Too Scared To Fail: Barriers To Small Business Growth

We know that more than half of all new businesses in South Africa fail within the first 12 months and that, by the end of 10 years, 96% of them will have closed their doors – but how many of these re-enter the market? And how many more don’t even try to start up because of this high risk of failure? We don’t know because those statistics don’t exist.

However, we can be fairly certain that our re-entry rate is low since entrepreneurs made up only 7.8% of economically active people in South Africa in 2008 and that dropped down to 5% when the recession hit in 2009. When we look at what is restricting enterprise development in South Africa, it appears that a major constraint is that we are too scared to fail.

A pronounced stigma of failure is often blamed for hampering entrepreneurship, innovation and growth. This emerges clearly when we compare attitudes to failure in different societies. One comparison is between the United States and Japan: for individuals in the US, failure is often regarded as a precursor to success, while in the Japanese culture it is a matter of deep shame to ‘lose face’.

Some societies are inherently risk-averse and others are not. We can attribute this to a number of cultural influences. Foremost amongst these are the distinctive characteristics of individualist or collectivist societies and cutting across these are shame-based and fear-based factors. All play a role in social attitudes to failure.

According to a study by L Eaton and J Louw (University of Cape Town, Dept of Psychology, 2000), individualist cultures are characterised by individual uniqueness and self-determination. In such cultures the self-made man is admired and personal initiative is highly valued. We have seen this attitude exemplified in the ethos of the “American dream” where people feel that, regardless of their status, they have the right to pursue opportunities for self-upliftment and self-empowerment. Entrepreneurship thrives in such an environment. In the United States, failure is regarded as a part of one’s intellectual property; entrepreneurs are expected to experience tough times as part of their learning curve. This is even reflected in that country’s less rigorous funding requirements and more lenient bankruptcy laws.

We have seen a similar phenomenon at work in the explosive growth of high-tech small businesses in Israel. Dan Senor and Saul Singer, the authors of Start-Up Nation: The Story of Israel’s Economic Miracle (Hatchette Book Group, New York, 2009), believe that one of the factors that has contributed to that nation’s entrepreneurial success is the high premium that it gives to individual initiative and risk taking. It is a culture where failure does not carry a social price, hierarchies are flattened, questioning and challenging is encouraged, improvisation and experimentation is favoured over discipline and mistakes are acceptable provided that people capitalise on what they learn from them.

By contrast, say Eaton and Louw, collectivist cultures place the group before the individual. In such societies people are expected to identify and comply with the group identity;in exchange they receive protection from the group. People have strong ties with their group and are more likely to offer it unquestioning loyalty. Individuals are encouraged to conform and do what is best for the group. In this environment the failure of an individual brings shame to the entire group, so it is a natural consequence that, in collectivist societies, people are averse to the risk of failure and shame.

Eaton and Louw argue that, in a South African context,collectivism is best expressed in the indigenous term ‘ubuntu’. While ubuntu does not subject everyone to a communal identity, it gives precedence to the status of the community and individuals are expected to align with its interests.

In the 1980s Geert Hofstede developed a model, the Hofstede Model of Cultural Dimensions, for measuring national cultures according to a selection of criteria, one of which is individualism. With regards to individualism the United States scores the highest, at 91 out of a possible 120 points, South Africa scores 65 and Tanzania and Zambia both score 27. Hofstede’s South African score is likely to be socio-economically skewed because, at the time, the subjects of his study were people who worked for IBM. Nevertheless, his model substantiates the existence of relatively low individualism in South Africa.

Shame and fear are culprits as well because they affect our motivation to be entrepreneurial. Diane Francis, a prominent Canadian economic commentator (www.dianefrancis.com) once mentioned that attitudes to entrepreneurship are affected by whether a society is shame-based or fear-based. In fear-based societies the fear of losing money or of not earning enough is an incentive for taking risks and being entrepreneurial. This is typical of a society where individuals are expected to be self-reliant and take care of themselves. However, in a shame-based society, the failure of an individual brings shame to the entire peer group, so entrepreneurship tends to be stifled. And this is certainly not confined to non-western countries – in fact in many European countries, as in South Africa, failure in business is even penalised.

In South Africa, if your business fails it becomes even harder to re-enter the small business sector: black-listing is hard to shake off, it is much more difficulty to borrow money the second time around and individuals who have entered into debt agreements may be banned from getting further credit. It seems that the old commonwealth norm of contempt for what is perceived as ‘weakness’ has distorted the judgement of our decision makers.

We need to rethink how our social attitudes to failure have infiltrated and are undermining all our best efforts to support enterprise development. Emerging entrepreneurs who approach small business support institutions for assistance in setting up their businesses will not be given the time of day until they have registered their companies – often an intimidating process for the uninitiated. Banks won’t lend to someone whose credit record doesn’t look good. Woe betide the entrepreneur who has a judgement against his name – even when the debt has been repaid, it will take a costly legal procedure to have this blot of failure rescinded from his credit record. Individuals who hope to consolidate their debt by means of a loan have to prove that they can afford the loan – but if they could afford it they would not need it!

The result is that those individuals who pick themselves up after they have failed and have the passion and commitment to try again do not receive recognition. The risk-reward ratio for entrepreneurs in South Africa is not appropriate; it inhibits initiative and it contributes directly to our low re-entry rate.

We also have to consider how our cultural inclinations affect our service levels. When a specific job is assigned to an individual who is held accountable for its completion, the result is likely to be efficient delivery. In a collectivist environment where responsibility is assigned to a group the result is more likely to be delays and lack of accountability. It is a factor that certainly impedes and even cripples the effectiveness of those state institutions that are tasked with supporting enterprise development in South Africa.

While we have significant small business support initiatives in place, their impact appears to be negligible at best. Yet government hopes that the business sector will help to create 5 million new jobs by 2020, in particular via small business growth. At the same time there are repeated calls from the private sector for an enabling environment for entrepreneurship. If we are to achieve any of this, both government and business will need to devise measures that are sensitive to the cultural impediments to entrepreneurship. It is not enough just to provide support structures; we urgently need to look at how we can change the prevailing mindsets that stand in our way, starting at school level.

In conclusion, it is worth quoting a finding from a round-table discussion hosted by South Africa’s Small Business Project (the SBP) in September 2009. The subject was the disturbing lack of progress in small business growth in South Africa and the participants included stakeholders from all sectors engaged in small business development, from the private sector up to the presidency:

“The international experience is that very large numbers of businesses – up to 80% and more – fail in their first ten years. Where the environment favours entrepreneurs, for example in the USA, it is relatively easy to re-enter the market. If the environment is too punitive (as with those credit black-listing, for instance) re-entry is much harder, and we lose the learning that failed entrepreneurs have gained, which could equip them to be better business people the second time around. The issue of credit history needs to be dealt with more sensitively in South Africa. The USA also has better coping mechanisms to support re-entry, including much greater labour flexibility. These are important considerations in a competitive globalised economy.”

That discussion took place three years ago. Has anyone been listening?

One thought on “Too Scared To Fail: Barriers To Small Business Growth

  1. As a consultant, we did some similar “obstacles to entrepreneurship” research for Nedlac in 2004 – it came to exactly the same conclusions, plus others such as corporate and government’s slow payment mechanisms.

    So 8 years on and very few (if any) of these hurdles have been removed. Government’s response is similar to re-arranging the deckchairs, and apart from SAB and a couple of others, few corporates make much effort to understand and support smaller businesses.

    As usual, I suspect entrepreneurs are on their own.

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