Harnessing the power of South Africa’s informal startup sector: A catalyst for inclusive growth

Instead of criminalising informal activity, local governments should support it

Consider this ratio for a minute: 45:45:10.

That is the global average of formal employment by large firms, self-employed and informal, micro and small businesses and finally the unemployed. 

In South Africa, our ratio is something like this: 50:10:40.

Our formal employment statistics are on par or even exceed global averages, but we have seemingly not been able to address the creation of jobs through small and medium enterprises, despite a number of policy and programmatic interventions. 

In recent years, the South African startup ecosystem has captured the attention of global investors, with Cape Town’s “Silicon Cape” emerging as a hub for innovation and entrepreneurship. I witnessed this firsthand as I built and launched my tech startup, DigsConnect.com, right in the heart of Cape Town’s tech scene. However, South Africa’s startup ecosystem is really a story of two ecosystems. It is crucial that we acknowledge and recognise the immense potential of another dynamic and vibrant sector that often operates beneath the radar — the informal startup sector.

There is a parallel start-up world in the informal sector that receives far less attention. We have had the privilege of observing the remarkable resilience and creativity demonstrated by young entrepreneurs in the informal sector. These individuals, often facing limited resources and navigating complex regulatory environments, are driving economic activity and job creation within their communities.

The National Youth Development Agency’s journey with informal sector startups has seen more than 100 000 young entrepreneurs provided with non-financial support with more than 15 000 provided with financial support, creating and sustaining 45 000 jobs. More than 80% have survived beyond two years, the “valley of death” for small and micro enterprises. 

The informal sector accounts for a substantial portion of South Africa’s economy. According to a study by Statistics South Africa, the informal sector contributed approximately 6.2% to the country’s GDP in 2020, employing millions of South Africans and fostering economic resilience in the face of challenges.

The World Bank estimates that over 80% of new job opportunities in developing countries, including South Africa, are created within the informal sector. These entrepreneurs not only provide employment for themselves but also generate income and livelihoods for their communities, particularly in marginalised areas where formal job opportunities are scarce.

This is part of the magic of South Africans: our ability to hustle, make a plan, provide solutions and services at a micro level that, when compounded, amount to something huge on the macro level. It’s what I experienced first-hand with digsconnect.com, when the shortage of university-built accommodation resulted in hundreds of thousands of private houses and flats with two, four or six bedrooms, became the “distributed” residences to service our students’ accommodation needs. 

In contrast, the formal startup sector benefits from a more structured ecosystem with access to venture capital, incubation programmes, and an extensive network of experienced mentors, both locally and abroad. This sector tends to focus on high-tech and scalable businesses, attracting significant investment and fostering global connections. While it is undoubtedly a driving force for innovation, it is important not to overlook the potential of the informal sector and the inclusive growth it can generate.

South Africa’s informal startup sector shares similarities with its counterparts in Ghana and Nigeria. These countries also possess vibrant ecosystems where entrepreneurs operate within informal settings, catering to the unique needs and challenges of their respective communities. According to the International Labour Organization, the informal sector accounts for more than 80% of total employment in Ghana and approximately 65% in Nigeria, showcasing the significant role these sectors play in their economies.

To unlock the full potential of the informal startup sector, it is crucial for government agencies such as the NYDA, to support these entrepreneurs through targeted programmes and initiatives. Recognising the importance of this sector, the NYDA has been actively engaged in identifying the needs and challenges faced by informal startups. Through initiatives such as mentorship programmes, skills development workshops and access to microfinance options, the NYDA aims to empower and uplift these young entrepreneurs. A culture shift is also required, away from job seekers to towards job creators. This shift could be managed by harnessing the existing potential of young people while they are engaged in short term programmes, to see an exit towards enterprise development. 

There is also a need for support from local governments upwards to support enterprise development, which moves away from criminalising informal activity towards harnessing it. Funding remains a critical piece of the puzzle, and innovative funding models that could be explored include repurposing the Social Relief of Distress grant as well as Public Employment funding towards sustainable enterprise development. This is critical. Existing private sector Enterprise Supplier Development and ESG funds should not only consider supporting the existing small businesses, but should fundamentally support the creation of new market entrants. 

In addition, collaboration between the formal and informal sectors is essential. Silicon Cape and similar innovation hubs across the country can act as catalysts for collaboration, offering mentorship, expertise, and access to market opportunities for informal startups. The informal startups can share lessons on adaptability, resilience and working in price-sensitive communities. This cross-pollination of ideas and resources could lead to innovative solutions that address the diverse needs of our society.

South Africa’s informal startup sector has the potential to be a powerful force for economic and social transformation. By harnessing its energy, creativity, and localised approach, we can build a more inclusive and resilient economy. It is imperative that we, as a nation, recognise and support the informal sector’s contributions, empowering young entrepreneurs to thrive and create a brighter future for all South Africans.

Alexandria Procter is Managing Director, Digs Connect Board Member of the National Youth Development Agency (NYDA). Waseem Carrim is CEO of the NYDA.

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