How to start a business in South Africa

How to start a business in South Africa

Starting your own business from the ground with no experience can be a daunting task. A lot of people are afraid of what might go wrong and some of the ones who are brave enough to start their own businesses often quit too soon. South Africa has unique challenges and opportunities for entrepreneurs. This is a guide on how to start a business in South Africa.

This guide comes after seeing a lot of entrepreneurs making errors in starting their own businesses. The information contained in this guide has been pulled from multiple sources, mainly from entrepreneurs who have succeeded in starting up a business in South Africa. South Africa is one of the most difficult places to do business, with a start-up failure rate of 80% within the first year. This guide may be unorthodox as it highlights parts of entrepreneurship that are often overlooked and goes around the general information.

Statistics

  • 80%-90% of businesses formed in South Africa fail within the first 2 years. The average global failure rate of businesses is 30% within the same period.
  • South Africa is ranked number 84 in ease of doing business as of 2019. It was ranked 32 (lowest) in 2008. This means conducting business in South Africa is extremely difficult.

It’s important to familiarize yourself with statistics as an entrepreneur, they paint a better picture of how things really are, especially to people with no experience. Now that you have seen these stats, are you discouraged? Don’t be, this article will guide you on everything you need to know to be on the safe side.

Long term vision: starting a business in South Africa

You need to have a long-term vision, especially if you have never run a business successfully before. This is a vision that you must believe in and devote yourself to wholeheartedly.

You will face a lot of obstacles in your business journey; it’s important to remember that the odds are against you and not for you. Your vision will keep you on track, it is of utmost importance that you believe in the vision. Your vision should not be about making money, if you start a business with the aim of making money and not adding value to society then it’s likely that your business will end up as part of the 90% businesses that fail within the first 2 years.

Imagine your business at its finest hour, what do you want it to be and what do you want it to stand for? In my case (author) I believed in my vision so much that I chose to drop everything else in life to pursue it.

Value vs Money

We live under capitalism; in order to win a capitalistic society; you must provide value. People pay for things they consider to be valuable, all the successful businesses you know got successful by providing value.

It’s very important to understand this, a lot of aspiring entrepreneurs aren’t concerned with providing value but with making money. If you provide value, you will definitely make money. A good example of a company that has always stood for providing value to customers is Amazon.com, Amazon has a market cap of over 1 Trillion USD.

People aren’t going to support your business because they know you or because you are from the same town. They will go where they feel like they get the most value for their money. Your long-term vision should be focused on the value your business will add to society.

It’s important to note that value is calculated differently, a tech company and a clothing brand aren’t going to calculate value the same way. It can be said that people like feeling beautiful; therefore, they find value in clothing that makes them feel more beautiful. However, a tech company will most likely have to solve a problem or improve a system in order to create value.

If you start your business with the sole purpose of earning money then you are likely to be crushed by competitors who are aiming to provide value.

Things won’t go according to plan

You will not be successful within 3 months, sorry to break it to you. Almost everything will not go according to plan and that’s okay. We don’t even recommend having a business plan, it’s better to have a mind map of where you are taking your business.

It doesn’t matter how much you pay for a business plan; things just won’t go according to it. You will find yourself changing your business plan multiple times as the company evolves. Just don’t pay for a business plan, I know it’s very tempting for novice entrepreneurs to draft a business plan as it makes them seem more professional, but don’t, save your time.

It takes around 2 to 3 years for businesses to be profitable on average; let that sink in. This also depends on your start up costs, the more money a business needs to operate, the longer it will take to make profit.

It takes around 4 – 7 years before a business truly reaches its height. A unicorn or an overnight success is a business that grows tremendously in value in 4 years. Are you prepared to wait for 4 years to get your business where it needs to be? Moreover, are you prepared to work for over 18 months without seeing any profits in your business?

These are some of the benefits of familiarizing yourself with statistics, they allow you to see the true picture of what is happening. Most South African entrepreneurs quit after not making profit for 12 months because they think they have failed, while in reality they are doing just fine. You can only start panicking after not making a profit in 3 years, otherwise you are still just fine.

You are not immune to statistics, it’s not like you will come up with a magic formula that will have you achieve success in just 3 months. There are always outliers but that doesn’t mean you should base your calculations on the hopes that you will be that outlier.

Fail fast and adapt

Don’t be afraid of failure, if you fail but still stay in the game then you have not failed, people who fail are the ones that quit. As we said above, things will not go according to plan, you might blow up all your capital, that’s fine, as long as you are learning.

Show me one discipline where you start off being a professional. In almost all disciplines, whether it’s sport, art or careers in general; you start off being an amateur. You have to learn before mastering your craft, it’s okay to fail, as long as each and every failure teaches you something (experience).

Some entrepreneurs fail and don’t know what caused them to fail, those entrepreneurs are doomed. If you don’t know what made you fail then you are bound to repeat your mistakes. Adapting is also key in building a successful business, after failing; you should adapt. You can not afford to repeat the same processes that made you fail in the first place.

The above was mainly the mental framework or head-space an entrepreneur needs to be in. You should not expect anything to be easy, don’t you love a challenge? I love challenges, I think challenges are fun.

Now let’s look at some of the steps that you can take when starting your own business in South Africa.

1. Decide on what your business will do

Decide on what type of business you are going to open, is it a service-based business or does it sell physical goods? It’s also important to look at the value proposition of your business at this stage.

Generally speaking, do you think people will find value in what you have to offer? This is usually easier to answer if there are already successful businesses in the market you want to penetrate.

2. Organize your idea

No, don’t do a business plan, just make a very detailed mind map of how your business will operate. Try to write this down if possible, at this point you should be willing to play devil’s advocate, try to come with a list of reasons why your business will not be successful. Then think hard about how you are going to go around those obstacles, sometimes, entrepreneurs are too optimistic and don’t want to acknowledge the reality of their unique challenges. That’s why 90% of businesses fail in South Africa, it’s always these overly optimistic entrepreneurs.

Don’t focus on the tiny details, but the overall mind map or highlights of where your business will go. This will give you direction.

3. Research - starting a business in South Africa

Every business sector or industry has unique challenges. The same goes for entrepreneurs, at this point you should do a lot of research on how your industry functions. This includes all the challenges that businesses in your industry face, you will likely face them as well.

Your research should include market research, do you think there are people who are willing to pay for your products or services where you operate? Sometimes it’s harder to do market research if you are going to be the first to open a certain business in your area. Try to get all statistics of mainly challenges and operations of your desired business.

If for example you are going to open a social app, you should do research on how much app development will cost you, the time it usually takes to develop an app, maintenance costs, and user acquisition techniques. After acquiring this information; you should go back to step 2 and re-organize your idea.

4. Validate your business idea

You can validate your business idea by asking people you know if they would find your business valuable. There are many ways to validate your business idea, you can make online surveys or sell a sample of your product. If validating your idea requires you to produce samples then this is the stage where you do that.

The purpose of this stage is to find out whether people are willing to pay for your products or services, or whether they find them valuable. If there are enough people who are validating your idea then go for it, it’s always better to ask strangers or people you can trust when it comes to honesty.

5. Come up with a name for your business

Don’t think too hard about a business name, it can be changed at any time. It is always important to come up with a name that will be easy to remember and brand.

It may happen that your business name is already taken, it’s best to go and check through the CIPC website if your preferred business name is not taken. It is also important to check on whether a domain for your name is available. It would be such a shame if you were to think of opening an eCommerce store, go through the hustle of registering your business, only to find out that your domain name is already taken.

It’s important to make sure that both the dotcom and co.za versions of your domain name are available. You can easily check the availability of your domain name on Blue Host.

6. Register your business

Registering a business in South Africa only costs R175, it usually takes a week or 2 before your business is fully registered. You can register your business through the CIPC website or through FNB. FNB will open a business account for you when you register through them.

7. Logo

A logo is one of those things that matters more to other businesses than it does to others. A fashion brand definitely needs to pay more attention to its logo than an accounting firm. A spaza shop or Shisa nyama might survive without a logo. However, it’s important that all businesses have a logo. A logo can cost you anywhere between R150 and R1 500 (or more) in South Africa.

The amount of money you pay for a logo should go hand in hand with how important a logo is for your business. A logo can be redesigned anytime but it becomes difficult if you are producing physical goods that have to come with your logo. Think Vodacom, remember it was blue, they made a switch to red and a new logo and people have adapted to that.

8. Open a website

I wish someone explained to me the importance of having a website when I started my business. It is especially important if you are in the services sector, if you run a business that sells services then you definitely need a website.

A car wash or spaza shop might do well without a website. But you will find that a website will be your best ally if you are in the services sector. However, it’s important to note that a lot of people will never really see the benefits of owning a website, that’s because they go about it the wrong way.

Most entrepreneurs just use a website as some sort of portfolio, a place to dump information about the business. That’s not how it ought to be, a website can be a powerful sales tool if used correctly. Let’s do some quick math, the average lead conversion rate is around 3%. A lead is a person who has the potential to become your client/customer. If your website receives around 5 000 visitors per month then it’s very likely that 3% of them will end up as your clients. That’s 150 people. Guess what? A lot of business websites are a ghost town, no one ever visits them, they only get visited by the owner and on the first month when the owner announces to his WhatsApp friends that he has a website.

This website (MySouthAfrica) receives around 20 000 to 30 000 visitors per month, and it’s only 7 months old, the projected traffic by November is 70 000 unique visitors per month. However, realistically speaking, your small business website will never reach those numbers. Getting people to come to your website takes a lot of skill, resources, hard work and a lot of time.

A more realistic goal should be getting around 5 000 visitors per month, that would be an incredible milestone for your business. Imagine if you are running a catering company and over 5 000 people see your work every month, a lot of them are bound to become your clients. Here is a detailed guide on how to use your website effectively.

Open a website for your business and immediately invest in using it effectively, this alone can save your business from becoming part of the 90% businesses that fail within the first 2 years. A standard business website only costs R1 200 from Promta Web Services.

You will have to pay an SEO specialist/company to raise your website traffic. SEO services are expensive, I personally charge R5 000 for SEO services, some companies charge as much as R20 000. However, it depends on where you want your website traffic to come from, if you want your 5 000 visitors to come from all over the world then you might pay as high as R150 000. Contact me if you want to build traffic for your website.

9. Developing the product

If you are running a business that needs you to develop the actual product, e.g. a clothing brand, now is the time to do that. If you are building an app then now is the time to do so, most service businesses don’t need to develop any product, they only need equipment and resources. This is the time to get your equipment and resources in order if you run a service-based business.

10. Getting funding for your business in South Africa

Do you have money? If not, then how do you plan on making this whole thing work? I’m asking. It’s extremely difficult to push a business without funding, however, it’s completely possible. Funding doesn’t mean you should receive a 100 000 Rands from the bank or investors.

You should aim to have enough money to develop your product, buy equipment and cover all your start up costs. It’s also good to have some money saved up for marketing, you will also need to have money enough to cover the first 3 months of your operating expenses.

If you can’t raise that money by yourself then you might consider asking your family to invest in your business or seeking external investors. There are a lot of investors who are often willing to invest money into promising start-ups. The problem is that a lot of entrepreneurs don’t know where to find these investors.

You can also get finance from the government, there are lot of government programmes that fund SMMEs. Some of these programmes include Umsobovu Youth Fund, SEDA, NYDA and Khula. But if you are going to go with the government route then you will need to produce a business plan.

Venture Capital firms are not known for funding start-ups, a business usually goes to a VC when it wants to scale its business. VC’s only help with accelerating your growth, not getting you up from the ground. Don’t approach any Venture Capital firm when starting, it’s better to approach angel investors.

Angel investors are people who provide capital for business start-ups. There is no shortage of Angel investors in South Africa. The first round of investment is known as seed funding. Jozi Angels is one source where you can get funding for your business.

11. Client acquisition

How do you plan on getting clients? This is a part that most entrepreneurs overlook. They always make an assumption that they will get some clients, the initial number is usually 10. It’s easy for an entrepreneur to think “there is no way I won’t get 10 clients”.

Three months will go by without you getting any client with that kind of mentality. Some entrepreneurs come with a very great product to the market, and just because it’s great; they think it will market itself or people will readily pay for it. That’s not how things work, getting just 1 client is very difficult in the real world.

If you don’t invest in a client acquisition strategy then you will find yourself advertising your business to your WhatsApp friends and hunting for clients on Facebook forums. Frankly, none of those are sustainable, they only work when there is a hot new product on the market.

I would advise you to just skip hunting for clients on Facebook forums/groups. It just takes too much of your time, time that you could have used to improve other aspects of your business.

You will likely get one or 2 clients/customers when you are starting out, these are usually people who know you. After that, it’s an uphill battle, you might not get another client for several months. Don’t waste your time on Facebook forums, commenting under every post that needs your services, or posting your business in your timeline. It most often never works; you will get a few people who will ask you the price and complement you but never buy. Same goes for Twitter, Instagram. However, Pinterest can be a great source of getting clients/users/customers.

12. Getting clients, the right way

A good friend of mine from high school called me and said he needed my help. He had just gotten into the business of real estate, it sounded urgent so we quickly scheduled a meeting. He said to me “Khanya, I need your help, I need to get clients”, I asked him why he chose to come to me of all people, he said “because I know you know how these things work”.

I was impressed by the fact that he knew that all these other commonly hyped up tactics don’t work. A lot of people spend a lot of time advertising their business on WhatsApp status and spamming Facebook posts. It never works and it’s often difficult to get an ad into things like newspapers and magazines.

So, what’s the correct way to go about this? The answer is digitally. It is very likely that all your target market has daily access to the internet, unless you are in some rural area. Digital marketing has been gaining a lot of traction, SEO is also part of digital marketing.

The best sources for clients/users are Facebook and Google. There are over 2 Billion Facebook users globally and over 17 million people use Facebook in South Africa. There is a very high chance that your clients are hiding somewhere on Facebook.

Facebook allows marketers to advertise to their massive audience, I am pretty sure you have seen ads with the label “sponsored”. Those are businesses that are leveraging the power of Facebook’s reach. You can start running ads on Facebook with as little as R50. R50 will likely get your business advert seen by more than 900 people, that’s more than we can say for your WhatsApp status viewers.

However, if you want to see real returns on your Facebook campaign; you have to spend at least more than R1 000. R1 000 can bring over 2 000 people to your website, remember the golden average conversion rate? The average conversion rate is 3%, however, the average conversion rate from Facebook ads is 9%. This means that out of 2 000 people that go to your website through Facebook ads; over 180 are likely to be your clients. Even if you do poorly and convert only 1%, that’s still 20 clients.

Google ads

Google runs an ad network similar to Facebook. Google ads are a bit more expensive compared to Facebook and have a surprisingly lower conversion rate. There are over 5 billion searches on Google per day, that is a massive audience, and huge chunks of these searches are sales related.

You can run targeted ads to people who make these searches, these are searches like “accounting firms in Vanderbijlpark”. Most often, people who make these searches have an intent to buy. My sister went to Google and typed “Huawei p40” and clicked on the first advert that appeared and bought the phone right then and there.

Google ads tend to be a bit more expensive when compared to other types of ads, you can expect to pay more than R13 per link click, this means with a budget of R1 000, you can expect to get 77 people to your website. But remember, these are people who have an intent to buy, no one logs in on Facebook with a credit card on their hand.

Sometimes link clicks can cost as low as R3 and as high as R500, it all depends on which keywords you are targeting. Keywords that are very popular will cost you more as you are basically competing with more advertisers for the same keywords. Keywords related to legal and insurance businesses often cost between R150 and R500 per link click. Contrast this with Facebook, that only charges between R0.50 and R3 for link clicks.

There are a lot of different ways to get clients, it’s also important to choose a strategy that works best for your business. A spaza shop won’t really see the benefits of digital marketing, while an eCommerce store won’t go far without it. Here is a more detailed guide on how to market your business.

13. Customer retention

How do you win in a capitalistic society? You create value. If your clients get value from you then they will keep coming back. This is not hard; all you have to do is give them excellent customer service and value for their money.

Happy clients/users/customers are likely to introduce their friends and family to your business. This is where the power of word of mouth comes in, word of mouth is extremely powerful in growing a business. This is because you will get clients/customers you didn’t pay a cent to advertise to. Your happy clients/customers will do the job for you.

Why do you think a lot of people find it hard to switch from Google to other search engines like DuckDuckGo? It’s because they don’t find the same quality of results from other search engines. However, search engines like DuckDuckGo have exploded in popularity recently because of their value proposition. DuckDuckGo is a search engine that is privacy focused, it doesn’t track you and follow you with ads. This is something that some people appreciate, these people have switched to DuckDuckGo.

It’s because DDG is giving them value that they don’t find when using other search engines. I searched for “SMEG kettles” the other day on Google and now I get SMEG kettle ads everywhere I go on the internet.

14. Growing your business in South Africa

 A lot of entrepreneurs make the mistake of calculating growth based on the amount of money they have made. Not on the percentage of growth they have made. For example, an entrepreneur starts a business with R100 and makes a profit of R1 000 by the end of the first year. Instead of looking at it as only making R1 000 in a year, look at it as a growth of 1000%. If this growth rate persists year over year then your business will be making millions soon enough.

You will never find a return of 1000% from any bank or financial institution, you are lucky to get a return of 8%, but you as an entrepreneur have done something remarkable, you have grown your business by more than 1000%. That’s how you should look at growth.

15. Don’t scale too fast

74% of tech companies fail after raising millions in funding because they scaled too fast. Scaling too fast has advantages as well as disadvantages. You will be required to scale if you get an investment from the government, or angel investors.

Let’s say you apply for funding of 1 million rands, the government will tell you that in order for you to get this fund you must hire a certain number of people immediately after receiving funding. Let’s say you decide to hire 2 permanent software developers, pay each of them R18 000 per month, then you decide to hire other people like receptionists. These 2 software developers will cost you R432 000 in salaries per year, add another R80 000 for other staff members and now you have R512 000 in yearly expenses; only on salaries.

We haven’t taken into account the money you will be paying to lease operating premises on a monthly basis and all the other operating costs. Operating premises may cost you R132 000 per year, add that to the R512 000, now you R644 000 in yearly expenses.

See how dangerous this is? This means your business should figure out a way to earn close to R700 000 per year in less than 24 months. If your business can’t earn that much money then it will be bankrupt. It’s unlikely that you will reach those numbers in less than 24 months. This will put you under immense pressure to seek another round of funding, what happens when you don’t get it? Your business fails and shuts down.

Companies that have scaled too fast include companies like Uber, Uber has never turned a profit despite being valued at over 80 billion USD. In fact, they are operating at a loss, if their cash runs out and for some reason, they can’t raise another round of funding then they would have failed.

Conclusion

This was a guide on how to start a business in South Africa. Starting a business is not easy and it requires a lot of hard work. You will face a lot of challenges and obstacles but that’s the exciting part. Do you have any thoughts or questions? Comment below.

This Post Has 3 Comments

  1. I have a business Anni want to be helped growing it.

  2. i have learnt something about business which gave me enough courage to start my own business…even though on some of the points i didn’t agree with you but you have helped me very much…you will soon find about my business.

    1. Thanks Bongani, would love to hear about it.

Leave a Reply

Close Menu