Why SA’s start-ups are not winning any races
• Lack of early-stage funding, poor skills preparation and too little holistic focus are just some of the hurdles
The start-up scene in SA is burgeoning. There are more than 300 incubators and entrepreneur development organisations and a few industry bodies.
The available capital pool has increased substantially in recent years and throw a stone in Johannesburg or Cape Town and it will hit a start-up coworking space.
According to a report, Unicorns, Gazelles & Leapfrogs: Fast-tracking the South African start-up ecosystem, there have been successes.
The report, released last week, showcases wins such as education tech company GetSmarter being sold to USlisted 2U in April for more than $100m; fintech businesses such as WiGroup and Yoco, which are experiencing exponential growth in SA and on the continent; health tech start-up LifeQ which has formed a prosperous relationship with Garmin US; and Johannesburg recruitment company Giraffe beating 54 finalists from around the globe in the last Seedstars World entrepreneurship competition.
In March, Johannesburg was the first African city to host the Global Entrepreneurship Summit. So things are not at all dire. But SA has yet to produce a “unicorn” — a start-up valued at $1bn or more — while Nigeria and Poland have.
Why does SA feel like an also-ran rather than a medal winner? The report aims to answer this and other questions relating to the start-up ecosystem by canvassing the views of 36 players over six months.
These included founders of new hotshops, venture capitalists such as Keet van Zyl, Craig Mullett and Brett Commaille and Giraffe’s Anish Shivdasani, Civic’s Vinny Lingham and Mimecast’s Peter Bauer.
Accompanying the anecdotal insights is research from other local and global studies. The report seeks to find an accelerated path for advancement.
The total value of the tech and innovation start-ups in Johannesburg and Cape Town is about the size of Melbourne, smaller than Lagos, and half the size of Sao Paolo.
There is progress and, seemingly, a will to succeed.
But the study reveals numerous blockages and stumbling blocks: constraining regulations and policy; limited early-stage venture capital; private sectorgovernment disconnects and trust issues; and a low tolerance of risk and failure. Most notable is a deep skills deficit as a result of an education system largely ill-equipped to produce entrepreneurs of calibre.
FOREIGN INVESTMENT
Some of the interviewees gave an international perspective because they are either involved in South African start-ups from abroad or are local start-up rock stars now focused on other markets. Their views were especially interesting.
Largely, they think SA could occupy a more prominent place in the global scene and is not working hard enough to attract foreign direct investment or carve out a niche for itself among a host of early-stage ecosystem wannabes.
While a little less than 40% of national GDP is generated by small, medium and micro enterprises (SMMEs), a tiny proportion of that comes from highgrowth, high-impact ventures or start-ups.
Local venture capital funds, which have a few billion rand at their disposal, are dwarfed by the healthy private equity market in SA that has more than R165bn funds under management, according to the South African Venture Capital and Private Equity Association.
The start-up game has to get bigger, better and faster for a few reasons.
Innovative and fast-paced (small, initially) start-ups have a transformative effect on business generally.
Technology- and innovationled businesses are growing at 4.5% globally versus overall global economic growth of only 2.6%.
Growth is the best way for the country to retain its existing entrepreneurial rock stars and quickly develop and nurture new ones. Investing in SMMEs will also assist in alleviating unemployment.
Of the world’s 10 largest companies, six or seven (if you include General Electric) are in technology or innovation, while only one or two (maybe three, if you count Sasol) of SA’s top 10 by market cap — Naspers and MTN — have a technology and innovation bent.
There are fairly well-agreed “success recipes” for emergingmarket start-up ecosystems from the likes of the World Economic Forum, Startup Genome and the Global Entrepreneurship & Development Institute, and they indicate a strong focus on immediate to medium-term key drivers.
These include skills improvement at a macro level at secondary and tertiary institutions particularly, but also entrepreneurial skills and job training such as basic digital programming and coding.
Banking and greater financial inclusion drive start-ups, as does deeper technology infrastructure and absorption.
Fostering an appreciation of entrepreneurship as a career path and making risk capital available — especially during the early stages — would also assist.
Longer-term imperatives include the presence and development of entrepreneurship in education and culture, local connectedness and community building.
Series A funding should be available and there should be global know-how and knowledge sharing.
There should be progressive policies and enlightened government intervention in start-up economics. Private-public disconnects and mistrust must be overcome. The role-players are aware of these imperatives and are trying to mobilise them.
It’s clear that drawing inferences from Silicon Valley is not going to be very helpful locally in the short term. But there are lessons to be learnt from Portugal, Malaysia, Poland and other emerging-market and earlystage ecosystems.
Too many of SA’s start-ups lack bold ambition, but those that have a strong drive get sold internationally or move to other markets. SA’s ratios of success are not far off international standards, but there is too much mimicry of global formulae.
Trying to support and fund high-end rock-star founders and low-end subsistence entrepreneurs using the same system is problematic.
There are, arguably, too many incubators and enterprise development entities (more than India and Israel put together), and too many of those — partly because of the large amounts of black economic empowerment enterprise development funding floating around — are of poor quality and unmonitored.
Despite the overall education quagmire, and entrepreneurial skills specifically, SA does have good university and academic outputs and could pair these rising stars with hotshot entrepreneurs to greater effect. Even though most of SA’s past entrepreneurial mega successes have come from nontech sectors, the future ones must be tech or innovation-based.
Fintech, medtech and perhaps innovation in renewables are seen as the most likely sectors for world-class activity out of the country.
LATERAL APPROACH
The country’s constrained market size makes it hard to create many start-ups that will be worth hundreds of millions of rand, but is a good test bed for business concepts.
Government agencies and the ability of development finance institutions to deploy, manage and get a return from investments needs attention.
A more lateral approach is required to overcome challenges, which might advance the space more rapidly towards world-class status.
These “leapfrogs” aim to leverage one or two large and dramatic shake-ups in the start-up space to create a quantum shift rather than just steady improvement.
Progress on the trajectory already under way must continue, including local-global collaborations; increased access to capital through avenues such as section 12J venture capital companies and the R1.5bn SA SME Fund, launched in 2015; more enlightened government participation; higher risk tolerances; and publicity for success stories.
SA could be a resource hub — a lot of the capacity locked up in incubators that is used to create large numbers of underequipped, soon-to-be-disillusioned entrepreneurs should be redeployed. Instead of being used to run outfits, these resources could be used to educate and upskill talent that could be incorporated into local and international start-ups.
This would also allow for the marketing of SA — Cape Town, in particular — as a destination for high-quality, lowercost start-up-specific skills and resources.
SA has no shortage of problems to be solved. A large portion of start-up capacity should be focused on developing social entrepreneurship — “for-good” ventures run along commercial lines.
Many of SA’s societal and practical challenges could be solved by innovation, and the hope would be that many of the solutions could be exported to other African and emerging markets. This focus could attract increasing global funding.
In another bolder “leapfrog” suggestion, ecosystem participants called on the government to direct public-sector pension funds to release 0.5% of their funds into the market as venture capital. The Public Investment Corporation’s share alone would be in the region of R10bn. Start-up demand would then need to be vigorously stimulated to meet capital supply.
Taking a cue from Poland and other eastern European markets, SA could focus the ecosystem’s attention on two or three verticals, such as fintech, medtech or renewables, and those specialised capabilities could be marketed nationally and internationally.
These paths are proposed as thought-starters, but they could possibly put the thinking on a new track for debate and input.
If a more lateral thought plan could be agreed on and actioned, there is a belief from those canvassed that the impact could be great.
GROWTH IS THE BEST WAY TO RETAIN ENTREPRENEURIAL ROCK STARS AND DEVELOP AND NURTURE NEW ONES