The Five Main Types of Entrepreneurs in African Countries

In a post which is titled Banks and Entrepreneurship in Africa, I explored how, in some African countries, wealth inequality and an unsophisticated banking system blend to adversely alter the risk-reward trade-off of emergent entrepreneurial ventures. [1]

In this post, I'll extend the ideas that underpin the aforementioned blog post by employing two dimensions ― 1) the Restraining Forces that are encountered (Force Field Analysis) by the entrepreneur, and; 2) the Gini coefficient of the entrepreneur’s operating environment ― to arrive at a cursory taxonomy of the African entrepreneurial ecosystem.

Before I do that, I'll open with a broad-sweeping tangential commentary on the Global Entrepreneurship and Development Institute's 2015 Global Entrepreneurship Index. The Global Entrepreneurship Index (GEI) is "an annual index that measures the health of the entrepreneurship ecosystems in each of 120 countries. It then ranks the performance of these against each other. This provides a picture of how each country performs in both the domestic and international context". (source)

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...The Current State of Entrepreneurship in Africa


Illustration 1, below, shows the 2015 entrepreneurial indices of 29 Sub-Saharan African countries:

Illustration 1 (click on illustration to zoom in) Adapted from: Global Entrepreneurship and Development Institute

As Illustration 1 shows:

• South Africa, Botswana, Namibia and Nigeria have got the highest entrepreneurship indices.
• Uganda, Malawi, Chad and Ethiopia have got the lowest entrepreneurship indices.

Otherwise put, nations that are relatively more affluent, in terms of per capita income and nominal GDP, have the highest GEI Indices; while nations that are relatively less affluent, in terms of per capita income and nominal GDP, have the lowest GEI Indices. This hints that there is a positive direct relationship between entrepreneurship, the conditions that lead to it and the prosperity of African economies. [2]

Illustration 2, below, shows the GEI indices of the nations of the world:

Illustration 2 (click on illustration to zoom in) Adapted from: Global Entrepreneurship and Development Institute

As Illustration 2 shows, like most countries in Latin America and Asia, all of the African countries that were researched by the Global Entrepreneurship and Development Institute have low GEI indices; i.e. they have indices below 40. Illustration 3, below, further-illuminates the extent of the differential between the GEI Indices of Sub-Saharan Africa and the rest of the world's sub-regions:

 

Illustration 3 (click on illustration to zoom in) Adapted from: Global Entrepreneurship and Development Index

Illustration 3 shows that Sub-Saharan Africa has a lower GEI Indice than all of the world's major sub-regions. To be exact, the average of the rest of the world's GEI Indice is 1.9 times the average of Sub-Saharan Africa's GEI Indice. Otherwise expressed; the rest of the world is about two times more conducive to entrepreneurial activity than Sub-Saharan Africa. Illustration 4, below, expositions the underlying causes of this disparity:

Illustration 4 (click on illustration to zoom in) Adapted from: Global Entrepreneurship and Development Index

As Illustration 4 shows, the chief culprits that are responsible for the lion's share of Africa's entrepreneurial lag, i.e. the dimensions where the gap between Africa and the rest of the world is largest, are:

• Start-up Skills.
• Networking.
• Risk Acceptance.
• Cultural Support.
• Opportunity Perception.
• Human Capital.

Evidently, these are all soft-factors that take adroit social engineering and patience to influence.

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“In this world, the optimists have it, not because they are always right, but because they are positive. Even when wrong, they are positive, and that is the way of achievement, correction, improvement, and success. Educated, eyes-open optimism pays; pessimism can only offer the empty consolation of being right."

― David S. Landes (The Wealth and Poverty of Nations)

"[Jean-Baptiste] Say brought the entrepreneur into the spotlight of economic thought (he is said to have invented the term, which literally means undertaker—which the Austrians call Unternehmer—with the connotation of one who undertakes an adventure)... The entrepreneur assembles the necessary inputs, the factors of production, into a temporal capital structure... Entrepreneurial ventures naturally do not come with any guarantees of feasibility or profitability."

― Mark Spitznagel (The Dao of Capital)

Illustration 5, below, shows the three main categories of entrepreneurs that are found on the African continent. It is, in essence, an entrepreneurship spectrum that depicts the capital intensity of each category of entrepreneur's operations. The deeper the shading; the higher the capital intensity:

Illustration 5 (click on illustration to zoom in)

The types of entrepreneurs that will be discussed in the forthcoming parts of this blog post include:

• Micro Entrepreneurs.
• SME Entrepreneurs.

...Micro-Entrepreneurs: The majority of African Entrepreneurs

Most entrepreneurs in Africa are micro-entrepreneurs; men, women and children who usually sell undifferentiated (predominantly consumer) goods in the smallest quantities possible. They are the urban equivalents of the subsistence farmers who cultivate marginal lands in Africa's rural precincts. To be exact, micro-entrepreneurs are subsistence business people [3].

Micro-Entrepreneurs are neither entrepreneurs by choice nor entrepreneurs by accident; they are entrepreneurs by necessity. Otherwise put; they employ themselves because there is a paucity of viable employment opportunities [4] [15].

For their exertions, they make razor-thin margins, and only manage to survive because of:

1. Channel innovation: Most of the micro-entrepreneurs in Africa are able to place their offerings at points where highly motivated consumers have the maximum likelihood of purchasing them e.g. bus termini, traffic intersections, etc. Their product placement strategy can be summed as follows: “get as close to the motivated customer as possible”.
2. Low cost business models: Most micro-entrepreneurs employ low-cost business models. They do this by using labor, which they and their families provide, to substitute for scarce factors of production (land and capital). Otherwise put, micro-entrepreneurs in Africa employ labor-intensive business models. For instance, to navigate around the high rentals in mainland Lagos (property shortage) retail micro-entrepreneurs may operate mobile rickshaw or pushcart stores at high pedestrian traffic points.
3. Tax evasion: The bulk of African micro-entrepreneurs operate in the informal sector; otherwise put, they pay very little to no taxes to local and central governments. For this class of entrepreneurs, profit is approximately equal to earnings before interest, tax, depreciation and amortization (i.e. Profit ≈ EBITDA). This tax-minimization strategy enables them to sell their offerings at razor-thin margins (without compromising profitability). Contrary to the dominant 'development economist' paradigm, any attempt to formalize the micro-entrepreneurship sector (i.e. get micro-entrepreneurs to pay taxes) would curtail its ability to retail wares at razor-thin margins and put it out of existence. This may not bode well for societal stability [5].

The entrepreneurial endeavors of this class of entrepreneurs are, by and large, zero sum games that make a marginal contribution to economic growth [14] [16]. Having said that, it is important to italicize that their efforts greatly aid the circulation of money in an economy.



...Proprietors of Medium Sized and Large Firms: Minority of African entrepreneurs

"What we tend to see is the final product, the ultimate end—while we are blind to what came before, the remote means to that end."

― Mark Spitznagel (The Dao of Capital)

Below, Illustration 6 uses the metaphor of an iceberg to depict the restraining forces that entrepreneurs encounter on the African continent:

Illustration 6 (click on illustration to zoom in)

A restraining force can simply be defined as a force that encumbers an entrepreneur from realizing his or her vision and mission. In the Iceberg metaphor in Illustration 6 [9]:

• The Mass of the Iceberg Above the Surface (8.3% of its mass): Represents the endogenous restraining forces that are shaped by consumers' needs and wants and by an entrepreneurial venture's ability to meet them profitably [11] [13]. Most entrepreneurs can perceive and grasp these restraining forces with relative ease.
  
• The Submerged Mass of the Iceberg (91.7% of its mass): Represents exogenous restraining forces that adversely impact an enterprise's staying power. To expound using the visual aid in Illustration 6: The outermost concentric ring, which is shaded in red, represents restraining forces that are shaped by three principal global macro forces including US Credit Cycles [6], US Foreign Policy [7] and China's Demand For Resources [10], and; The innermost concentric ring, which is shaded in green, represents restraining forces that are shaped by the constituent forces of an enterprise's industry environment including The Threat of New Entrants, The Bargaining Power of Buyers, The Threat of Substitute Products, The Bargaining Power of Suppliers and The Competitive Rivalry in the Market [8].

In Illustration 6, the middle concentric ring, which is shaded in yellow, represents restraining forces that are shaped by an enterprise's Political, Economic, Social and Technological context. These will be the subject of subsequent sections of this blog post:

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Illustration 7, below, shows the "other" types of entrepreneurs that exist in Africa with respect to two broad dimensions: 1) Restraining Forces that are shaped entrepreneur's Political, Economic, Social and Technological context (the yellow concentric ring in Illustration 6), and; 2) the Gini coefficient of the entrepreneur’s operating environment:

Illustration 7 (click on illustration to zoom in)

The assumptions that underpin Illustration 7, above, can be summed as follows:

• Influence or Wealth Concentration (Gini Index): The higher the Gini coefficient of the operating environment; the higher the correlation between entrepreneurial success and being a member of a rentier elite [12] The inverse of the level of institutional quality of a society can be used as an alternate measure [23].
• Restraining Forces (Force Field Strength): The higher the restraining forces that an entrepreneur encounters; the more likely that he or she will have to draw upon strategic thinking and superior relationship-building to counter forbidding environmental conditions.

Thus, the types of mid-sized and large scale entrepreneurs in Africa can be described as follows:

1. The Lucky People / Accidental Moguls (Low Restraining Forces: Low Gini Coefficient): These are entrepreneurs who operate in fairly developed African countries, i.e. the African countries with high GEI Indices in Illustration 1, and happen to be in the right place at the right time; doing the right things. Otherwise put, their success can be put more to serendipity than to superior strategic planning. Usually, when these types of entrepreneurs venture into a slightly different market context, they fail to replicate their success. Further, they also fail to succeed when the industry context changes. Examples of these types of entrepreneurs: the first integrated (IT) hardware retailers in Africa between 1995 and the early 2000s (when Africa's Public and Private sectors finally embraced ICTs fully) and internet cafe owners in the pre-mobile broadband era.
2. The Rent Seeker (Low Restraining Forces: High Gini Coefficient): Rent Seekers are part of the “establishment” in the society; their businesses wholly exist because of government legislation [17] and or government contracts [21]. These types of entrepreneurs are predominantly found in the resources, defense, and construction space in most African countries. They are also found upstream state procurement supply chains. In some Lusophone African countries, almost all entrepreneurs above the micro-entrepreneur threshold are rent seekers [22]. As long as the political status quo remains stable, these types of entrepreneurs tend to prevail in all types of market environments. Their political connections enable them to erect barriers to market entry and create new markets at will. Thus, they tend to be insanely profitable and tend to grow to gargantuan proportions.
3.  The Strategist Executors (High Restraining Forces: Low Gini Coefficient): These are rare gems that operate in relatively developed contexts, i.e. the African countries with high GEI Indices in Illustration 1. They encounter insurmountable odds that they deal with through superior strategic thinking and adroit execution. Of all the types of African Entrepreneurs, this type is the most resilient. These entrepreneurs have a keen ability to understand their environment and themselves. Further, they have the consistent ability to use these insights to generate actionable plans [20]. Generally, with the passage of time and the accumulation of power and connections [18], they may morph into the society's Establishment, and where institutions are weak, into a rentier class.
4. The Outsider (High Restraining Forces: High Gini Coefficient): These entrepreneurs are found in economies with low GEI Indices in Illustration 1. Owing to high barriers to market entry that exist in their operating environments, they are not supposed to exist at all [19]. Like the Strategist Executor, the Outsider deals with insurmountable odds through superior strategic thinking and adroit execution. However, the only difference between the Outsider and The Strategist Executor is: the latter operates in societies where formal channels can be used to do business ― in a predictable, cost-efficient, expeditious and transparent manner; while the former operates in societies where things are not as clean cut. Outsiders tend to pick niches that are either too dirty or too demanding or too dangerous for the traditional rent seeker’s entrepreneurial palate. Usually, their emergence tends to coincide with a Political, Economic, Social or Technological discontinuity or upheaval. In few numbers, they are reluctantly tolerated by the establishment because they are a vital source of tax revenues, economic resilience and jobs. However, in large numbers, they tend to disrupt the prevalent money-power equilibrium of a society. Generally, a preponderance of Outsiders signals changing political winds, and, it is symptomatic of a weakening establishment. By and large, in African countries, no successful Outsider remains on the periphery for too long; they tend to be co-opted into the ranks of the establishment [18]. If that fails, they tend to be "shut down" rather dramatically.

This simple taxonomy can help to develop:

• Capital allocation strategies in the private equity space.
• Risk mitigation strategies for investors and lenders.

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[1] African countries are similar in that they face identical developmental challenges and common entrepreneurial dynamics, however, it is of paramount importance to point out that there are really four "Africas": 

• Francophone Africa: Former French colonies in Central and Western Africa. They are dissimilar to the rest of Africa in that they have a wealth of attitudes and practices in common with France. Further, during colonial times, the French created an African-but essentially French elite that persists until this day.
• Northern Africa (including Sudan): The sub-region is in Africa, but it is really ― owing to the homogenizing impact of the Ottoman Empire, Gamal Abel Nasser's attempt to cultivate a Pan-Arab identity, religious factors (i.e. Islam), historical trade links, etc. ― part of Arabia; in literally every contextual dimension that one can conceive of.
• South Africa: It's a second world country that is culturally more secular than any other African country and institutionally Western.
• The Rest of Africa: Every other African country (outside of a war zone).

[2] This suggests that it would be prudent for African governments that seek to stimulate growth to start by creating a conducive environment for entrepreneurship.
[3] They work to satiate their lower-order Maslovian needs including Physiological and Safety needs.
[4] The micro-entrepreneurs in Africa should really be seen as the unemployed who eschew a life of vice or idleness and try to be 'captains of their fate'. They operate in markets that can truly be described as free markets; with perfect competition, no government intervention and normal profits (i.e. zero long run profits). Hence, it is reasonable to argue that if viable employment alternatives appear, they would cease their entrepreneurial endeavors.
[5] As I alluded to in footnote [4], the micro-entrepreneurs in Africa should really be seen as the "unemployed who eschew a life of vice or idleness and try to be 'captains of their fate'". If they are required to pay their 'fair share' of taxes, their razor-thin margins will be eroded to the point where they fail to generate returns that exceed their cost of capital. At this point, most of them would be forced to go out of business. This would, in turn, convert from being the unemployed who are captains of their fate ― i.e. the unemployed who blame themselves for their misfortunes ― to the unemployed who are idle ― i.e. the unemployed who blame central authorities for their misfortunes; a recipe for unrest. I am of the firm belief that most African governments intuitively understand this; this is why they allow hawkers to roam free.
[6] Most African countries are net importers (of energy, foodstuffs and capital goods) and they run budget deficits. To finance imports and budgetary expenditures, African countries rely on credit from international money and capital markets. These markets are primarily driven by US credit cycles; owing to this, US credit cycles influence African countries' cost of borrowing. Tightening phases in the cycle increase the cost of borrowing and the debt burden; loosening cycles reduce the cost of borrowing and the debt burden.
[7] US Foreign Policy, particularly who in the Middle East the US likes or doesn't like, influences the price of oil; a commodity that most African countries import.
[8] These are elements of Michael Porters' 5-Forces Model.
[9] The zones of the submerged part of the Iceberg that are not shaded represent chaos or probability.
[10] An adage that helps to illuminate latent causal relationships: "The 'Africa Rising' story was really a 'China Exports / Infrastructure Rising' story; which, in turn, was really a 'US Credit Rising' story".
[11] An enterprise's ability to meet consumer needs profitability is determined by a venture's admixture of human, physical and relational resources. 
[12] In this societal stratum, favors are the currency which is used to purchase influence (social capital) and information. 
[13] Underpinning human needs and wants are human preferences, which are, in a partial sense, a social construct. 
[14] "Entrepreneurial competition betters the world (though, paradoxically, most often at the expense of most of the competitors)" - Mark Spitznagel 
[15] Overpopulation is when there are too many people relative to the resources that are available to sustain them. Africa's urban areas have too few jobs ― resources that provide people with money with which to purchase their needs and wants ― to sustain their rapidly expanding youthful populations. In other words, using employment opportunities as a yardstick, urban Africa is overpopulated.
[16] In the Dao of Capital, Mark Spitznagel provides a succinct and commonsensical explanation of how economic growth occurs: "The production of higher-order capital goods furthers the production of lower-order consumer goods, with capital continuously improved through innovation to create better lower-order goods."  This dynamic is barely in existence in African economies. The main problem with the micro-entrepreneurship sector in Africa is that it is fiercely competitive, i.e. no meaningful surpluses are made by entrepreneurs; it does not allow for entrepreneurs to save capital for investment in higher-order means of production. Lack, of higher order means of productions means that the quantity of lower-order consumer goods remains static.
[17] This point does need to be expounded: The rent seeker benefits from laws that are advantageous to his / her venture being implemented and from reasonable laws that would be disadvantageous to his business not being implemented. 
[18] "In politics, wealthy people tend to be seen as wallets" - Chutinant Bhirombhakdi 
[19] In some contexts; outsiders owe their existence to corruption. Bribes are really the monetary price that outsiders pay to secure insider or rent seeker advantages. 
[20] In the Dao of Capital, Mark Spitznagel describes what the Strategist Executor does: "It has become fashionable in some quarters to speak of following one’s bliss, hoping to stumble upon profit as if blindfolded along a daisy-strewn path, this is not how the real world works and progresses. Entrepreneurs do not dabble, willy-nilly, in pursuits of fancy, chasing butterflies or endless real optionality; theirs is a practice of assuming an uncomfortable position in the difficult sunk costs required for the tools to achieve their clear goals. Even when their roundabout processes take them back to the drawing board countless times, to reinvent the very tools they need to produce their final goods, they are decidedly and determinedly purposeful." 
[21] They are the fractal equivalents of Adnan Khashoggi
[22] There are some economies in Africa that are really well-diversified family conglomerates with: World Bank and Chinese loans to build infrastructure; development aid to take care of the masses, and; IMF loans to lubricate balance of payment frictions.
[23] In African countries with high quality institutions, things work; no one spends six months on registration formalities; freeing up time for value adding tasks.