creativity, and divergent thinking”. They are usually good at finding new opportunities and thinking of unconventional ways to reach their goals. Those who score low on this trait tend to prefer familiarity and a narrower intellectual focus (Ranwala & Dissanayake 87). Conscientiousness (C): People who are conscientious are usually dependable, responsible, hard-working, and achievement oriented when it comes to attaining their goals. They prefer to think carefully before acting, set clear goals, and make huge efforts to achieve those (Ranwala & Dissanayake 86). Extraversion: People who are extraverted are usually “social, assertive, active, bold, energetic, and adventurous”. Those who score highly on extraversion are able to relate easily to the outer world of people and things (Ranwala & Dissanayake 86). Agreeableness: People who are agreeable tend to be “altruistic, warm, generous, trusting, and cooperative”. Agreeable people think actively about other people’s interests and are adaptive (Ranwala & Dissanayake 86). Neuroticism: Neuroticism describes the extent to which a person is “nervous, anxious, insecure or emotional”. Those who score low on neuroticism tend to be relaxed, self-confident and look at tasks positively (Ranwala & Dissanayake 87).

A lot of research exploring the link between each trait in the big 5 model and entrepreneurial behavior has been conducted in the last few decades. Of the 5 traits, two have consistently been positively associated with entrepreneurs. To begin with, entrepreneurs have been found to be more open to experience (O+) across most existing literature. It has been hypothesized that entrepreneurs are likely attracted to erratic and challenging environments. Entrepreneurs are required to come up with creative ­solutions, business models, and products; hence, an openness to experience aids these functions (Kerr et al. 291). The environment and the job requirements of entrepreneurs, therefore, are favorable for individuals who are open to experience. Second, Zhao & Siebert (265), in their meta-analysis of the literature on the relationship between the big 5 model and entrepreneurs, found that conscientiousness is a trait that has the strongest relationship with entrepreneurial status (C+) (265). There exists conflicting evidence regarding the role of extraversion in determining entrepreneurial outcomes. The reason behind this could be that growth-oriented entrepreneurs may need to be extraverted in order to manage relationships with partners, investors, and customers. Small business owners, on the other hand, can afford to stay away from systems that require them to be overly social (Kerr et al. 292). Zhao & Siebert (266), for example, found no differences between entrepreneurs and managers on the extraversion scale (266). However, in another study conducted by Envick and Langford, entrepreneurs were found to be less extraverted than managers. Thus, this is a trait for which the definition of “entrepreneur” matters greatly (Kerr et al. 292), the implications of which will be explored in a later section of this chapter. Finally, it has been found that entrepreneurs are marginally less agreeable and neurotic (A-, N-) as compared to managers. According to Kerr et al.:

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Some researchers hypothesize that, because most entrepreneurs eventually become the CEOs of their own ventures, they do not need to worry about pleasing other people around them, whereas managers must at least please their own bosses. Zhao and Seibert find entrepreneurs to be less neurotic than managers, suggesting that this is because entrepreneurs require exceptional self-confidence to take on the risks of starting a venture. Overall, however, there is not a strong pattern of significant results in the current literature on these two dimensions (293). Creativity An important challenge that entrepreneurs face is having to constantly generate or recognize opportunities that have the potential to be developed into goods or services that will be appealing to customers. It is an equally important challenge to find a balance between novelty and familiarity such that ideas are “new and different enough to capture consumers’ attention, but familiar enough to not be misunderstood or rejected out of hand as too radically different” (Ward 173). In line with this, entrepreneurial creativity was first defined as “the generation and implementation of novel, appropriate ideas to establish a new venture” (Fillis & Rentschler 54). It also exists before, during, and after the lifetime of a new business. Entrepreneurial creativity follows the following process: The first stage is problem identification, during which the problem solvers recognize, define, and attempt to understand the problem or the opportunity facing them. The second is preparation, during which the problem-solvers gather information and other resources necessary to tackle the problem or pursue the opportunity. The third stage is response generation, during which various ideas for solving the problem or pursuing the opportunity are designed. The fourth stage, validation and communication, involves the consideration of the ideas generated, selection among them, and formalization or communication of the selected approach (Fillis & Rentschler 62). Creativity is essential for several entrepreneurial activities. First, creativity encompasses qualities such as flexibility, visualization, and imagination, all of which are instrumental in aiding entrepreneurs to see new ways of applying past experiences to new problems. This, in turn, allows them to construct, and, possibly, implement alternative strategic direction. Second, creativity is important for dealing with the uncertainty associated with entrepreneurial environments as it facilitates strategic scenario thinking. Strategic scenario thinking involves “handl[ing] future situations by [creating] scenarios that are weighted according to their probability of occurring” (Petrakis & Konstantakopoulou 141). Here, creativity allows entrepreneurs to broaden their thoughts and formulate solutions to mitigate a wide variety of uncertain outcomes. Third, creative entrepreneurs are able to “make associations between previously unconnected domains” (Fillis & Rentschler 61). Thus, by merging two previously separate concepts or images, “novel properties can emerge that were not obviously present in either of the separate components. Such novelty can be exploited to develop new product ideas or market niches” (Ward 59).

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The link between creativity and entrepreneurship has mostly been explored through anecdotal and qualitative evidence as empirical evidence has been limited. However, the studies that have been conducted support the positive link between creativity and entrepreneurship. A study conducted by Zampetakis et al. (195), for example, showed that business school students with high individual creativity also showed higher entrepreneurial intention as compared to those with low individual creativity. It is evident through this section that there is a strong link between certain psychological traits and entrepreneurial outcomes and behaviors. The next section will now explore how this relationship is mediated by different types of entrepreneurial ventures. • • •

This list of traits is not exhaustive. What other traits do you think are important for an entrepreneur to be successful? Reflection: How would you assess yourself along these traits? Refer to the OYO and MnM vignettes mentioned earlier. In what ways do Ritesh Agrawal and Rahma Bajun display the traits discussed in this section?

Youth entrepreneurship The traits discussed above are especially important for young entrepreneurs, especially a high ESE, high-risk propensity, and a high nAch. Global trends show that young people are becoming increasingly more likely to start their own businesses. In 2016, it was found that younger generations are starting their first businesses earlier, i.e., around the age of 27, as compared to older generations, who tended to start their businesses around 35 years of age. This implies that younger generations are more eager to start businesses and are, possibly, more willing to be proactive and take risks in order to do so (Alton). As of 2018, according to research conducted on a sample of 2000+ entrepreneurs across the globe, 40% are under the age of 35 (BNP Paribas 5). As mentioned, the traits that contribute to entrepreneurial success are essential because, while the global environment has become more supportive of youth entrepreneurs, those in low-resource settings face a number of challenges. These include •

• •

•

Lack of guidance: It is essential for young entrepreneurs to have role models, such as parents or teachers, to help guide them through the process of setting up their own venture. Often, however, young entrepreneurs do not have access to role models that are aware of the requirements and opportunities of entrepreneurship. This results in a lack of encouragement for entrepreneurial activities, or even negative social attitudes that act as an obstacle to youth entrepreneurship (Potabatti & Boob 56). Lack of relevant training: Currently, education and training programs are focused more on preparing students for paid employment, and don’t do enough to nurture entrepreneurial attitudes and skills (Potabatti & Boob 56). Inadequate funding: When it comes to financial resources, young people are at a double disadvantage since they often don’t have enough personal savings, and youth-owned firms do not generally fit in the assessment parameters for bank loans (Potabatti & Boob 56). Limited networks: Young entrepreneurs likely have limited business networks and business-related social capital, which could have consequences for setting up and running their businesses and building legitimacy among key stakeholders (Potabatti & Boob 56).

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• •

Higher environmental uncertainty: Youth ventures tend to face more environmental uncertainties as compared to their more established competitors given how new they are (Chauhan & Aggarwal 8). Lack of a supportive ecosystem: Young entrepreneurs are faced with a paradox of expectations. On the one hand, entrepreneurship as a whole is not viewed favorably by society as it is not considered to be a viable career choice. However, on the other hand, they face immense societal pressure to succeed. This often causes young entrepreneurs to make hasty decisions that may harm their business in the long run (Patel).

In order to overcome these challenges, adequate training is also required to support young entrepreneurs, and there are 2 essential aspects of educating entrepreneurs (Dhriiti.com). The first aspect is ‘Inspire’, which involves teaching young people that entrepreneurship is a respectable, and viable, career option and providing them with the base-level skills required to set up a venture. This is usually done through schools and colleges, where students work on live projects and are taught entrepreneurial competencies such as the ability to innovate, to study one’s environment to identify gaps, and find viable solutions (Gupta). Once young entrepreneurs decide to set up ventures, the next aspect of training required is ‘Incubate’, which involves teaching young entrepreneurs ‘hard’ business skills such as how to network, how to pitch to potential investors, and create and implement business plans. This, however, cannot be taught in a classroom, and requires closely mentoring young entrepreneurs at every step of their journey. As a young entrepreneur, Tsui suggests that there are some key questions you should ask yourself to help give direction to your ideas. The first is, “do you have a clear business idea?”. If the answer to this question is “no”, then it is time to reassess, brainstorm, and develop some viable options. If the answer is “yes”, the next question is whether enough research has been done to decide if the idea has value to potential customers. If the answer is “no”, it’s time to do some research to determine the idea’s viability and marketability before looking for funders and investors. If the answer is “yes”, then the question becomes, “is there adequate startup funding to support the venture?”. If the answer is “no”, it’s time to sharpen the pitch and business plan (see Appendix III) and seek funding (see Chapter 4 for funding sources). If the answer is “yes”, then the venture is ready for launch. The next question to answer, then, is: what are the kinds of ventures that young entrepreneurs can start, and what are the traits required for each type? Over the years, researchers have developed a variety of ways to classify entrepreneurial ventures. Morris et al. synthesized these classifications into four general types. Further, entrepreneurs from each venture type were identified and asked to ascribe an organizational identity to each venture type by choosing from a list of adjectives, as well as adding adjectives of their own. These adjectives given to the entrepreneurs were across five dimensions: Smallness (e.g., simple, struggling, disadvantaged, self-sufficient), core values (e.g., community-focused, friendly, family-oriented, people-centered), innovation (e.g., inventive, creative, experimental, technological), strategic posture (e.g., reactive, conservative, risk-taking, market leader, aggressive), and growth (e.g., lifestyle, regional, rapid growth, scalable) (Morris et al. 11).

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The classification of ventures and findings from the study are as follows. 1 Survival ventures Survival ventures, as the name suggests, are set up to provide basic subsistence to the entrepreneur and his/her family. This essentially allows for a little more than a hand-to-mouth existence. Typically, the business is not formally registered and does not have a premises, many assets, or business banking relationships. Cash or barter is the primary mode of making transactions. There is limited reinvestment into the venture as it provides basic financial support and is only enough to cover important costs for the entrepreneur. Survival ventures usually operate in extremely competitive, generally undifferentiated markets (Morris et al. 6). Given the highly competitive nature of the market, entrepreneurs most often ascribed words like “demanding”, “struggling”, and “labor-intensive” when describing the organizational identity of survival ventures (Morris et al. 12). It can be inferred from this that a high ESE is important for survival entrepreneurs as they need to believe they have the ability to compete in this demanding market. Additionally, high achievement motivation is necessary to ensure that entrepreneurs are persistent and can overcome difficulties that they will inevitably encounter. Entrepreneurs also ascribed “creativity” to survival ventures (Morris et al. 12). This could be because the products in this market are highly undifferentiated and some level of creativity is important to ensure that entrepreneurs have an edge over their competitors. In the context of the big 5 model, scoring positively on 4 traits is important for survival entrepreneurs. First a high level of conscientiousness is essential to facilitate an entrepreneur’s ability to work hard and achieve his or her goals and keep up with the demanding market. Second, entrepreneurs described survival ventures as “people-oriented” and “friendly” (Morris et al. 12). Hence, survival entrepreneurs would require a moderate level of extraversion and agreeableness. Third, survival entrepreneurs need to be moderately open to experience as “flexibility” is also a part of a survival venture’s organizational identity (Morris et al. 12). Neuroticism, on the other hand, is a big 5 trait that is not as important for survival entrepreneurs. Finally, risk propensity is a trait that is not as important for survival entrepreneurs because, while “risk-taking” was a part of the list of adjectives presented to the respondents, it was not frequently chosen. 2 Lifestyle ventures Lifestyle ventures provide a largely stable income stream for owners based on a workable business model and a stable customer base. Lifestyle entrepreneurs are able to make modest reinvestments into their ventures and maintain competitiveness in the local market where the firm is embedded. These ventures usually have premises in a single location as well as employees. However, lifestyle entrepreneurs do not seek meaningful expansion or growth and the number of employees remains relatively constant. Given this limited capacity, it is difficult for the venture to grow to a large-scale venture and entrepreneurs are primarily focused on maintaining and improving the performance of current operations. As with all entrepreneurial ventures, a high ESE is important for lifestyle entrepreneurs. While lifestyle ventures are not conventionally characterized as demanding or labor intensive, a high ESE is important for entrepreneurs to begin their venture in the first place. Entrepreneurs often associated the word “persistent” with lifestyle ventures indicating that a moderate to high nAch is also important

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(Morris et al. 12). In order to improve the performance of current operations, a moderate level of creativity would also be required to either diversify products or improve sales through interesting marketing techniques. Other adjectives commonly ascribed to lifestyle ventures are “people-centered”, “friendly”, “caring”, and “customer-driven”, all of which are directly associated with the Agreeableness and Extraversion traits in the big 5 model (Morris et al. 12). Words like “integrity”, “responsible”, “dependable”, and “independent” relate to both Conscientiousness and Openness to Experience (Morris et al. 12). Low neuroticism is also related to all the above mentioned words. As with survival ventures, risk-taking was not associated with lifestyle ventures, indicating that a high risk propensity is not relevant even for lifestyle entrepreneurs. 3 Managed growth ventures Managed growth ventures usually have a workable business model and owners seek stable growth over time. This growth is achieved in several ways including occasional new product launches, periodic entry into new markets, expansion of facilities, locations and staff, and development of a strong local and regional brand. Entrepreneurs reinvest into the business fairly regularly and there is continuous yet moderate regional growth which guides ongoing business development (Morris et al. 6). ESE is a highly relevant trait for managed growth entrepreneurs as these types of ventures are often associated with the word “competitive” and “strategic” – skills that an entrepreneur needs to believe s/he has before starting the venture (Morris et al. 12). A high achievement motivation will also enable entrepreneurs to compete in this market. Additionally, creativity is essential for designing new products, creating good marketing campaigns, entering new markets, and other expansion activities. In terms of the big 5 traits, those relevant for managed growth entrepreneurs are very similar to those required for lifestyle ventures. More specifically, qualities like “people-centered”, “friendly”, “community-focused”, and “nurturing” are associated with managed growth ventures which are linked to high levels Agreeableness and Extraversion. “Dependable” and “integrity” are also ascribed to these types of ventures, which require a moderate to high level of Conscientiousness. The innovation and expansion aspect of managed growth ventures relates to a high level of Openness to Experience. As with the previous two ventures, a high-risk propensity is not relevant here as “risk-taking” was not ascribed to the organizational identity of managed growth ventures. 4 Aggressive growth ventures: Aggressive growth ventures are colloquially referred to as gazelles. They are typically technology-based ventures with strong innovation capabilities. Aggressive growth entrepreneurs seek exponential growth and are funded by equity capital. The launch of these ventures is driven by opportunities rather than necessity and is usually set up by a team of founders seeking to create new markets. Their market focus is typically large scale, i.e., national or international, and they often become candidates for initial public offerings or acquisition (Morris et al. 6). Of all the types of ventures, aggressive growth ventures would require the highest levels of all traits barring neuroticism, given the challenging nature of the market. ESE is essential for entrepreneurs to believe that they can survive in a market that is often described as “disruptive”, “competitive”, and “intense” (Morris et al. 13). A high nAch is also important for the same reasons.

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Since founders of these types of ventures are usually looking to create new markets, high levels of creativity are required to identify opportunities and create inventive products or services. An openness to experience is also important for this reason. Additionally, Morris et al. found that problem solving is an important quality for aggressive growth entrepreneurs. To this end, creativity and openness to experience are important for the entrepreneur to devise innovative solutions to any challenges that may come up. Entering a new market also poses a high risk as there is a strong possibility that the product will fail, hence a high risk propensity is also necessary for aggressive growth entrepreneurs. Since ventures like these require large amounts of funding, a high level of extraversion is required so entrepreneurs can network with the right people and pitch their ideas to possible investors. Agreeableness is not necessarily relevant for aggressive growth entrepreneurs to be successful. In fact, it is possible that the highly intense and competitive nature of the market would make aggressive growth entrepreneurs less agreeable than any other type of entrepreneur. Finally, as with all ventures, low levels of neuroticism are essential for the success of aggressive growth entrepreneurs. •

How would you classify the ventures set up by the two entrepreneurs in OYO and MnM?

Contextualizing traits Through this chapter so far we have established a relationship between entrepreneurship as a whole, youth entrepreneurship, and certain psychological traits. This relationship was broken down further to explore how traits relate to different types of entrepreneurs. This final section of the chapter will examine how the environment fosters different kinds of entrepreneurial ventures, and how they affect psychological traits manifested in an individual. In recent years, increased importance has been given to the private sector in Africa. Entrepreneurship is rising rapidly in the continent. According to the African Economic Outlook 2017, a report jointly produced by the African Development Bank Group (Af DB), the Organization for Economic Cooperation and Development (OECD), and the United Nations Development Programme (UNDP), 22% of the working-age population in Africa are starting or running new businesses. This is the highest in the world as compared to 18% in Latin America and 13% in Asia. Additionally, 80% of Africans view entrepreneurship as a good career opportunity. African entrepreneurs are also younger than in other developing regions with a median age of 31 years old, compared to 35 in Latin America and 36 in East Asia. African women are also twice as likely to start a business as women elsewhere (Pharramond). All these factors make the African environment highly conducive to fostering a high ESE as Klyver & Thornton (29) found that ESE is positively related to the cultural legitimacy of entrepreneurship as a career. A lot of the literature centered on entrepreneurship in Africa has focused on exploring entrepreneurs’ motivations. In Uganda, for example, entrepreneurs indicated that “making a living” or “making money” is the most important motivator for their business ownership. 61% of Ugandan entrepreneurs also preferred business ownership over working for a company because it gave them autonomy, freedom, and independence (Chu et al. 298). Results from a study conducted by Chu et al. supported this by showing that the top two motivations for Ghanaian and Kenyan entrepreneurs were “to increase

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my income” and “to create a job for myself ” (305). Scarcity is also an important motivator for African entrepreneurs. According to one study, Ghanaian entrepreneurs often invest in a business because they have few other options. “The majority of Ghanaians cannot entrust their savings to a financial institution. In fact, in Ghana, few financial institutions provide interest-bearing investments for individual savings. With no stock market and interest rates that fall behind the rate of inflation, Ghanaians often have no choice but to put money in their own businesses and hope for a reasonable return on their investment” (Chu et al. 298). Thus, most firms in Africa are micro enterprises started out of necessity, and rarely grow to become bigger than medium-sized enterprises. Data also shows that African entrepreneurs are largely running small and medium enterprises. According to Sriram & Mersha (258): In Africa, SMEs accounted for 3.2 million jobs and 18% of Kenya’s GDP in 2003 and were responsible for 95% of Nigeria’s manufacturing in 2005. Further, 70% of Ghanaian firms employed fewer than five people and 70% of Ghanaians are employed in microenterprises (Benzing and Chu, 2009). In South Africa, over 90% of formally registered businesses in the country are small, medium and micro enterprises and they account for almost half the country’s GDP and nearly a fifth of employment (Robinson, 2004). An earlier study reported that only 2% of African businesses had more than 10 employees (Spring and McDade, 1998). Going back to the classification created by Morris et al., it can be concluded from this that African ventures are largely survival or lifestyle ventures, mostly due to scarcity. Scarcity, however, greatly boosts creativity. A study conducted in 2015 showed that, across 6 different experiments, respondents in conditions of induced scarcity were able to come up with more novel product usages as compared to those in conditions of induced abundance (Mehta & Zhu 779. This is because scarcity forces people to think beyond the traditional way of solving a problem. The African environment is, therefore, highly conducive to increasing creativity, which is showcased by entrepreneurs like Rahma Bajun from the beginning of this section, in whose case scarcity of jobs acted as a primary motivator to setting up her own business. In terms of the Big 5 personality traits, Schmitt et al. (197–198) studied how each trait differed across 56 nations. The results showed that Africa scored significantly higher on Agreeableness and Conscientiousness as compared to other regions in the world. Additionally, it scored lower on Openness to Experience and Neuroticism (198). Finally, it was found that Africa did not differ significantly on Extraversion from other regions in the world (198). Similarly, Mata et al. (235) conducted a study examining the relationship among age, gender, and risk propensity across 77 nations. This study showed that ecologies with scarce resources and therefore heightened competition, much like that of Africa, could lead to increased propensity for risk taking regardless of age and gender.

Summary In this section, we have seen that there are certain psychological traits that can help entrepreneurs be more successful. Literature shows that there is a strong positive correlation between high ESE as well as a high nAch on entrepreneurial behavior and firm

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outcomes. Further, high ESE and high nAch are positively related to risk propensity, which is an important trait for entrepreneurs. Entrepreneurs are also more creative than non-entrepreneurs. Finally, in terms of the big 5 personality traits, there is strong evidence supporting the positive effect of openness to experience and conscientiousness on entrepreneurial behavior. On the other hand, entrepreneurs are less Agreeable and Neurotic as compared to non-entrepreneurs. The literature on Extraversion, however, is conflicted because some entrepreneurs need to be extraverted in order to manage relationships with partners, investors, and customers, and others can afford to stay away from systems that require them to be overly social. The relationship between psychological traits and entrepreneurial outcomes is mediated by types of entrepreneurial ventures. The 4 types of ventures discussed in this chapter were survival, lifestyle, managed growth, and aggressive growth ventures. The traits that are important for all venture types are ESE, nAch, creativity, openness to experience, conscientiousness, extraversion, and low neuroticism. Risk propensity, however, is a trait that is important only for aggressive growth entrepreneurs. The relationship between psychological traits and types of ventures is further mediated by culture and the environment. In general, entrepreneurship in Africa is booming. As a result, ESE is high because the cultural legitimacy given to entrepreneurship fosters ESE. The African entrepreneurial environment is also characterized by scarcity, which fosters creativity. Compared to other regions in the world, Africa is more Agreeable and Conscientious. It is, however, less Open to Experience and Neurotic (198). Africa also has a higher risk propensity than other parts of the world. Like in Africa, there is a global increase in the number of youth ventures/entrepreneurs. However, those in low-resource settings face numerous challenges such as lack of guidance, inadequate funding, and limited networks. Hence, it is essential to train young people and foster in them the traits required to build and run successful ventures. The answer to the question “what makes a good entrepreneur?”, therefore, is not a straightforward one and the relationship between traits and entrepreneurship is one mediated by several factors such as the classification of ventures and cultural context.

Note

* This chapter was written by Karuna Banerjee, Programme Analyst at the Centre for Social and Behaviour Change, New Delhi, India.

References Ahlin, B., Drnovsek, M. & Hirich, R. D. “Entrepreneurs’ Creativity and Firm Innovation: The Moderating Role of Entrepreneurial Self-Efficacy.” Small Business Economics 43.1 (2013): 101–117. Alton, L. Are Millennials More Or Less Likely To Start Their Own Businesses?. [online] Forbes.com. (2017) Available at: https://www.forbes.com/sites/larryalton/2017/02/15/are-millennials-moreor-less-likely-to-start-their-own-businesses/#257426461301 [Accessed 21 Dec. 2019]. BNP Paribas. Today’s Elite Entrepreneurs: Searching For Positive Impact. Print. Global Entrepreneur Report (2018). Botella, J., Narváez, M., Martínez-Molina, A., Rubio, V. J. & Santacreu, J. “A Dilemmas Task for Eliciting Risk Propensity.” The Psychological Record 58.4 (2008): 529–546. Brunstein, J. C., & Heckhausen, H. “Achievement Motivation.” Motivation and Action, 137–183 (2008) Cambridge, UK: Cambridge University Press.

Understanding youth entrepreneurs 191 Chanchani, M. “Ritesh Agarwal’s Journey from Being a SIM-Seller to the Helm of OYO Rooms.” The Economic Times (2015). https://economictimes.indiatimes.com/small-biz/entrepreneurship/ ritesh-agarwals-journey-from-being-a-sim-seller-to-the-helm-of-oyo-rooms/articleshow/ 48322588.cms. Chauhan, K. & Aggarwal, A. “Youth Entrepreneurship: The Role and Implications for the Indian Economy.” Amity Journal of Entrepreneurship 2.2 (2017): 1–11. Chen, C. C., Greene, P. G. & Crick, A. “Does Entrepreneurial Self-Efficacy Distinguish Entrepreneurs from Managers?” Journal Of Business Venturing 13.4 (1998): 295–316. Chu, H. M., Benzing, C. & McGee, C. “Ghanaian and Kenyan Entrepreneurs: a Comparative Analysis of Their Motivations, Success Characteristics and Problems.” Journal of Developmental Entrepreneurship 12.3 (2007): 295–322. Collins, C. J., Hanges, P. J. & Locke, E. A. “The Relationship of Achievement Motivation to Entrepreneurial Behavior: A Meta-Analysis.” Human Performance 17.1 (2004): 95–117. Cumberland, D. M., Meek, W. R. & Germain, R. “Entrepreneurial Self-Efficacy and Firm Performance in Challenging Environments: Evidence from the Franchise Context.” Journal Of Developmental Entrepreneurship 20.01 (2015): 1550004. Densberger, K. “The Self-Efficacy and Risk-Propensity of Entrepreneurs.” Journal of Enterprising Culture 22.04 (2014): 437–462. Diener, E. & Lucas, R. E. “Personality traits”. In R. Biswas-Diener & E. Diener (Eds), Noba Textbook Series: Psychology. 2019. Champaign, IL: DEF Publishers. Fillis, I. & Rentschler, R. “The Role of Creativity in Entrepreneurship.” Journal of Enterprising Culture 18.01 (2010): 49–81. Gist, S. “Meet Rahma Bajun; Entrepreneur and Founder of MnM Clothing Line.” Saga Gist – Top Source for Nigeria News. (2020). https://www.sagagist.com.ng/2019/06/meet-rahma-bajun-entrepreneurand.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+sagagist+%28SagaGist%29 Gupta, N. Personal Interview. (30 Jan. 2020). Hallak, R., Lindsay, N. J. & Brown, G. “Examining the Role of Entrepreneurial Experience and Entrepreneurial Self-Efficacy on SMTE Performance.” Tourism Analysis 16.5 (2011): 583–599. Kerr, S. P., Kerr, W. R. & Tina Xu. “Personality Traits of Entrepreneurs: A Review of Recent Literature.” Foundations and Trends in Entrepreneurship 14.3 (2018): 279–356. Klyver, K. & Thornton, P. H. The Cultural Embeddedness of Entrepreneurial Self-Efficacy and Intentions: A Cross-National Comparison. (2010). http://citeseerx.ist.psu.edu/viewdoc/ download?doi=10.1.1.470.9310&rep=rep1&type=pdf. Lagosian. “Rahma Bajun | Founder & Creative Director, MnM Clothing Line”. Audio Blog Post. Lagosian in New York City. Qwenu, (4 Mar. 2019). Landqvist, H. & Stålhandske, P. “Risk Propensity of Entrepreneurs – a Study of Underlying Factors in Background and Personality in Comparison with Managers.” University Of Gothenburg, 2011 https://gupea.ub.gu.se/handle/2077/26609. Mata, R., Josef A. K. & Hertwig, R. “Propensity for Risk Taking across the Life Span and around the Globe.” Psychological Science 27.2 (2016): 231–243. Mehta, R. & Zhu, M. “Creating When You Have Less: The Impact of Resource Scarcity on Product Use Creativity.” Journal of Consumer Research 42 (2016): 767–782. Modgil, S. “22 Years, 6 Failures and One Hell of a Startup; And Ritesh is Not Stopping Yet! - Inc42 Media.” Inc42 Media. (2016). Morris, H. M., Neumeyer, X., Jang, Y. & Kuratko, D. F. “Distinguishing Types of Entrepreneurial Ventures: An Identity-Based Perspective.” Journal of Small Business Management 56.3 (2016): 1–22. Newman, A., Obschonka, M, Schwarz, S, Cohen, M. & Nielsen, I. “Entrepreneurial Self-Efficacy: A Systematic Review of the Literature on Its Theoretical Foundations, Measurement, Antecedents, And Outcomes, And An Agenda For Future Research.” Journal Of Vocational Behavior 110 (2018): 403–419. Patel, A. Personal Interview. (28 Jan. 2020).

192  Special topics on African entrepreneurship Petrakis, P. E. & Konstantakopoulou, D. P. Uncertainty in Entrepreneurial Decision Making. New York: Palgrave Macmillan, a division of Nature America Inc., 2015. Pharramond, H. “Africa is Still Rising and Entrepreneurs are a Driving Force | SOCAP.” Social Capital Markets | SOCAP (2019). Potabatti, P. S. & Boob, N. D. “Youth Entrepreneurship: Opportunities and Challenges in India.” IOSR Journal of Research and Method in Education 5.2 (2015): 55–59. Ranwala, R. S. & Dissanayake, D. M. N. S. W. “Big Five Personality Traits and Entrepreneurial Inclination: A Study Based on Sri Lankan Undergraduates” Social and Basic Sciences Research Review 4.4 (2016): 84–98. Schmitt, D. P. et al. “The Geographic Distribution of Big Five Personality Traits.” Journal of CrossCultural Psychology 38.2 (2007): 173–212. Sriram, V & Mersha, T. “Stimulating Entrepreneurship in Africa.” World Journal of Entrepreneurship, Management and Sustainable Development 6.4 (2010): 257–272. Tang, J. & Tang, Z. “The Relationship of Achievement Motivation and Risk-Taking Propensity to New Venture Performance: A Test of the Moderating Effect of Entrepreneurial Munificence.” International Journal of Entrepreneurship and Small Business 4.4 (2007): 450. Tsui, M. Tsui, Megan. “Entrepreneurship in College: From Planning to Startup Funding.” AffordableCollegesOnline.org. 2020. Ward, T. B. “Cognition, Creativity, and Entrepreneurship.” Journal of Business Venturing 19.2 (2004): 173–188. Wu, S., Matthews, L., Dagher, G. K. “Need for Achievement, Business Goals, and Entrepreneurial Persistence.” Management Research News 30.12 (2007): 928–941 Xu, H., and Ruef, M.. “The Myth of the Risk-Tolerant Entrepreneur.” Strategic Organization 2.4 (2004): 331–355. Zampetakis, L. A., Gotsi, M., Andriopoulos, C. & Moustakis, S. V. “Creativity and Entrepreneurial Intention in Young People.” The International Journal of Entrepreneurship and Innovation 12.3 (2011): 189–199. Zhao, H. & Seibert, S. E. “The Big Five Personality Dimensions and Entrepreneurial Status: A MetaAnalytical Review.” Journal of Applied Psychology 91.2 (2006): 259–271. Zhao, H., Seibert, S. E., and Hills, G. E. “The Mediating Role of Self-Efficacy in the Development of Entrepreneurial Intentions.” Journal of Applied Psychology 90.6 (2005): 1265–1272.

12 Technologies enabling entrepreneurship in Africa*

Introduction Bottom of the pyramid (BOP) markets represent institutionally complex landscapes (Mair, Marti & Ventresca, 2012) characterized by economic poverty and severe resource constraints (Onsongo, 2019). The complexity arises from institutional voids, both market and social, and differ significantly from industrialized business contexts (Khoury & Prasad, 2016). Technology on the other hand, has been a major global factor, particularly the role technology plays in creating and sustaining global markets (Friedman, 2006). An especially impactful example of this type of technology is the mobile phone, when applied to institutionally complex markets. It has been remarkable to observe the spread of mobile phone use in rural Africa which has, in many cases, outpaced the spread of such necessities as electricity and running water (Etzo & Collender, 2010). These technologies leapfrogged traditional landline telecommunication enabling regions like Africa to match the developed world’s ability to communicate over long distances (Fong, 2009). Mobile telecommunications help to fill institutional voids and structural holes, allowing nascent entrepreneurs in BOP markets to increase the flow of critical high-quality information (Granovetter, 1973) and leverage existing weak ties (see Chapter 7), leading to better and greater market access. This has the potential to empower individuals to become opportunity-motivated entrepreneurs, characterized by growth, job creation, and economic freedom, rather than being forced into necessity-motivated entrepreneurship (NME), characterized by minimal growth, small size, and limited options (Langevang, Namatovu & Dawa, 2012; McMullen, Bagby & Palich, 2008). Telecommunication technology has been available in most developed economies for a century now, and we often take for granted that people can communicate seamlessly with even the most extended individuals in their network (Roller & Waverman, 2001). Prior to the proliferation of mobile phones, most entrepreneurs in markets such as Africa were very much limited by lack of access to communication technology. An entrepreneur’s market was limited by geography. Finding a new supplier required word-of-mouth references and innovation was slow to spread. One can see how it would be nearly impossible for an average entrepreneur in a rural setting to grow a venture in the face of such network, and, by extension, market limitations. All these factors limit venture performance and serve as barriers to scale. Presently, an entrepreneur operating in a developed economy is not limited by the lack of access to the communication technology necessary to reach customers, employees, and suppliers, even if they fall outside the entrepreneur’s network. A brief internet search or, traditionally,

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referencing the phonebook, would quickly yield a contact number. This was not true for entrepreneurs in most developing nations, prior to the deployment of mobile phone business model and network infrastructure. Policymakers, the media, and mobile phone companies have long touted the potential for mobile telecommunication to alleviate poverty in such markets (Corbett, 2008) and the widespread adoption of mobile phone technology has coincided with more than one billion people rising out of extreme poverty (Radelet, 2015). There is still a limitation on understanding how technology affects nascent entrepreneurial behavior in these markets, given that most technological innovation lacks capacity and can be prohibitively expensive for adoption (Akemu, Whiteman & Kennedy, 2016). Landline telecommunication never really penetrated African markets (Aker & Mbiti, 2010), so mobile telecommunication offers a unique opportunity to observe a rapid shift in both the structure of social networks and the degree of information asymmetry, which can directly impact the rate and nature of entrepreneurship in the region. It is no surprise that the economic benefits of connectivity highlighted in current research generally stem from increases in market efficiency that lead to producer and consumer welfare (Aker, 2008; Aker & Mbiti, 2010; Jensen, 2007; Klonner & Nolen, 2008). Past studies have found that telecommunication technology is positively related to various economic outcomes (Hardy, 1980; Norton, 1992) and Waverman, Meschi & Fuss (2005) find similar economic effects for mobile telephony. This technology-enabled market efficiency influences entrepreneurship and is thus positively related to broader economic growth (Klapper & Love, 2011; Vallierie & Peterson, 2009). Much more complex mechanisms through which entrepreneurship is linked with technology adoption to economic development, are at play, especially in Africa, whose economic activities are often overlooked in academic studies (Afutu-Kotey, Gough & Owusu, 2017, p. 4; Walsh, 2015).

The African context More than a quarter of the world’s population operates in BOP markets, where availability and affordability of basic products is uncertain (Hammond et al, 2007; Karnani, 2007). The inefficiencies in these markets, caused by exploitative intermediaries capitalizing on asymmetric information (Huang & Rozelle, 1998; Prahalad & Hammond, 2002; Viswanathan & Rosa, 2007), are difficult to overcome, especially when network access is limited. African entrepreneurs, in particular, struggle to establish and maintain effective networks (Barr, 1999; Kiggundu, 2001; Ramachandran & Shah, 1999) in what is already a difficult environment for business (Koop, de Reu & Frese, 2000), as discussed in Chapter 1. Such macro- and micro-conditions engender spatial, temporal, informational, or financial disconnects, known as structural holes (see Chapter 7), which ultimately slow market exchanges and the flow of goods and information (Tarafdar & Singh, 2011). In such markets, there exists a misconception that people are not very entrepreneurial (Naudé, 2010). It is probably assumed that if they were more entrepreneurial, there would be more small businesses, more jobs, more tax revenue and, in short, more economic development. To the extent that this has not happened, it seems unlikely that lack of entrepreneurial spirit is to blame: there are, on average, more entrepreneurs per capita in developing nations than in developed nations (De Soto, 2001). Many families sell, produce, or livestock from their farms. The average village offers every kind

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of basic service: shoe repair, barbershops, car washes, restaurants, etc. Entrepreneurial activity is an important source of cash income in developing nations because jobs are scarce: government positions, in particular, are cherished for their regular – or relatively regular – paychecks and the access to credit and services that may be available as a result (Heeks, 2001). It is, therefore, not the quantity of entrepreneurs, but the quality and scale of each entrepreneurial opportunity that impacts the region’s overall economic development and growth. Despite its salience to medium- and long-term regional growth (Asongu, 2013; Brixiova, Ncube & Bicaba, 2015) entrepreneurship has been largely unexplored in developing contexts (Asongu & Biekpe, 2017). This section explores the role of technology access in facilitating improved information access (Kanungo, 2003) and subsequent socioeconomic processes (Avgerou, 2008) at the macroeconomic level (Asongu & Biekpe, 2017). Explicating the entrepreneurial process as such a mechanism, we can further extend our understanding of entrepreneurship in Africa (King & McGrath, 1999; Kiggundu, 2001) and the crucial role that technologies have played and will continue to play. Technologies impacting the entrepreneurship process From a sociological perspective, new venture formation is often conceptualized as a function of opportunity structure, resource access including capital and information, and entrepreneurial motivation (Aldrich & Zimmer, 1986). Entrepreneurs do not function within a vacuum but are subject to the idiosyncrasies of their task environment (Dess & Beard, 1984). These fundamental concepts are often taken for granted when we study entrepreneurship in developed economies, but they help us to more fully understand the limitations faced by entrepreneurs in developing contexts, such as Africa. This is primarily true because our networks determine the number and quality of the opportunities available to entrepreneurs and impact the resources they can access. As a result, when conceptualized through a sociological framework perspective, an entrepreneur represents an embedded actor in a complex network of continuing social relationships (Aldrich and Zimmer, 1986, p. 8) which constitute the market. These relationships may include customers, suppliers, service providers, creditors, government agencies, or any number of additional stakeholders. The strength of these ties, and by extension the value of the market, depends on the level, frequency, and reciprocity of relationships between individuals varying from weak to strong. Entrepreneurs typically access a wide range of service providers, suppliers, investors or lenders, and customers where mobile technologies and internet access can fundamentally change in the magnitude and nature of how entrepreneurs shape their network. Mobile phones can help to strengthen ties, by overcoming spatial isolation and increasing the frequency of contact. Better market access opens a variety of opportunities to nascent entrepreneurs, and larger, more efficient markets would presumably increase the quality of those opportunities. Mobile technologies can therefore impact entrepreneurship due to three major reasons. It (1) reduces asymmetry of critical information necessary to recognize, refine, and exploit entrepreneurial opportunities, (2) thereby improving inputs to the entrepreneurial search process, and (3) impacting the process outputs and outcomes, i.e. growth-orientation of the opportunities, and subsequently its contribution to regional economic growth.

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Information asymmetry Since entrepreneurs need to be connected to individuals in positions to provide timely and accurate information, it is important to note that mobile phones not only facilitate the initial connection but enable continuous information access that is both timely and verifiably accurate. In fact, studies have found changes and amplifications to network structures of African entrepreneurs due to mobile phone purchases, which has then led to as much as 30 percent venture growth (Donner, 2006a). Household and venture-level exposure to risk can be mitigated through access to larger networks and more timely and accurate information, critical not only in sparking entrepreneurship, but also for coping with natural disaster, health epidemics, and sociopolitical conflicts (de Bruijn, Brinkman & Nyamnjoh, 2009). Moreover, access improves saving and credit (World Bank, 2013), financial safety nets communities (Ruth & Hsiung, 2007), and exogenous shock support (Rosenzweig & Binswanger, 1992) – all lower perceptions of financial risk which may hinder entrepreneurial activities. Furthermore, mobile telecommunication additionally strengthens familial, community, and industry support which has been shown to positively influence venture growth, particularly in the agriculture sector (Bandiera & Rasul, 2006; Conley & Udry, 2010; Khavul, Bruton & Wood, 2009). Mobile phones also contribute to increased social capital and cohesiveness within communities, as found in South Africa and Tanzania (Goodman, 2005). Even between communities, information asymmetry can be exacerbated in underdeveloped countries if the disparity between the wealthy and the poor is great (Abramovitz, 1986; Bernard & Jones, 1996; Kwan & Chiu, 2015). In such contexts, mobile communications may provide instances for Kirznerian arbitrage opportunities. We see that search costs reductions through mobile telecommunication increases the sum of consumer and producer surplus, allowing alert entrepreneurs to create value (Kirzner, 1973). Entrepreneurial search This technology-driven surplus generally stems from increases in market efficiency that lead to producer and consumer welfare, as seen in agricultural and labor markets (Aker, 2008; Aker & Mbiti, 2010; Jensen, 2007; Klonner & Nolen, 2008). For an example, as shown in Figure 12.1, note that entrepreneurs may supply goods and services to benefit both themselves and their consumers, thereby creating sustainable surplus. In low production zones, consumers gain (1) and (2), while entrepreneurs’ trade-off (1) for gaining (3). This represents a net value co-creation of (2) + (3), a transfer of (1) from entrepreneurs to their customers. Whereas, in a high production region, customers lose (4) + (5), while entrepreneurs gain (4) and forego (6). A transfer of (4) now moves from customers to entrepreneurs. Notice also, the ability to arbitrate between two regions, at Q* and Q’ depends on the entrepreneur’s ability to search with lower costs (δ represents change in quantities due to shifts in supply). Given that information asymmetry and social cohesion limits such opportunity recognition, mobile telecommunications overcome this isolation, thereby unlocking potential to be entrepreneurial and create value as a result. In other words, whereas, nascent entrepreneurs are constrained by information asymmetry such that they refrain from taking initiatives to create or contribute to existing and aggregate business cycles (Asongu & Nwachukwu, 2018), mobile telecommunication has the

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Figure 12.1  Entrepreneurial search for arbitrage opportunities.

potential to overcome this constraint by modulating informational flow and building capabilities (Mchombu, 2003). These technologies further open up access to key records and data, and have the potential to improve the functioning of any number of underlying public institutions in African nations, such as the potential to solve the challenge of land registry. This is particularly exciting considering the financial capital that could be made available to aspiring entrepreneurs to exploit growth-oriented opportunities (Heeks, 2001; Misuraca, 2007; Oxhorn, Tulchin & Selee, 2004). Beyond this, there exists evidence that mobile telecommunications are a major difference maker for entrepreneurs (Aker & Mbiti, 2010; Hardy, 1980). For small-scale firms in South Africa and Egypt, mobile phones were associated with increased profits, more efficiency, time savings, and better communication with suppliers (Samuel, Shah & Hadingham, 2005). The efficiency of these markets has also increased, which is apparent from the reduction in the variance of equilibrium prices (Reinganum, 1979; MacMinn, 1980) positively affecting both consumers and producers (Jensen, 2007; Aker, 2008). Better price dispersion (Aker & Mbiti, 2010; Jensen 2007; Overa, 2006), and market-regulated behavior from market agents (Aker, 2008; Muto & Yamano, 2009), is particularly beneficial for entrepreneurs in perishable commodities, such as agricultural products and produce (Abraham, 2006; Aker & Mbiti, 2010; Muto & Yamano, 2009). Lowered search costs and improved certainty regarding the accuracy of quoted prices leads to less spoilage, making such endeavors Pareto-improving (Aker & Mbiti, 2010) thus, creating value for both entrepreneurs and their customers. For instance, in rural India, the fisheries sector benefited from mobile phone technology, when higher coverage led to significant reduction in fish price dispersion and a decline in wastage ( Jensen, 2007). In the grain markets of Niger, mobile phone access reduced price dispersion by 10 percent (Aker & Mbiti, 2010). Rural farmers and fishermen often use mobile phones, particularly text messages, to stay in touch with markets and to cut travel costs, gaining more real-time price knowledge, reducing the bargaining power of middlemen that add no beneficial consumer value (Donner, 2004).

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Entrepreneurial motivations Entrepreneurial opportunities are situations where new goods, services, or organizing methods can be introduced by entrepreneurs for their customers, typically for profit (Eckhardt & Shane, 2003). These opportunities are organized and brought to markets, by individuals, either alone or collectively. As such, opportunity exploitation can be thought of as a cognitive act (Shane, 2003) largely being impacted by networks. This perspective explains why information is so important to recognizing and exploiting an entrepreneurial opportunity (Eckhardt & Shane, 2003; Venkataraman, 1997). Opportunity exploitation involves more robust framing and development to achieve viability and overcome the uncertainty inherent to the venture development process (Eckhardt & Ciuchta, 2008). The outcome of these processes, and the types of growth prospects of said opportunities, are thus very much a function of information and network access. Encouraging opportunity-motivated entrepreneurship (OME), or high growth-oriented entrepreneurship, should lead to more job opportunities, but the mobile phone industry itself has generated significant job growth. Selling phones, chips, calling plans, parts, data packages, and other products is a sizable, labor-intensive industry. There is also an array of tangentially related industries that are only possible through mobile telecommunication access: mobile money and payments being one of the most impactful and fastest growing, but also ride-sharing or on-demand services, like delivery and e-commerce. Mobile phones are a significant driver of job growth and creates options for individuals who may have been pushed into necessity-motivated, or low-growth, subsistence entrepreneurship. Although large-scale studies, explicitly focusing on mobile phone impact on job creation, have been limited, (Klonner & Nolen, 2008) in Kenya, for example, the private transportation and communications sector rose by 130 percent between 2003 and 2007 (CCK, 2008) coinciding with mobile phone proliferation (Aker & Mbiti, 2010). Entrepreneurs in Africa are often faced with the need to both educate and train their employees to keep up with global competitiveness and skills (Kiggundu, 2002). Digital technologies with internet network capabilities provide a wide array of options and alternatives, not only for training employees on trade, but perhaps even more directly, for entrepreneurs to educate themselves on best practices on management, operations, and finance, amongst others. The resources that become available to an individual entrepreneur, or an emerging small business when they have access to the internet are virtually unlimited – marketing ideas, marketing tools, customer surveys, financing ideas, actual capital investment via websites like GoFundMe, Indiegogo or KickStarter, IT solutions and organizational tools, as well as a plethora of hardware or software troubleshooting, training, and motivation techniques. Taken together, the breadth and diversity of informational resources available on the internet, enabled by accessible devices, have the cumulative power to directly enhance an entrepreneur’s perceived and actual self-efficacy. Emerging themes Sub-Saharan Africa is the natural setting for studying the impact of technologies for entrepreneurship. First, telecommunication technology has the most dramatic effect on BOP actors, and Sub-Saharan Africa has the highest ratio of individuals in this

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category per capita (Radelet, 2015). Second, landline telecommunication never really penetrated most African markets. And finally, the artifact of interest in our study, the mobile telephone, has achieved remarkable penetration in African markets, even in very rural areas, so entrepreneurs in this context went from very nearly zero access to telecommunication technology, to nearly ubiquitous access in just a few years (Aker & Mbiti, 2010). For instance, in Ghana in 2002, roughly 8 percent of individuals owned mobile phones. By 2014, 83 percent of Ghanaians owned mobile phones (Pew Research Center, 2017). Overall, African countries were in a position to adopt the newest and most advanced technologies, skipping or leapfrogging the expense associated with deploying capital-intensive legacy technologies (Comin & Hobijn, 2004). Mobile phone technology, as a key example of technological leapfrogging, is much cheaper to build and instantly upgrade the phone service available in developing nations to that of developed nations. The cost of landlines in developed countries was very expensive but developing nations did not have to make a sizable investment in landlines, instead developing other necessary infrastructure. In some villages, the local mobile service tower informally serves as a charging dock for community members who have no other way to charge their mobile devices. The multiplier effects abound, second-hand smart phones are beginning to flood the market as consumers in developed nations continuously upgrade to newer, more advanced models. While e-waste dumping might become an increasing concern in Africa, related aftermarket repair industries are flourishing (Amankwah-Amoah, 2016) and are capable of delivering smartphones to even the most remote markets. Such technological access has far-reaching effects that we are only beginning to understand (Donner, 2008). For example, Sub-Saharan Africa has the largest growth in mobile phone use (Etzo & Collender, 2010), and has long been home to high levels of NME (Langevang, Namatovu & Dawa, 2012; Naude, 2010; Rosa, Kodithuwakku & Balunywa, 2008). We can analyze entrepreneurial motivation with datasets compiled from the Global Entrepreneurship Monitor’s (GEM) Adult Population study, and the International Telecommunication Union’s (ITU) World Telecommunication/ICT Development Report. Looking at macro-level effects of mobile adoption on entrepreneurship, as shown in Figure 12.2, it is evident that for many African nations, the relationship between mobile technology adoptions, controlled for population, on the ratio of opportunity to NME was generally positive. In order to evaluate this trend, collected data from the GEM Adult Population Survey from 2001 to 2015, for both national and individual level responses (Acs, 2008) was tested. This survey represents the predominant data source for both the degree, and nature, of global entrepreneurship (Bosma & Harding, 2007; Williams, 2008) and has been used frequently prior literature to study entrepreneurial efforts in Africa (Bosma & Levie, 2010; Kropp, Lindsay & Shoham, 2006). Necessity-motivated entrepreneurship (NME) is a measure for the driver of entrepreneurship and represents the national percentage of those involved in entrepreneurial activity due to no other available alternatives for economic income, while on the other hand, opportunity-motivated entrepreneurship (OME) represents the national proportion of those involved in entrepreneurship who are driven by the value of the opportunity as compared to other alternative courses of action. Studies have often employed a ratio of the two (OME:NME) as a measure for entrepreneurship studies with a variety

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9.5

Angola Malawi Uganda Expon. (Angola) Expon. (Malawi)

Botswana Namibia South Africa Expon. (Botswana) Expon. (Namibia)

Ghana Nigeria Zambia Expon. (Ghana) Expon. (Nigeria)

OME:NME (RATIO)

7.5

5.5

3.5

1.5

–0.5 1.4

1.5

1.6

1.7

1.8

1.9

2

2.1

2.2

ADOPTION RATE (LOG MOBILE SUBSCRIPTION PER 100 PEOPLE)

Figure 12.2  Between country comparison of the effect of mobile adoption to OME-NME ratio. Source: Author team’s analysis on data from Global Entrepreneurship Monitor’s (GEM) Adult Population study, and the International Telecommunication Union’s (ITU) World Telecommunication/ICT Development Report.

of heterogeneous theoretical outcomes (Maritz, 2004; Perunovic, 2005; Coffman & Sunny, 2020). Moreover, collected data on mobile phone subscriptions per 100 people, for each country, from the ITU, World Telecommunication/ICT Development Report and database (also collected by the World Bank) shows rates of mobile phone adoption by country. See Figures 12.3.a and 12.3.b for the growth of mobile phone penetration between 2000 and 2014. This data source and related measure has been used in prior studies in this area (Asongu & Biekpe, 2017). Although measures of mobile penetration and use are notoriously unreliable in Africa ( James & Versteeg, 2007), these datasets have been leveraged in traditional approaches and past research methodologies, used previously to identify adoption patterns for mobile technology (Orlikowski & Iacono, 2001). This include studies in various African contexts, including South Africa, (Brown et al, 2003; van Biljon & Kotze, 2007) Nigeria, (Adeoti & Adeoti, 2008) Kenya, (Meso, Musa & Mbarika, 2005) Guinea, (Kaba et al, 2006) Botswana, Uganda, and Ghana (Scott, McKemey & Batchelor, 2004).

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Figure 12.3.a  Mobile penetration in Africa – 2000. Source: Author team’s map created from data from Global Entrepreneurship Monitor’s (GEM) Adult Population study, and the International Telecommunication Union’s (ITU) World Telecommunication/ICT Development Report.

Figure 12.3.b  Mobile penetration in Africa – 2014. Source: Author team’s map created from data from Global Entrepreneurship Monitor’s (GEM) Adult Population study, and the International Telecommunication Union’s (ITU) World Telecommunication/ICT Development Report.

202  Special topics on African entrepreneurship

Implications for policymaking and practice The adoption of emerging technologies improves relationships for entrepreneurs with stakeholder networks for the entrepreneurial agent, such as access to suppliers, customers, and governance methods, while allowing agents to overcome informational and resource constraints that serve as institutional barriers to growth-based entrepreneurial opportunities and development. This trend also has macroeconomic implications, beyond individual or firm-level entrepreneurship. With an impetus for government intervention in both demand-side education of local African nascent entrepreneurs, and supply-side regulatory framework and industrial structuring, technology can be an additional support structure to influence bottom-up economic policy and engender higher levels or growth-oriented entrepreneurship. In line with a body of literature exploring the nexus of telecommunications and economic development (Hardy, 1980; Norton, 1992; Saunders, Warford & Wellenieus, 1994), the predominant narrative of the impact of mobile phones in management and exchange of ideas in the developing world (Donner, 2008) holds true. Policymakers and private sector leaders can help further amplify this reality on the ground. Allocation of spectrum, and restructuring of local mobile phone competition, in attempts to liberalize and privatize existing and new telecommunications markets may amplify rates of adoption (Donner, 2008). Mobile tariffs, as a means of encouraging inter-provider competition, have been explored in past research (Wallsten, 2001) with the general argument stating that more accessible, and less expensive, mobile phones have the potential to close the global divide between developing and developed nations (Kenny, 2002; Mbarika, 2002; Snowden, 2000; Wade, 2002). This is a compelling narrative for government and aid organization policymakers. With new innovation, such as voice-over-internet protocol and wireless loop solutions, costs of connectivity in developing nations could be further reduced and unlock more efficiency. Although macroeconomic efficiency is generally hard to measure, (Chowdhury, 2006) higher adoption of mobile phones is found to be positively related to foreign direct investments (FDI) (Lydon & Williams, 2005). Traditionally, the infrastructure in Africa has lagged most of the developed world. The same barriers that plague entrepreneurs also stymie infrastructure projects, such as poor infrastructure (Collier, 2007), institutional misaligned, shortages of or lack of access to capital (Asiedu, 2006), and lack of education (Isaacs et al, 2007). Critical necessities, such as roads, ports and railroad tracks, power plants, distribution lines, water treatment facilities, etc., all represent daunting expenses to developing economies (Fukuda-Parr & Lopes, 2013). Building mobile towers is comparatively cost effective amidst competing infrastructure investments (Donou-Adonsou, Lim & Mathey, 2016). Such infrastructure is built and maintained by actors representing the private industry ( Jiang et al, 2015). As mobile use increases with additional demand for units and bandwidth, and as consumers move to internet-connected devices, these investments and assets can be upgraded to additional capacity, and thereby create local employment opportunities. Combined with other positive factors, rapid spread of mobile technology can be considered much more feasible than other basic public services and technological deployments, including power, clean running water, and transportation. In fact, tens of thousands of towers have been built across Africa in the last fifteen years.1 Internet access has been available at some level across Africa for a number of years, although access varies significantly from country-to-county. Mobile towers are prevalent

Technologies enabling entrepreneurship 203

Figure 12.4  BOP actors, networks, and entrepreneurial opportunities.

in Africa and need only be upgraded to support data usage for the internet. With mobile technologies accessing internet connectivity (Chang, Chen & Zhou, 2009), the inherent value of owning such devices has increased exponentially, transitioned from mere tools of communication to multi-purpose affordance capable of conducting key business processes remotely. Some entrepreneurs have leveraged internet access successfully, but personal computing has been leapfrogged as well, for most of Africa (Woodburn, Ortmann & Levin, 1994). Leveraging these trends, particularly in terms of creating robust ecosystems for entrepreneurs’ subsequent growth and innovation, NGOs, firms, and governmental support strategies could be framed in ways that deploy and nurture mobile phone networks and business models to engender opportunities that co-create value (Sun & Im, 2015). Such collaborative and value co-creation approaches between government and industry could include local donors and NGOs in designing microloans to encourage purchase and insurance schemes against loss (Donner, 2006b), which would sync with the organizational goals of policymakers and non-profit managers. Figure 12.4 contextualizes this potential within the backdrop of the global economy – where actors in BOP markets could leapfrog their infrastructural arrangements and strengthen functional networks critical for growth-oriented entrepreneurship.

Summary Africa has witnessed the widespread introduction of various technologies from agricultural innovations such as improved seeds, to solar-powered cooking stoves. The staggering rate of adoption of such technologies warranted attention from practical stakeholders and scholars alike. The role that mobile phone adoption plays, not only demand-side attributes, such as changes in household consumption, but in the regional supply-side production, i.e. entrepreneurial entry and growth, is still emerging. Focusing on a process model of entrepreneurship, we urge stakeholders to consider the behavior of market actors and agents, search costs, and price dispersion dynamics through technological innovations in mobile telecommunication and explore ways to further close the digital divide.

204  Special topics on African entrepreneurship

Exploring the information perspective is timely given the rapid and recent interest in the role of the knowledge economy in Africa (Tchamyou, 2017; Asongu & Tchamyou, 2016). The role of technology in social innovation is also an emerging topic (Mulloth, Kickul & Gundry, 2016), such as looking at the relevance of mobile phones in social outcomes in the developing-nation context (Akemu, Whiteman & Kennedy, 2016; Amankwah-Amoah, 2016; Brouwer & Brito, 2012; Gupta & Jain, 2012; Islam & Meadeb, 2012; Mir & Dangerfield, 2013; Sonne, 2012; Sydow, Sunny & Coffman, 2020). Although BOP markets represent a large swath of the world’s economy, the literature on technology-driven development has been limited (see Asongu & Biekpe, 2017 for a recent exception), particular given the scope of the transfer and diffusion of technology innovation from the developed world and the myriad positive outcomes they engender (Tarafdar & Singh, 2011). Research in this space has similar potential to the study of landline telephones by sociologists (Ball, 1968; Thorngren, 1977). The technology is so new, and so paradigm shifting, that it is difficult to grasp the scope of the implications to regional entrepreneurship and innovation. And we may only be seeing the tip of the iceberg, as such technologies spread in its wake. Figure 12.4 illustrates the disparity in access to key resources of the entrepreneurial process necessary for sustaining economic growth, with respect to different network attributes and level of infrastructure critical for its functioning. The dark gray layer (left) represents the greatest number of global individuals (at around four billion) and characterized annual per capita income of under 15,000 U.S. dollars (power purchasing parity). This is the proverbial BOP. Developed nations are represented in the apex of the pyramid (right). This region had been the arena for centuries of industrial and technological developments, allowing actors within them to have highly functional networks, with robust nodes and edges, representing strong and high-quality flow of resources, both information, knowledge and different forms of capital. Comparing this to the BOP region with significantly less-developed infrastructure, the networks are weaker, smaller with reduced flow of considerably low-quality exchange of resources and information. Mobile phone technology and its rapid adoption has leap-frogged the functioning of the BOP networks, with a higher marginal utility per unit access, keeping level of infrastructure development the same as before. It is interesting to evaluate if such improvements to networks and access of critical information improves recognition and exploitation of growth-oriented entrepreneurial opportunities, and over time higher economic benefits in the region.

Notes



* This chapter was written by Sanwar A. Sunny, Department of Marketing and Entrepreneurship, Merrick School of Business, University of Baltimore, USA and Chad D. Coffman, Department of Global Entrepreneurship and Innovation, Henry W. Bloch School of Management, University of Missouri-Kansas City, USA. 1. Sixty percent of Sub-Saharan Africa had mobile phone coverage as early as 2008 (International Telecommunication Union, 2009).

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Index

Italicized and bold pages refer to figures and tables respectively, and page numbers followed by “n” and “b” refer notes and boxes. ABAN see African Business Angels Network (ABAN) abilities 52; role of 53; see also skills Abudu, Mo 158, 163 Abuja: developing in 173–176; joint ventures 176; land acquisition 174–176; legal issues 176 Abuja Geographic Information Systems (AGIS) 174 Abuja–Jabi Lake Mall 169 access to finance 69; lack of 7, 10, 135; see also finance/financing accounting: financial management 80 achievement 21; motivation 180–181; need for 180–181 acid-test ratio (quick ratio) 83–84 acquisitions 54, 140 Acs, Zoltan 16 Actis 169–170 affordable loss, determining 28 Afghanistan 104 Africa: birth rates 167; entrepreneurial activity in 32; environmental conditions, entrepreneurial exit and 143–145; environment for entrepreneurs 5–13; history of entrepreneurship 3–4; income levels/tiers 18–20, 19; infrastructure constraints in 110; innovative financing approaches in 77; marketing in 97–101; population 167; postcolonial 4; practical implications for women entrepreneurs in 164; trade within, historical perspectives 3; venture capital industry 76; see also economy(ies); entrepreneurship, in Africa Africa Continental Free Trade Agreement (AfCFTA) 42 African Business Angels Network (ABAN) 75 African Century, the xviii African Continental Free Trade Area (AfCFTA) 7 African Development Bank Group (Af DB) 188 African Economic Outlook 188; report (2017) on African entrepreneurial ventures 4–5 African entrepreneurship see entrepreneurship, in Africa

African Leadership University 101 African Union 155 African Women’s Decade (2010-2020) 155–156 African Women’s Development Fund (AWDF) 73–74 Africapitalism 34 Afrimarket 41–42, 47, 50, 61, 91, 92, 99, 111; customer segmentation 92–93 Agarwal, Ritesh 179 age 43, 44; and intentions, relationship between 59; personality traits and 43 aggressive growth ventures 187–188 agreeableness 44, 181, 182 agricultural revolution, entrepreneurship and 3 AirBnB 179 Aje, Oyinade 163 Ajo system (Nigeria) 159 Akinboro, Bolaji 69, 71, 137 Akinkugbe, Kofo 162 Alakija, Folorunsho 162 Albania 104 Aldrich, Howard 16 Alemu, Bethlehem 110, 119 Algeria 19, 30, 32 Alibaba 41 Amazon 72, 74, 75 ambiguity, tolerance for 21, 22 angel investors 51, 70, 74–75 angel networks 75 Angola 30 Aniston, Jennifer 96 Apple 74, 75, 144 ArchXenus 70 artificial intelligence 103 Artinger, Sabrina 141 Asrat, Tseday 70, 71 assembly lines 105 assertiveness 21 assets, chart of accounts 89 assurance, quality 107 Audretsch, David 16 authority, respect for 10 autonomy, need for 43

212  Index availability 107 avoidance, uncertainty 21–22, 30 Awosika, Ibukun 162 Ayat Real Estate 77 backward vertical integration 138 Bajun, Rahma 179 balance sheet 81, 82, 83 banks 51 banquiers ambulants 77 Becattini, Giacomo 16 Belkahia, Rania 41, 47, 50, 55, 61, 92 Bezos, Jeff 72 Bezos Family Foundation 72 Big Five model 44, 53, 181–183, 189 big picture, entrepreneurship theory 17, 17, 18– 26; change perspective 23–26, 25; day-to-day (decision making) 27–30; economic structure 20, 20–21; entrepreneurial opportunities, discovering and creating 27, 27, 27; entrepreneurial opportunities, exploiting 28–30, 29; income levels 18–20, 19; institutions 21–23, 22, 24, 25; mid-levels (industry) 26–27 Bill and Melinda Gates Foundation 18 Birch, David 16 Birmeh, Nana Akua 70 birth rates 167 Boahen, Badu 144 Boampong, Prince Boakye 124 Boko Haram 6 bookkeeping system 80 bootstrapping (self-funding) 70–71 Botswana 19 bottom of the pyramid (BOP) markets 98, 99, 193 Bourbon Coffee 137 Brazil: emerging markets 97; rise of nationalism xviii Brexit, immigrant crisis in xviii bricolage 29–30, 31, 44, 54 Buffett, Warren 26 bureaucratic processes, women entrepreneurs 161 Burkina Faso 6 Business Model Canvas, the (www.strategyzer. com) 60 business operations, financing 79–80 Business Partners 76 business plan template 129–130 business-to-business (B2B) transactions 111 business-to-consumer (B2C) transactions 111 Cameroon 6, 76, 77 Canal Plus 60 Cantillon, Richard 16 capacity, defined 104 capacity management 104

Cape Verde 22 capitalism, globalized 34 capital markets 51 Capital Properties project 170 cash flow statement 81, 82 Castle Beer 109 causation 29; effectuation and 29 Cellulant 69, 71, 137 Certificate of Occupancy 175 Chad 3 change: dialectical theory 25, 26; evolutionary process 23, 25, 26; institutional 23, 25; principal motors 23, 25; teleological theory 23, 25; theoretical perspective 23, 25, 26 chart of accounts 80; assets 89; expenses 90; income 90; liabilities 89–90; owner’s equity 90; for small business (example) 89–90 China 3, 7, 30, 34; economic rise of xviii; efficiency-driven economy 30; as emerging economy 30–31, 31, 97; institutional influences 31 China International Trust and Investment Corporation (CITIC) Construction 170 China State Construction Engineering Corp 170 CI see continuous improvement (CI) civil unrest 5 CNBC 72, 139 Coca-Cola 110 cognitive properties 27 collaboration 46 collectivism 21, 52; female entrepreneurship 57; vs. individualism 21 colonialism xix common-sense 49 communalism 10–11 communal spirit 10 community initiatives, women entrepreneurs 158–159 compassion for social change 47 competence-based curriculum 34 competency(ies): task-related 52; through education and training 56 Computer Warehouse Group (CWG) 137 confidence 48, 51, 61 Congo Free State 4 conscientiousness 44, 181, 182 continuous improvement (CI) 107, 113 continuous line-flow systems 105 control costs 108 Cooper, Arnold 16 coordinator(s), entrepreneurs as 16 Corbishley, Christopher 33 cost(s): control 108; cost-related 108; failure 108; quality 108 COVID-19 pandemic xviii; economic collapses (2020) 49; impacts on global economy 6, 49;

Index 213 national inflation rates after 7, 8; national interest rates after 7, 9 creative artifacts portfolio 29 creativity 53, 183–184; African vs. Western societies 60; cultural differences impacts 46; individualist 44; personality traits 44–47; problem-solving and 44; process framework 44; SCAMPER mnemonic 46–47; sociocultural 44–45; Western model 46 Crosby, Phillip 108 crowdfunding 70, 75 cultural dimensions: Hofstede on 21–22, 22, 30; individualism 21; indulgence 21; longterm orientation 21; masculinity 21; power distance 21; uncertainty avoidance 21 cultural factor 10–11; see also sociocultural environment culture(s): collectivist 60; creativity and 46; Hofstede’s cultural dimensions 21–22, 22, 30; as informal institution 21; role in education and training 59–60; see also ethnicity current ratio (CR) 83 customer(s): identification 137; positioning 93–95; retention 94; segmentation 92–93; targeting 93–95 Dangote, Aliko 69, 71, 72, 100–101, 119, 137 Dangote Group 71, 72, 100–101, 110, 137 da Vinci, Leonardo 15 De Beers 4 debt financing 70, 72, 79; advantages/ disadvantages 80; growth through 80 debt ratio 84 debt to equity ratio 84–85 decision areas, OSCM 104–111 decision making (day-to-day) 27–30; entrepreneurial opportunities, discovering and creating 27, 27, 27; entrepreneurial opportunities, exploiting 28–30, 29 Dell computers 137 Democratic Republic of the Congo (DRC) 4, 5, 6, 7, 18, 97 demographic factors: age 43, 44; education 44; gender 43, 44; personality traits and 43, 44 density, networks 121–122 desirability 48 developers, international/national (Africa) 169–171 dialectical theory, of change 25, 26 diaspora populations 60 discrimination, women entrepreneurs 159 distinctiveness 94 diversification strategies 138 diversity, networks 121–122 documentation: financial management 80–82, 81, 82; transactions 80 Dollar Shave Club (DSC) 95, 98

Durotoye, Tara 158, 163 Dynamic Data Systems 144 Eagle Hills 170 Eberle, Bob 46 Ebola outbreak xviii, 7 EbonyLife TV 163 Echeruo, Chinedu 144 e-commerce business 41–42, 100, 111; examples 100 economic empowerment, women 161 economic environment, for African entrepreneurs 6–10, 8, 9; challenges 7; COVID-19 pandemic impacts 6; Ghana 7; IMF outlook (2019) 6–7; inflation 7; lack of access to finance 7, 10; national inflation rates 7, 8; national interest rates 7, 9; Nigeria 7; World Bank report (2019) 6 economic order quantity (EOQ) model 109 The Economist xviii economy(ies): African 6–10, 20, 20–21; COVID-19 pandemic impacts 6, 49; developing 144; efficiency-driven 20, 20, 21, 30, 33; emerging, entrepreneurship theories from 30–31, 31; factor-driven 20, 20, 21, 30, 32; formal institutional levels 23, 24; gender-neutral 22; IMF outlook (2019) 6–7; individualism scores 22; informal institutions 22; innovation-driven 20, 20, 21; structure, big picture (entrepreneurship) 20, 20–21; World Bank report (2019) 6; see also global economy(ies) EcoPost 110 education 44, 198; ethnicity and culture, role of 59–60; gender, role of 57–59, 58; and training, framework 55–60, 57; women 56, 57 effectuation 28, 34, 54, 141; affordable loss, determining 28; causation and 29; leaning in to surprise 28; means, determining 28, 29; memoir exercise 28, 29; principles of 44; processes 28–30, 29; stakeholders, co-creating with 28; strategies 34 efficiency-driven economies 20, 20, 21, 30, 33 Egypt 3, 19, 30, 76, 97, 197 Eko Atlantic City 173 Elumelu, Tony 34, 73 Emirates Airline 96 emotional stability 44 emotional support 50, 51 empathy 107 employees vs. entrepreneurs 56 E-Myth series (Gerber) 79 Enda 75, 108 Endrias, Abrhame 42, 47, 50, 55, 61 energy level 43 Energyx Nigeria Ltd. 173

214  Index enterprise(s) ii; African Economic Outlook report (2017) on new ventures 4–5; creative 35; mircoenterprises 4; new ventures, defined 17; scope of 4–5; small 4; types of 4–5; see also specific names entrepreneurial exit 142–148; African environmental conditions and 143–145; benefits of 145; self-efficacy and overconfidence management 145–148 entrepreneurial failure 140–142; individual entrepreneurs 141; levels 141; overconfidence and 146–148; profiles 141; of startup firms 141 entrepreneurial marketing vs. traditional marketing 95–97 entrepreneurial opportunities see opportunities, entrepreneurial entrepreneurial search, for arbitrage opportunities 196–197, 197 entrepreneurial self-efficacy (ESE) 180, 186, 187 entrepreneurial teams 123–125 entrepreneur(s): achievement motivation 180–181; African 5–13, 33; as agents of change 23; big 5 personality traits 44, 53, 181–183; big-time gambler 141; bricolage 29–30, 31, 44; challenges 5; Chinese 31; classification 48–49; confused 141; as coordinators 16; creativity 43–47, 183–184; cultural dimensions and 21–22; dissatisfied lord 141; early-stage 5; economic environment 6–10, 8, 9; economic structure and 20, 20–21; education and training 55–60, 57; European 3; failures 54; growth-oriented 22; hybrid 49; income levels/tiers and 19–20; intentions 43; journey of 27; legal and regulatory environment 11, 12; level of passion 35; megalomaniac 141; mindset 43, 54–55; motivation 47–52; necessity 4, 48, 48, 49, 52–53; opportunity 4, 48, 48, 49, 52–53; part-time 49; personality traits 43–47, 53; personal networks 116; political environment 5–6; as problem finders 45; real estate development 168–169; risk propensity 181; role of 116; self-efficacy assessment 53, 54; skills 52–53; sociocultural environment 10–11; success 54–55; successful 26; supported at arm’s length 141; technological environment 11, 13; understanding 179–189; vs. employees 56; vs. non-entrepreneurs, personality differences between 47; wealth-power nexus 4; what makes a good 179–184; women 56 entrepreneurship ii; African environment for 3–13; agricultural revolution and 3; armed conflict impacts 6; China 31; competence-based curriculum 34; creativity 44–47, 183–184; defined 16–17; education and training program 55–60, 57; features xix; female 10, 155–164; global ii; growth-oriented

22, 23; history of 3–4; industry (mid-levels) 26–27; informal institutions 22; innovation in 17; international trading routes, history 3; knowledge gap about 34–35; newness in 17; new ventures, defined 17; overview xviii–xix; personality traits 43–47, 53; slavery and 3; technologies impacting process of 195–198; teleological theory of change 23, 25; youth 184–188; see also economy(ies) entrepreneurship, in Africa: African Economic Outlook report (2017) on new ventures 4–5; armed conflict impacts 6; colonialism and 4; economic environment 6–10, 8, 9; enterprises, scope and types of 4–5; environment for 3–13; features xix, 4–5; history of 3–4; international trading routes, history 3; legal and regulatory environment 11, 12; overview xviii–xix; political environment 5–6; postcolonial Africa 4; slavery and 3; sociocultural environment 10–11; technological environment 11, 13; theories 32, 32–34; trade within, historical perspectives 3 entrepreneurship, theories of 15–36, 54; African perspective 32, 32–34; big picture 17, 17, 18–26; day-to-day (decision making) 27–30; defined 16–17; from emerging economies 30–31, 31; history 16; importance 15–16; knowledge gap about 34–35; mid-levels (industry) 26–27 environmental turbulence 49 environmental uncertainty 185 environment(s), for African entrepreneurs 5–13; challenges 5; economic environment 6–10, 8, 9; entrepreneurial exit and 143–145; legal and regulatory environment 11, 12; political environment 5–6; resource-constrained 54; sociocultural environment 10–11; technological environment 11, 13 EOQ (economic order quantity) model 109 Equitel 43 Equity Bank 42–43, 47, 50, 61, 91, 92, 99, 103–104; value proposition 94–95 equity financing 70, 73, 79; advantages/ disadvantages 80; growth through 80 Eritrea xviii, 17 ESE see entrepreneurial self-efficacy (ESE) esusu (Nigeria) 77 Ethiopia xviii, 18, 42, 44, 48, 57, 70, 71, 73, 77, 97, 98, 108–109, 110, 119; ukub in 77, 78b ethnicity 10; role in education and training 59–60; see also culture ethnic networks, role of 60 Europe 19, 167; immigrant crisis in xviii European entrepreneurs 3 evolutionary theory, of change 23, 25, 26 e-waste dumping 199 expansion: constraints 135–136; external strategies 138–140; financing 79; geographic 137;

Index 215 internal (organic) strategies 136–138; into new market territory 137; strategies 136–140; see also growth expenses, chart of accounts 90 experiential learning 34 Explorations in Personality (Murray) 181 Exquisite Magazine 59 external growth financing strategy 79–80 external growth strategies 138–140; acquisitions 140; franchising 138–139; licensing 139–140; mergers and joint ventures 140 extraversion 44, 181, 182 Facebook 71, 74, 75 Factfulness (Rosling) 18 factor-driven economies 20, 20, 21, 32 Fagbemi, Moni 162 failure: costs 108; defined 142; entrepreneurial see entrepreneurial failure family: funding form members 70, 71–72; investment, women entrepreneurs 158; and work, balance between 48 fashion magazine industry 59 fast-moving consumer goods (FMCG) 99 feasibility, perceived 48 Federal Capital Development Agency (FCDA) 174 Federal Capital Territory (FTC) 173, 174 female entrepreneurship 155–164; African Women’s Decade (2010-2020) 155–156; bureaucratic processes 161; challenges 159–162; collectivism 57; discrimination and gender bias/stereotypes 159–160; education and training program 55–60, 57; fashion magazine industry 59; funding 158–159; Ghana 157–158; grants for 73–74; illiteracy 160–161; inadequate/poor infrastructure 162; individualism 57; in-group collectiveness 57; lack of/insufficient information about microfinancing options 161; lower rates (Islam) 10; motivations 157–158; opportunities 163; opportunity recognition/risk perception 157–158; overview 155–156; peculiarities of African context 156–157; performance, in Africa 162–163; policy implications 164; practical implications, in Africa 164; South Africa 157; in SSA 159–160; Uganda 157–158; women entrepreneurs, training of 56, 57–59; see also women femininity 21 Fettah, Nadia 101, 137 field service 107 finance/financing 69–86; Africa-specific methods 70; angel investors 70, 74–75; business operations 79–80; buyer financed operations 70; crowdfunding 70, 75; debt financing 70, 72; early-stage 46; equity financing 70, 73; external growth financing strategy 79–80;

from family members and friends 70, 71–72; grants 70, 73–74; growth and expansion 79; informal financial systems 70, 77, 78b; internal growth financing strategy 79; Kiva person-to-person lending 70, 76–77; lack of access 7, 10, 46; microfinance organizations 70, 74; pooling together 70; self-funding 70–71; startup funding sources 69–78; venture capital firms 70, 75–76; venture’s finance management 80–82; venture’s financial health and performance evaluation 82–86; working capital 79 financial forecast 130, 131–132 financial management 80–82; accounting and bookkeeping system 80; documentation/ reporting 80–82, 81, 82; income statement 81, 81; record keeping 80–81 financial sector 46 financial support 50–51 fixed mindset 54 Forbes (magazine) 119, 123, 145 formal institutions 21, 23; China 31; dimensions 23; levels 23, 24 forward vertical integration 138 4P/7P formulation (marketing mix) 91–92, 93; packaging 92; people 92; place 92; positioning 92; price 92; product 91; promotion 92 franchise agreement 139 Franchise Association of South Africa (FASA) 139 franchising 138–139 friends, funding form 70, 71–72 frugal innovation 103–104, 110 funding 69; Africa-specific methods 70; angel investors 70, 74–75; approaches 70; buyer financed operations 70; crowdfunding 70, 75; debt financing 70, 72; equity financing 70, 73; family members and friends 70, 71–72; female entrepreneurship 158–159; grants 70, 73–74; inadequate 184; informal financial systems 70, 77, 78b; Kiva person-to-person lending 70, 76–77; microfinance organizations 70, 74; pooling together 70; real-life examples 69–70; self-funding 70–71; startup, sources of 69–78; venture capital firms 70, 75–76; see also loan(s) Fusion Capital 76 Gates, Bill 55 Gaye, Diariétou 156 Gazelles 4 Gbadamosi, Esther Kemi 155, 157 GEM see Global Entrepreneurship Monitor (GEM) gender 43, 44, 143; discrimination and bias/ stereotypes 159–160; Islam and 10; personality traits and 43, 44; role of 57–59, 58; see also women

216  Index gender-neutral economies 22 gender neutrality 22 geographic expansion 137 George, Gerard 33 Gerber, Michael E. 79 Ghana xviii, 19, 30, 33, 59, 70, 76, 77, 98, 100, 144, 163; economic environment 7; entrepreneurs 188–189; female entrepreneurship 157–158; political environment 5–6; real estate development 169; religion and spirituality 10; SMEs 189 Ghana Accra Mall project 169 Ghanatalksbusiness.com 70 Ghana Youth Enterprise and Entrepreneurial Development Agency (GYEEDA) 5 Ghansah, Jesse Arhin 124 Gillette 95 Gladwell, Malcolm 52, 141 Glam Africa (magazine) 59 global economy(ies) 6, 32; COVID-19 pandemic impacts 6; see also economy(ies) global entrepreneurship ii; see also entrepreneurship Global Entrepreneurship ii Global Entrepreneurship Monitor (GEM) 17, 32; Adult Population study 199; entrepreneurial activity in Africa 32; entrepreneurs, classification 48–49 globalization 143; OSCM and 103 globalized capitalism 34 GoFundMe 198 Goldman Sachs Foundation 163 Google 71, 74, 75, 76 Gotter, Bastian 123, 124 Government of Singapore Investment Corporation (GIC) 170 grants 70, 73–74 Great Britain, slavery and 3 Greece 3 Green Agro Solutions 42, 47, 50, 91 Gross Income Before Taxes 85 growth: constraints 135–136; external strategies 138–140; financing 79; internal (organic) strategies 136–138; management 135–140; projections 6–7; rates 135, 167; strategies 136–140; sub-Saharan Africa 6–7; through debt financing 80; through equity financing 80; see also expansion growth financing strategy: external 79–80; internal 79 growth mindset 54 growth-oriented entrepreneurs 22, 23, 34 Growthpoint Investec African Properties (GIAP) 170 “guerrilla” marketing 95 guidance, lack of 184

heroism 21 Hofstede, Geert 21, 30; on cultural dimensions 21–22, 22, 30 home building industry 168–169 HopStop.com 144 horizontal integration 138 House of Tara (cosmetics) 163 human capital theory 55 hybrid entrepreneurs 49 Ibrahim, Mo 17 The Illusions of Entrepreneurship (Shane) 142 improvisation 34 income, chart of accounts 90 income levels/tiers: Africa 18–20, 19; big picture (entrepreneurship) 18–20, 19; categorization of countries 18–20, 19; entrepreneurs and 19–20; Level 1 18; Level 2 18–19; Level 3 19; Level 4 19 income statement (profit and loss statement) 81, 81 incubation 45, 46 independence, need for 43, 48 India xviii, 3, 19, 30, 104, 197; as emerging economy 30–31, 31, 97; factor-driven economy 30; jugaad, concept of 31, 98, 103–104; mobile phone technology 197; rise of nationalism xviii Indiegogo 198 individual/environment interface (social networks) 122, 122–123 individualism 21, 22, 48, 51; female entrepreneurship 57; high 22; levels of 51–52; vs. collectivism 21 individualist creativity 44 indulgence 21 Industrial Development Centers (IDCs) 6 industry/industrialization 33; mid-levels 26–27 inflation 7, 8; national inflation rates 7, 8 influencer marketing 95–96 influencers 95–96; selection criteria 96 informal economy 116; World Bank on 116 informal financial systems 70, 77, 78b informal institution(s) 21–22, 69; China 31; culture as 21; entrepreneurship 22; funding 69; Hofstede’s cultural dimensions 21–22, 22, 30 information corridors 27 information technology, advances, SCM and 111 infrastructure (inadequate/poor), women entrepreneurs 162 infrastructure constraints, in Africa 110 in-group collectiveness, in female entrepreneurship 57 initial public offering (IPO) 141 innovation 43, 47; in entrepreneurship 17; frugal 103–104, 110; jugaad 31, 98, 103; see also newness

Index 217 innovation-driven economies 20, 20, 21 inputs 102; measurement 111 institution(s): big picture (entrepreneurship) 21–23, 22, 24, 25; change 23, 25; China 31; defined 21; development 30, 31; formal 21, 23; group-oriented culture 31; impact of 36n1; informal 21–22; types of 21 intellectual property (IP) 96, 140 intention(s) 43; age and, relationship between 59; see also mindset interest-free loans 71 interest rates 7, 9; national interest rates 7, 9 Interface Technologies 162 internal growth financing strategy 79 internal (organic) growth strategies 136–138; backward vertical integration 138; diversification 138; forward vertical integration 138; horizontal integration 138; market penetration 136; new market development 136–137; new product development 137 International Monetary Fund (IMF) 169; economic outlook (2019) 6–7 international/national developers (Africa) 169–171 international opportunities 163 International Telecommunication Union (ITU) 199 international trading routes, history 3 internet 198; access to 202–203; growing use of 163 introspection 45, 46 inventory 84 inventory management 109; economic order quantity (EOQ) model 109 investment schemes, for new towns 173 Ipaye, Bapajide 118 Irabor, Betty 59 IrokoTV 123, 145 ISIS 6 Islam: female entrepreneurship, lower rates 10; gender and 10 Israel, rise of nationalism xviii Japan 20 Jobs, Steve 17 job shop processes 105 joint ventures 140; in Abuja 176 jugaad (frugal innovation) 98, 103–104; concept of 31 Jumia 41–42, 111 Kadhikwa, Twapewa 70, 137 Kaldi’s coffee chain 70, 71, 108–109, 110 Kamkwamba, William 30 kanju (jua kali) 31 Kennedy, Weldon 75 Kenya 19, 33, 42, 69, 71, 75, 76, 94, 95, 98, 103–104, 108, 110, 137, 138, 139, 156, 188; SMEs 189

Khayesi, Jane 33 Khelil, Nabil 141 KickStarter 118, 198 Kirusa 144 Kiva person-to-person lending 70, 76–77; Field Partners 76 Kloosterboer, Marjan 172–173 Knight, Frank 16, 28 Knight Frank Group LLC 169, 170 knowledge 55; overconfidence in 147 Knowledge@Wharton (magazine) 137 Koran 10 Lamptey, Robert 144 land acquisition, in Abuja 174–176 landline telecommunication 193, 194, 199 land markets, in established cities 172 legal environment, for African entrepreneurs 11, 12 legal issues, Abuja 176 Leopold II, King 4 Level 1 countries 18, 19, 21 Level 2 countries 18–19, 19, 21, 30 Level 3 countries 19, 19, 30 Level 4 countries 19, 19 Levi-Strauss, Claude 30 Lewin, Kurt 15 liabilities, chart of accounts 89–90 Libya xviii, 3, 22, 30, 156 licensing 139–140 licensor 140 lifestyle ventures 186–187 line-flow processes 105 Lionheart (movie) 60 liquidity 82–83; current ratio 83; defined 83; net working capital 83; quick ratio 83–84; short-term 83, 84 loan(s): from family and friends 71; interest-free 71; microfinance 70, 74; women entrepreneurs 159; see also funding Local Enterprise and Skills Development Program (LESDEP) 5 locally made materials, campaign for 163 locus of control, internal 43, 44 logistics 110 long-term orientation 21 long-term solvency analysis 84–85; debt to equity ratio 84–85; total debt ratio 84 Lusaka 21 MacMillan, Ian 16 Maldives 19 Mali 6 managed growth ventures 187 management, financial 80–82; accounting and bookkeeping system 80; balance sheet 81, 82; cash flow statement 81, 82; documentation/ reporting 80–82, 81, 82; record keeping 80–81

218  Index manufacturing 26 marketing: in Africa 97–101; competitive environment 96; customer segments 92–93; defined 91; direct-to-consumer 97; entrepreneurial vs. traditional 95–97; 4P/7P formulation 91–92; function of 91; “guerrilla” 95; influencers 95–96; positioning 93–95; principles 91; targeting 93–95 marketing mix (4P/7P formulation) 91–92, 93; packaging 92; people 92; place 92; positioning 92; price 92; product 91; promotion 92 market penetration strategy 136 Marx, Karl 16 masculinity 21; traits 21 McClelland, David 180–181 McGrath, Rita 141 McKinsey & Co 98 means, determining your 28, 29 Medium and Small Loans Centre (MASLOC) 5 Megbope, Ayodeji 163 memoir exercise 28, 29 Mensah, Domini 124 mergers/joint ventures 140 microenterprise 119 microfinance 70, 74 microfinancing, insufficient information about, women 161 Microsoft 55 mindset(s) 43; creativity 44–47; entrepreneurial 47, 54–55; fixed 54; growth 54; personality traits and 43–47; types of 54; see also intention minority(ies) 59 mircoenterprises 4, 7 MnM Clothing Line 179, 188 mobile phones: advantages 195, 197, 198; growing use of 163 mobile tariffs 202 mobile telecommunications 193, 194, 199; advantages 195, 197, 198; entrepreneurial search 196–197, 197; information asymmetry 196; mobile adoption to OME-NME ratio, country-wise 199–200, 200; mobile penetration in Africa 200, 201; towers, building 202 mobilization 54 Moritz, Michael 76 Morocco 19, 22, 30, 97, 137 motivation(s), entrepreneurial 47–52, 198; achievement 180–181; emotional support 50, 51; female entrepreneurship 157–158; financial support 50–51; necessity-opportunity binarity 48, 48–49; passion, role of 49–52, 51; “push” and “pull” factors 47–48, 157 Mozambique 22 M-Pesa mobile money 4, 104 Muhammad Badri Retail Store: balance sheet 81, 82, 83; debt to equity ratio 85; income statement (profit and loss statement) 81, 81;

quick ratio 84; return on assets (ROA) 85; return on sales (ROS) 85; total debt ratio 84 Murray, Henry A. 180–181 Musk, Elon 17 Mwangi, James 42, 47, 50, 55, 61, 94 Namibia 22, 70 Nando 139 Nano (Tata Motors) 98, 99, 103 national inflation rates 7, 8 national interest rates 7, 9 nationalism, rise of xviii National Youth Employment Program (NYEP) 5 Ndhlukuka, Divine 158, 162 Ndola 21 “necessity” entrepreneurs 4, 48, 48, 49, 52–53, 193; interventions for 58 necessity-motivated entrepreneurship (NME) 193; mobile adoption, country-wise 199–200, 200 need for achievement (nAch) 180–181 Neistat, Carey 96 Netflix 60 Net Income After Taxes 85 networking 46 net working capital 83 network(s) 116–122; analysis 117; density, diversity, and social frontiers 121–122; entrepreneur's role 116; limited 184; personal 116; social networks (individual/environment interface) 122, 122–123; strong and weak ties combined 119–120; structural holes 120–121, 121; weak ties 117, 118; see also team(s) neuroticism 181, 182 New Guinea, history of entrepreneurship 3 new market development strategy 136–137 newness 17; see also innovation new product development strategy 137 new towns 172–173; investment schemes for 173; see also real estate development new ventures: African Economic Outlook report (2017) on 4–5; defined 17; registration 17; see also enterprise(s); venture(s) The New Yorker 141 Nigeria 19, 30, 32, 59, 60, 69, 76, 77, 97, 98, 110, 118, 123, 137, 139, 160, 163; Ajo system 159; economic environment 7; political environment 6; real estate development 169; SMEs 189; women entrepreneurs in 160 Njoku, Jason 123, 124, 145 Njoroge, Ken 69, 71, 137 No Leftovers 163 Nollywood 60, 123 non-entrepreneurs 47; vs. entrepreneurs, personality differences between 47 North Africa 3 Nubia 3

Index 219 Ogunlesi, Adenike 163 Okere, Austin 137 O’Malley, Michael 169 OMG Digital 124 Omidyar Network Africa 135 Onasanya, Tewa 59 Onwutalobi, Chioma 59, 96 Onyenokwe, Adesuwa 59 Opdyke, Jef D. 167 openness to experience 44, 181, 182 operations and supply chain management (OSCM) 102–113; capacity management 104; continuous improvement 113; decision areas 104–111; globalization and 103; inputs 102; inventory management 109; objectives 102; outputs 102; overview 102–104, 103; process design 105–106, 106; productivity measurement 111–113; quality management 106–109; supply chain management 109–111; technological advances and 103 operations management 102 opportunities, entrepreneurial 198; cognitive properties 27; discovering and creating 27, 27, 27; effectuation 28–30, 29; exploitation 28–30, 29, 198; female entrepreneurship 163; identification of ii, 55; information corridors 27; international 163; in real estate development 167–176; recognition, female entrepreneurship 157–158; risk vs. uncertainty 28 “opportunity” entrepreneurs 4, 48, 48, 49, 52–53, 144; interventions for 58 opportunity-motivated entrepreneurship (OME) 198; mobile adoption, country-wise 199–200, 200 optimism 43 Organization for Economic Cooperation and Development (OECD) 188 orientation 44; long-term 21 Osborn, Alex 46 OSCM see operations and supply chain management (OSCM) Osembo, Navalayo 75, 108 Outliers (Gladwell) 52 outputs 102; measurement 111 overconfidence 141; defined 146; entrepreneurial failure 146–148; in knowledge 147; management 145–148; outcomes 147–148 owner’s equity, chart of accounts 90 OYO Rooms 179, 188 packaging, marketing mix 92 partial factor productivity (PFP) 112–113 part-time entrepreneurs 49 passion 55; challenges/hurdles and 50; checklist to assess level of 50, 51; common-sense perspective 49–50; development of 52; emotional support 50, 51; financial support

50–51; level of , entrepreneur 35, 51; role of 49–52, 51; situational factors 50 people, marketing mix 92 perseverance 47 personality traits 43–47, 53; agreeableness 44, 181, 182; Big Five model 44, 53, 181–183; compassion for social change 47; conscientiousness 44, 181, 182; contextualizing 188–189; creativity 44–47, 183–184; demographic factors and 43, 44; emotional stability 44; entrepreneurial mindsets 47; entrepreneurs vs. non-entrepreneurs 47; extraversion 44, 181, 182; gender-based 43, 44; innovation 47; need for autonomy 43; neuroticism 181, 182; openness to experience 44, 181, 182; optimism 43; perseverance 47; risk taking 47; see also specific entries personal networks 116 personal savings, women entrepreneurs 158 personal services 26 PFP (partial factor productivity) 112–113 Philippines, rise of nationalism xviii pitch deck 129 place, defined 92 podcasts 95–96 polarization, political 5 policy implications, women entrepreneurs 164 policymaking and practice, technology 202–203, 203 political environment, for African entrepreneurs 5–6; Ghana 5–6; Nigeria 6; stability 5 Poole, Scott 23 population 167 position/positioning 92; customer 93–95; marketing 93–95; value proposition 93, 94–95 postcolonial Africa 4 Powell, Thomas 141 power distance 21 prelaunch checklist 61, 62 prepaid expenses 84 price 92, 94 probability theory 28 problem-solving, creativity and 44 process design 105–106, 106; bottleneck resource 105; job shop processes 105; lineflow processes 105; projects 105; service flow chart 106, 106 production line 105 productivity measurement 112; factors 111; in OSCM 111–113; partial factor productivity (PFP) 112–113; total factor productivity (TFP) 111–112 product(s) 91; development 137; new product development strategy 137 profitability 83 profitability analysis 85–86; return on assets (ROA) ratio 85; return on investment (ROI) 86; return on sales (ROS) ratio 85

220  Index profit and loss statement (income statement) 81, 81 projects 105 promotion, marketing 92 protectionism 7 public-private investments 173 pull factors 47–48; defined 157 push factors 47–48; defined 157 quality 94; costs 108; defined 106 quality improvement 108 Quality is Free! (Crosby) 108 quality management 106–109; continuous improvement (CI) 107, 113; dimensions 107; P – E score 107; six-sigma approach 107; total (TQM) 107; walk-through audit 107–108 quality of conformance 107 quality of design 107 quality of services 107 quick ratio (acid-test ratio) 83–84 Radioxity Media 155 Rand Merchant Bank 170 real estate development: African international/ national developers 169–171; building development 168; building operation 168; building renovation 168; developing in Abuja 173–176; entrepreneurial opportunities in 167–176; entrepreneurs 168–169; income property 168; land banking 168; land development 168; land markets in established cities 172; land packaging 168; new towns 172–173; overview 167; property redevelopment 168; Real Estate Investment Trusts (REITs) 171–172; sale property 168; stages 168 Real Estate Investment Trusts (REITs) 169, 171–172; necessary conditions for 171–172 record keeping 80–81 regulatory environment, for African entrepreneurs 11, 12 REITs see Real Estate Investment Trusts (REITs) reliability 107 religion/religiosity 10; Ghana 10; role of 10; Uganda 10; see also spirituality Rendeavour 173 reports/reporting: balance sheet 81, 82; cash flow statement 81, 82; financial 80–82, 81, 82; income statement 81, 81 resource-constrained environments 54 resources deployment 54 responsiveness 107 return on assets (ROA) ratio 85 return on invested capital (ROIC) 26 return on investment (ROI) 86 return on sales (ROS) ratio 85 Rhodes, Cecil 4

Right of Occupancy 175 risk perception, female entrepreneurship 157–158 risk propensity 43, 181 risk taking 47 risk vs. uncertainty 16, 28 RMB Westport 170 ROA (return on assets) ratio 85 robotics 103 Rodrik, Dani 32–33 ROI (return on investment) 86 Rosling, Hans 18 ROS (return on sales) ratio 85 Ruf ‘n’Tumble 163 Russia 34; rise of nationalism xviii Rutta, Lorna 110 Rwanda 17, 156, 168–169 Safaricom 104, 144 Saham Finances 97, 101 Saharan Desert 3 Sambo, Sibongile 159 Sarasvathy, Saras 28 Say, Jean-Baptiste 16 Saya Mobile 144 SCAMPER mnemonic 46–47 Schumpeter, Joseph 16 SCM see supply chain management (SCM) Securico 162 segmentation, customer 92–93 self-actualization 46 self-adequacy 43 self-assessment, passion 50, 51 self-efficacy 53, 55; assessment 53, 54; entrepreneurial exit and 145–148; impact of 57 self-employment 47–48 self-examination 55 self-expression 46 self-funding (bootstrapping) 70–71 self-rule 43 Senegal 4, 18 seniority, respect for 10 Sequoia Capital 76 service flow chart 106, 106 SERVQUAL method 107 Seychelles 19 Shane, Scott 26–27, 142 six-sigma approach 107 skills 52–53, 55; elements 53; necessity 52–53; role of 53; self-efficacy assessment 53, 54; see also abilities Sky.Garden 100 slavery 3; entrepreneurship and 3 Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) 6 small- and medium-sized enterprises (SMEs) 4, 189

Index 221 small business/enterprises 4; chart of accounts for (example) 89–90 smart phones 199 SMEs see small- and medium-sized enterprises (SMEs) social capital and superstitious beliefs, negative relationship between 10 social change, compassion for 47 social frontiers 121–122 socialization 50 social media 95, 100 social networks: emotional support from 51; importance of 117; individual/environment interface 122, 122–123; strong and weak ties combined 119–120; structural holes 120–121, 121; weak ties 117, 118 social responsibility, norms 10 social trends 11; see also sociocultural environment sociocultural creativity 44–45 sociocultural environment, for African entrepreneurs 10–11; communalism 10–11; factors 10; religion/religiosity 10; superstitious beliefs 10; women and 11 Sokowatch 100 SoleRebels 110, 119 Somalia xviii, 20 South Africa 4, 19, 22, 30, 51–52, 59, 97, 99, 104, 139, 156, 167, 197; female entrepreneurship 157; growth projections 6–7; venture capital industry 76 South African Airways 159 Southern Africa Venture Capital and Private Equity Association (SAVCA) 76 South Sudan xviii, 5 Southwest Asia 3 spirituality 10 stability, political 5 stakeholder(s), co-creating with 28 Starbucks Coffee 71, 74 startup funding see funding statistics 28 stereotypes, women entrepreneurs 159 Storey, David 16 strong ties 118; use of 119; weak ties combined with 119–120 structural holes 194; social networks 120–121, 121 sub-Saharan Africa (SSA) 6, 51–52, 99, 156; growth projections 6–7; international investors 169; legal and regulatory environment 11, 12; telecommunication technology 198–199; urbanization in 167; women entrepreneurs in 159–160 success, material rewards for 21 Sudan 30 superstitious beliefs 10; and social capital, negative relationship between 10

supply chain management (SCM) 109–111; advances in information technology and 111; logistics 110; see also operations and supply chain management (OSCM) survival ventures 186 sustainability 94 susu (Ghana) 77 Swahili entrepreneurs 3 Swaniker, Fred 101 tangibles 107 Tanzania 19, 48, 76, 97, 104 targets/targeting: customer 93–95; marketing 93–95 TATA Corporation 103 Tata Motors 98, 99 team(s) 123–125; adjourning 124; forming 124; norming 124; performing 124; stages of 124; storming 124; see also network(s) technological environment, for African entrepreneurs 11, 13; challenges 11 technology 193–203; advances, OSCM and 103; African context 194–203; emerging themes 198–203; entrepreneurial motivations 198; entrepreneurship process, impacts 195–198; information asymmetry 196; lack of 11; overview 193; policymaking and practice, implications 202–203, 203; see also telecommunication technology telecommunication technology 193–194, 198– 199; economic benefits 194; landline 193, 194, 199; mobile 193, 194; mobile adoption to OME-NME ratio, country-wise 199–200, 200; mobile penetration in Africa 200, 201; policymaking and practice, implications 202–203, 203; sub-Saharan Africa 198–199 teleological theory, of change 23, 25 10,000-Hour Rule 52 TFP (total factor productivity) 111–112 theory(ies), of entrepreneurship see entrepreneurship, theories of theory of planned behavior (TPB) 48 Thunderbird for Good (T4G) 56 Tihanyi, Laszlo 33 tolerance, for ambiguity 21, 22 tontines (Cameroon) 77 Tony Elumelu Foundation 73 total debt ratio 84 total factor productivity (TFP) 111–112 total quality management (TQM) 107 TPB see theory of planned behavior (TPB) TQM see total quality management (TQM) trade: within Africa, historical perspectives 3; international trading routes 3; wholesale 26 traditional marketing vs. entrepreneurial marketing 95–97

222  Index training 55–60, 198; ethnicity and culture, role of 59–60; gender, role of 57–59, 58; lack of 184; women 56, 57; see also education traits 43; contextualizing 188–189; see also personality traits transactions, documentation 80 TrendWatching 100 Tunisia 156 Tupuca 100 turbulence, environmental 49 Turkey, rise of nationalism xviii Uganda 33, 76; entrepreneurs 188; female entrepreneurship 157–158; muslim women in 10; religion and spirituality 10 ukub (Ethiopia) 77, 78b uncertainty 117, 141; bricolage 29–30; effectuation and 28–30, 29; environmental 185; vs. risk 16, 28 uncertainty avoidance 21–22, 30 UNICEF 100 Unilever 95, 110 United Nations, on urbanization 167 United Nations Development Programme (UNDP) 188 United States 19, 95, 167; rise of nationalism xviii; slavery and 3 University of Michigan 4 unpredictability see uncertainty urbanization 167; rising 11; see also real estate development value chain management 102; see also operations and supply chain management (OSCM) value proposition 93, 94; communicable 94; distinctiveness 94; Equity Bank 94–95; importance 94; price/quality 94; profitable 94; sustainability 94 Van de Ven, Andrew 23 van Noorloos, Femke 172–173 VC see venture capital (VC) venture capital (VC) 22, 46, 51, 70, 75–76; firms 76 Venture Capital for Africa (VCF4) 76 venture capitalists (VCs) 179 Venture Partners Botswana 76 venture(s): aggressive growth 187–188; classification 186–188; financial health and performance evaluation 82–86; financial management 80–82; financing 69–86; lifestyle 186–187; liquidity 82–83; long-term solvency analysis 84–85; managed growth 187; profitability 83; profitability analysis 85–86; startup funding sources 69–78; survival 186; types of 49

Vietnam 19 Vodafone 104 walk-through audit 107–108 Warby Parker 97, 98 weak ties: combined with strong ties 119–120; in social networks 117; strength of 118 West Africa xviii, 41, 92–93 Westport property group 170 wholesale trade 26 William Davidson Institute (University of Michigan): Francophone West African countries, study of 4 women: bureaucratic processes 161; community initiatives 158–159; discrimination and gender bias/stereotypes 159–160; economic empowerment 161; entrepreneurs 56, 160–161; family investment 158; female entrepreneurship, lower rates in Islam 10; funding for entrepreneurship 158–159; illiteracy 160–161; inadequate/poor infrastructure and 162; lack of/insufficient information about microfinancing options 161; loans 159; personal savings 158; sociocultural environment and 11; see also female entrepreneurship work and family, balance between 48 working capital, financing 79 World Bank 18, 156, 162, 163, 169; assessment of doing business 11, 12; on informal economy 116; report (2019) on economic environment 6; Worldwide Governance Indicators project 23 World Telecommunication/ICT Development Report 199 Worldwide Governance Indicators project 23 www.doingbusiness.org 17 Xente 100 Youth Empowerment Scheme (YES) 6 youth entrepreneurship 184–188; challenges 184–185; dimensions 185; higher environmental uncertainty 185; inadequate funding 184; lack of guidance 184; lack of relevant training 184; limited networks 184; supportive ecosystem, lack of 185; see also personality traits Zalando 94 Zambia 21, 32, 109 Zappos 94 Zimbabwe 33, 162 Zipline 100 Zuckerberg, Mark 17