A Look into the South African Startup Ecosystem

Admit it or not, the startup ecosystem has today become the most crucial component for a country’s economic development. Having realized this fact, governments worldwide are spending enormous sums for the development of a robust startup ecosystem in their countries. Nowadays, many African countries are flourishing due to their developed tech startup ecosystems. According to a report by WeeTracker, the startups operating in Africa received US$ 1.3 billion in startup funding in 2019, and it was the first time that the annual Africa-focused startup funding crossed the US$ 1 billion mark.

The southernmost country of the African continent, South Africa has emerged as an important commercial, industrial, and cultural centre. The country saw a startup funding of US$ 67 million in the year 2019. The South African startup ecosystem is on its path to becoming robust and developed, thanks to the 4 main innovation centres of the country – Cape Town, Johannesburg, Pretoria and Port Elizabeth. 

South Africa has ties with a growing number of international investors and many startup support organizations are actively participating in the ecosystem. 2012-2017 has been an emerging phase for the country with a significant increase in digital skills & training, entrepreneurial spirit, innovation and availability of funding. The South African consumer and business market is constantly growing day by day. A report by Startupblink has ranked the startup ecosystem of Cape Town and Johannesburg as 146 and 160 respectively on a global scale, 1 and 2 on a national scale. The report ranks the South African startup ecosystem as 52nd out of 100 countries.

This article will dive into the South African startup ecosystem and briefly look at the – drivers of growth of the startup ecosystem, challenges faced by startups, investor landscape, startup support organizations and government support.

• Drivers of Growth of startup ecosystem

The growth of South Africa’s startup ecosystem, be it in terms of maturity or innovation has been driven by:

1. Rise in the number of tech-savvy and talented entrepreneurs, developers, market leaders, and designers. 
2. Emerging startups in numerous technology sectors like Healthtech, Fintech, Mobility & Logistics, and Edtech that are leveraging artificial intelligence (AI), machine learning, Internet of Things (IoT) and blockchain technologies.
3. The emergence of a number of incubators, accelerators, startup pitching competitions and entrepreneurial support organizations willing to invest in innovative startups.
4. Rise in investment from the government and innovation funding and support.
5. Growing number and size of funds (both local and international) willing to provide early-stage investment, particularly at the VC stage.
6. Organizations are looking beyond traditional internal innovation and are venturing into advanced external innovation through partnerships with startups.
7. Reduction in red-tapism and the government is actively promoting economic development by providing incentives to small and medium-sized businesses through various incentives such as subsidies, R&D grants, tax deductions etc.

• Challenges Faced by Startups

Startups in every country have to face some challenges to thrive. Be it the access to capital, government regulations, the market for the product etc. South African startups have their own set of challenges:

1. Being a relatively smaller country, raising startup funding in South Africa can be tricky. With few consumers with real buying power, investors tend to provide small funding amounts and commit at later funding stages. 
2. Inconsistent regulatory and trading laws and increasingly strict import regulations cause high import costs, which hinders companies’ abilities to do business with foreign suppliers.
3. There are gaps at the seed funding stage and encouragement of angel investors.
4. The exchange rate is steadily declining and the rand is weakening due to monetary easing. The lending rates had dropped by 300 basis points in the first half of 2020 alone. 
5. There is a high unemployment rate in South Africa and the COVID-19 pandemic has worsened it even more.  
6. Due to gender-inequality issues, women entrepreneurs are discouraged from running successful businesses. They experience gender bias when negotiating deals or accessing venture capital.

• Investor Landscape

Several early-stage funds and VCs are actively investing in startups across Africa. According to a report by SAVCA (Southern African Venture Capital and Private Equity Association), by the end of 2016, the South African VC industry had invested US$ 241 million in 461 deals. 

Angel Investors: Angel Investors can add more value to startups than institutional investors as their benefit is 100% tied to the startup’s success. South Africa has many active angel investors and investment groups. Here are some websites where you can search for them-

1. Jozi Angels – An angel investor network based in Johannesburg, South Africa that invests in innovative early-stage companies and helps them grow by providing industry knowledge, networks and capital.
   
2. Dazzle Angels – A female-focused angel fund, led and funded by experienced business women.
   
3. SABAN – A not for profit industry association dedicated to angel investing in South Africa. 

Venture Capital: VCs are institutional investment funds that invest in startups and small businesses. Entrepreneurs usually seek venture capital after angel funding. South Africa has several well-established VC funds and venture capital companies. It has been possible due to the tax incentives to investors. Most funds are newly established and are investing actively in early-stage companies.

1. Kingson Capital is one of SA’s largest private VC funds. Kingson Capital invests in startups with the potential to scale through Africa and into the US markets.
2.  Angel Hub Ventures started in 2011 as the first angel group in South Africa; it matured into an early-stage venture capital firm in January 2014. 
3.  Empowerment Capital is a black-owned investment company involved in numerous BEE (Black Economic Empowerment) transactions ranging from Blue Chip multinationals such as DHL and Heineken to small and medium-sized enterprises. It is a forward-thinking fund with a primary focus on sustainability and social transformation.
4.  Kalon Venture Partners is a disruptive technology VC fund in the SA tech VC space investing in post-revenue startups, not necessarily post-profit ventures.
5.  Knife Capital is a VC investment manager that accelerates Africa’s innovation-driven companies’ international expansion by providing knowledge, funding, and networks. 

• Startup Support Organizations

South Africa’s startup ecosystem has observed a significant rise in the number of stakeholders offering non-financial business support, mentoring, and co-working spaces. 

1. Silicon Cape – Silicon Cape is a hub and an ecosystem enabler for tech-enabled startups, entrepreneurs, creatives, VCs and angel investors. It is based out of Cape Town. Silicon Cape provides startups with online resources, advocacy and pitching support if they take a paid membership.
   
2.  Grindstone Accelerator – This Cape Town-based accelerator provides an established structured entrepreneurship development programme that assists innovation-driven companies in becoming sustainable and fundable. It was launched in 2013 by VC firm Knife Capital.
   
3. MEST Incubator Cape Town (by Meltwater Entrepreneurial School of Technology) – MEST offers technology entrepreneur training, internal seed funding, and a broad network of hubs providing incubation for technology startups in Africa. Its hubs are located in Accra, Ghana; Lagos, Nigeria; Cape Town, South Africa and Nairobi, Kenya.
   
4.  Founders Factory – It is an accelerator and an incubator aiming to support 140 tech startups in the next five years. Founders Factory hosts a comprehensive 6-month program providing startups with the opportunity to receive £30,000 in cash and £100k+ in services. Its Venture Scale program helps startups establish product-market fit and scale their businesses.
   
5. JoziHub – It is a co-creation space in Johannesburg, SA dedicated to creating sustainable change in the continent. It provides co-working spaces to share ideas and collaborate. JoziHub also offers its members access to a network of innovators and inspirational events and activities.

• Government Support

Job creation has always been on the agenda of the South African Govt. Therefore, it is making considerable investments in building the country’s startup ecosystem and bringing about required changes in laws and regulation for ease of business. 

But there is always a loophole somewhere. There are often inefficiencies in fund allocations and the government support is fragmented. The institutional capital providers like endowment funds and pension funds do not invest in VC funds. Most of the money comes from businesses and private individuals. Apart from these concerns, there are some departments that are assisting startups and supporting them:

1. Department of Finance and the Treasury: The department has successfully set up tax breaks for early-stage investors through Section 12J of the Income Tax Act.
   
2. Department of Science and Technology: The department administers many international funding and grants for R&D and innovation. The Technology Innovation Agency that comes under this department provides seed funding as well.
   
3. Department of Small Business Development: This is a newly established department by the Govt. The department has committed to supporting SABTIA (South African Business Technology Incubation Association).

If we look at the local govt level, Johannesburg and Cape Town are ahead in providing support to startups, engaging stakeholders, policy-making and encouraging entrepreneurs to set up businesses in their cities. 

Conclusion

South Africa has been making efforts to develop the startup ecosystem. Although the measures have generated favourable results, most of the activity is concentrated in the cities Johannesburg and Cape Town. 

It has numerous accelerators, incubators, VCs and other supportive organizations. But the main challenge is to raise awareness among the entrepreneurs about the options available to them. Government’s willingness to work with the private sector to improve the entrepreneurial landscape, increase economic growth and create employment will help South Africa prosper as a global hub for startups and entrepreneurs. 

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