Ramblings about startups, cellular, entrepreneurship, tech, & the future!

Does South Africa have a startup ecosystem?

I may be biased, but within a few weeks after deciding to close down my startup in Johannesburg, I traveled to Israel to meet some of the most exciting tech startups around who are changing the landscape in Artificial Intelligence, Machine Learning, and Cyber-security. And it made me realise that even though we are trying, South Africa’s nascent startup community is miles away (literally & figuratively) from the world’s best tech hubs, such as Silicon Valley, Israel, & even Kenya.

Although it’s difficult to quantify exactly how many startups Israel has compared to South Africa, what is quantifiable is the number of exits. According to a report by IVC Research Centre, total transaction value for exits of Israeli companies in 2017 reached $23 billion (even though this is heavily swayed by the mammoth acquisition of Mobileye by Intel for $15.3b, the average exits for the next 8 companies still comes to $446m) (interestingly, this is the highest $ value of exits per capita in the world). South Africa by contrast had a successful 2017 as well, but this translated to exits totaling $137m (which is primarily made up of the GetSmarter exit to 2U for $123m), according to a VentureBurn article. Regardless of the exact number and size of startups in each country, there is no question that the South African tech ecosystem is dwarfed by Israel’s.

And there are so many reasons for us to all want startups to succeed in South Africa!

  • It’s simple math but more business = more jobs, and there is no question that entrepreneurship would help turn the tide against the endemic unemployment that is plaguing South Africa.
  • Startups can also help introduce much needed foreign investment and foreign talent to South Africa. Overseas investors would be throwing money at South Africa if we were incubating world-class startups worth investing in. Again if you look towards Israel, they are now seen as a global R&D hub with more than 300 multinational corporations already operating in Israel and attracting global investments with major VCs such as Greylock partners and Sequoia Capital having local offices. And imagine the talent we could attract to South Africa as well! We could reverse the infamous brain drain and offer exciting career opportunities to entice qualified professionals to move to SA and be part of our startup success story rather than the other way round.
  • Of course, there’s also the softer side of things – looking at Israel, people are proud of their country and what they have achieved. They have a lot to celebrate and importantly, success breeds success with thriving entrepreneurs encouraging nontrepreneurs to reach for the stars. Just imagine what such success could do for South Africa. We thought the short-lived high of the 2010 Soccer World Cup was incredible— picture the high you’d get from living in one of the most cutting-edge countries in the world, filled with hungry entrepreneurs in an environment that is ready to nurture and encourage them.

This is clearly a goal we should be actively working towards.

But why is South Africa not where we should be in the startup world?

I don’t think it comes to one single answer – it is rather a combination of many factors that are intertwined in a startup ecosystem. An ecosystem is made up of various dynamic components that all exist together, interacting with and influencing each other. The primary components of the startup ecosystem are: talent, investors, and culture. Don’t get me wrong, a startup can still exist outside of this ecosystem, but it is only when all these components play together in the startup orchestra that you really begin to hear the beautiful melody of startup success. And just like any ecosystem that is subject to feedback loops, when all these primary components are in place they begin to exponentially leverage each other for further growth – more startups create more talent, brings in more investment, create a better culture, encourage more startups, etc.

Talent

Looking at the Israeli startup ecosystem, some of their specialities include Machine Learning, Big Data, and Artificial Intelligence. This is driven by a vast talent pool with some of the best data scientists in the world graduation from the Israeli Army (primarily from 8200, the cyber-intelligence arm of the Israeli Defense Force) and the top Israeli universities. South Africa definitely has some impressive talent when it comes to the STEM disciplines (Science, Technology, Engineering and Mathematics) but our skill sets, experience, and sheer number of graduates in these fields just doesn’t compare. Additionally, the majority of our top talent either lands up going overseas or finding a cushy corporate job. After all, startups just aren’t the top employers of choice in South Africa that they are elsewhere.

The length and breadth of the Israeli startup ecosystem also produces many ‘startup graduates’ — rockstars who have been involved in their first startup or two, sold out, and are now working on their next one. These entrepreneurs have earned their stripes and boast the experience and investor-wooing track record that give their new startups a very competitive edge.

Investment ecosystem

Although South Africa has a healthy investment community, the number of early-stage startup investors is still minimal. South African investors just don’t have the same risk appetite as some international funds who are happy investing in 100 early-stage startups with the knowledge that only 1 or 2 will be breakout successes. One would think that the tax-incentivised Section 12J funds would create more of a market for investment in these startups but South African investors are generally cautious and risk-adverse and prefer the safe bets with sound business models as opposed to the maverick upstarts.

Once again, the void of an active ecosystem inhibits further investment. There are often limited numbers of up-rounds or exits of SA startups which makes it difficult for early-stage investors to realise their investments. If there were more of an ecosystem with such further investments, then early-stage investors would be more incentivised to take some punts knowing that there were potential exits on the horizon.

The cautious South African investors follow one metric, and one metric only – cash flow. They are not seduced by growing user-bases, engagement, or any of the other softer KPIs that excite Silicon Valley firms. They want a business model that will make real money. Although this is certainly preferable to any investor (or businessman/woman), they don’t have the appetite to invest in the long run knowing that such returns may come at a later stage, which is often a model that early-stage startups follow.

Additionally, there appears to be a South African haircut in terms of investing in local companies, with investors automatically discounting a businesses based in South Africa compared with some of its international peers. This is probably due to all of the reasons listed in this post and is another obstacle along the path to startup success.

Culture

Once again, this is another vicious cycle – The lack of startups leads to less startups. If there were more startups, and some made successes of themselves, these would inspire others to do the same thing. This would also help startups become seen as the companies where the brightest-of-the-bright choose to work as they know that they can make great money, have lots of fun, and hopefully make an impact on the world.

South Africa already has a number of tech incubators and accelerators, which are running some exciting projects in Johannesburg and Cape Town, and are doing their part in encouraging startups. But their overall success so far has been slightly muted and we need more of these structures if we really want to make an impact on a global scale.

Being an entrepreneur or startup CEO is not easy and it’s difficult enough being alone at the top. But it’s even more difficult not having peers around to talk to. Once again, this is where the startup hubs of the world shine and where South Africa can catch up. We need startup CEOs to inspire other CEOs, to have more social interactions together, and to start identifying with each other and mentoring each other to make sure we all succeed.

Just to note that there are two exceptions when it comes to the startup culture in South Africa and that is Cape Town and Stellenbosch. These cities have both positioned themselves as startup destinations and are creating the kind of culture necessary for startups to thrive in. There are many exciting initiatives underway in these cities and they should be a model for others to follow.

Where to from here?

The one option is to do what Adii Pienaar, a South African serial entrepreneur, did and live in South Africa while registering your company overseas, hiring staff overseas, and working with overseas investors. The other option is to go overseas and do a startup there. But as a proud South African, I think we can do better. We must do better. The necessity of entrepreneurship is best expressed by Michael Porter, who states that entrepreneurship is “at the heart of national advantage”. We need to make this work in South Africa and once we build this startup ecosystem, the sky’s the limit for South Africa. With new jobs, innovation, foreign investment, foreign talent, and success all round, our South Africa will better place to live for us and our children.

But how? Below are some suggestions, which have been added to by the LinkedIn community, that may help us through this challenge:

  1. Investors need to take a chance on South Africa and help early-stage startups who otherwise wouldn’t have the opportunity. This funding can be augmented with the guidance, networking, and functional expertise that experienced investors bring to the party, and can be channeled through incubators and accelerators.
  2. It goes without saying but we have to improve our educational system so that we have more students finishing high-school and, in-turn, more STEM graduates.
  3. We need to build a startup culture in South Africa and encourage more meet-ups, networking events, and formal programmes among like-minded entrepreneurs.
  4. As a society we also need to encourage risk and applaud entrepreneurs. Part of this means viewing entrepreneurial failures in a more redeeming light (as they do in other startup success cities).
  5. We need to identify our niches where we can shine. I don’t seriously think we can compete with the likes of Israel when it comes to Big Data-related startups, but we can address African issues that effect millions of other people on our continent. There are tons of problems around us ready to be fixed which provides massive opportunities for those startups brave enough to tackle them.
  6. Government should play a bigger role in growing the country’s startup ecosystem. They should review of our business-unfriendly Labour Laws, Intellectual Property laws, and the general ease of doing business in South Africa, potentially invest in startups/funds, and provide more tax benefits for startups / small businesses. And according to Graham Shapiro, owner at Shapiro Advisory, government should “be easier with regards to compliance and tax – give the business some space to get off its feet without having to worry about all the red tape – either that or subsidise outsourced accounting and compliance services”
  7. Government could also support entrepreneurs and startups by creating a network to offer business mentoring and coaching, as well as other skills like financial literacy, digital marketing, and more, suggests Arno Wakfer.
  8. Universities should work harder to turn their ground-breaking research into viable businesses (perhaps through government investment).
  9. We should implement more incubator-type organizations where proper mentoring and support is available. According to Mignon (Chaya) Soutter-Yankelowitz, MD at Ground Fibre SA, “so many startups fail because of lack of support because the people around them don’t have the proper skills to advise them correctly.”
  10. Edwin Selbst, an Audit Advisory Specialist, suggests that “there should be platforms where entrepreneurs can access finance, capital and investment opportunities. Also less bureaucracy with regard to startup of legal entities as well as the registration with SARS should be simplified.”

Please comment on this article and let me know if you have any other ideas to help make South Africa a brighter startup destination.

(Originally published on LinkedIn)


Also published on Medium.

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