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Tech entrepreneurship
ecosystem in South Africa
2018
Commissioned by
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2 Tech entrepreneurship ecosystem in South Africa Tech entrepreneurship ecosystem in South Africa 3
Preface
The digital era has brought a fundamental Given the importance of strong fundamentals Google
In our view,has
thecommissioned thispreconditions
inputs that form the study to for For the
Based onpurposes of this
our assessment, westudy, entrepreneurs
identified leading and
shift in the global economy, pushing the limits in attracting both domestic and global interest success
identify areas for improvement ineach
and the resulting outputs feed other and
policies in emergent countries in tech entrepreneurship,
are defined as those individuals who focus putting
an iterative process, which determines the health of the USA, Singapore, Israel and UK at the top of the list.
of innovation and redefining the boundaries in the tech entrepreneurship ecosystem, regulations which affect tech entrepreneurship on building a rapidly scalable business
a tech entrepreneurship ecosystem. Factors such as Identifying successful countries provided a filter for
of global trade. Innovations have never been countries which fail to make broader reforms in South Africa, as part of a six- country study
the quality, connectedness, and efficiency of a tech
venture with the aim of innovating, improving,
selecting best practices as well as setting performance
faster paced, more widespread, or scaled up in education, good governance and create that includes the
entrepreneurship Russian– Federation,
ecosystem which we referTurkey,
to as the or transforming
indicators the countries
that aspiring current way such of doingcan
as Turkey
more quickly, creating billion-dollar “unicorns”. a business environment that supports Nigeria,
inputs United
– create Arab Emirates
the conditions (UAE) and
for sustainable the
success. things.
use
3,4
to assess The entrepreneurship
their domain,areas,
status, identify improvement
Over the last 15 years, the ICT sector – as a entrepreneurship risk falling behind.2 Kingdom of Saudi Arabia (KSA).
Meanwhile, effectiveness in generating tangible results according to our definition, includes
and apply approaches that fit the nature the own
of their
backdrop to innovation and digital advances such as growth, employment, the creation of wealth ecosystems.
‘startup’ and ‘scale-up’ phases of the business
– has seen its share grow from just 1.3 percent along with further innovation – the outputs – cultivates a lifecycle when companies
To put Turkey’s status in context,experience
we have compared
stronger ecosystem by attracting more of the required
of the global economy to 3 percent, and it’s high and
input growthoutput inindicators
revenuesforand numbers
Turkey against aofpeer
inputs. This holistic perspective is reflected in the
set to grow even more.1 set of countries with comparable
employees while validating their value development stages,
framework we used to assess tech entrepreneurship
similar characteristics,
proposition. or geographic
Furthermore, proximity.
we specifically
success.
Nations that nurture a digital- and innovation- address
In the finaltechnology-driven
stage of the study, we entrepreneurship
conducted extensive –
based culture have pioneered the global primary
companies with technology-enabledthebusiness
research in Turkey to complement desk
shift toward knowledge-based industries research. Whereas the desk research served to
models and a focus on hyperconnectivity
and have enjoyed extraordinary wealth (and develop the structure of the tech entrepreneurship
between networks, people, businesses, things,
ecosystem and identify current initiatives that are
job creation), while transforming the way and hardware.
in place to cultivate it, we gained insights and
people live and do business. This shift is made understood the context and impacts by conducting
possible by substantial tech entrepreneurship Using
bespoke these definitions,
research we began
with ecosystem with
participants,
activity within a supportive environment that comprehensive research of existing
together with Girişimcilik Vakfı (Entrepreneurship
includes both government and private-sector literature
Foundation). toThe
identify factors that correlate
policy recommendations that are
contributions. Initiatives by leading countries part
with tech entrepreneurship success. Turkish
of this report are suggestions from the We
are now regarded as best practices for entrepreneurial community for further
identified seven components explaining policy initiatives
that will help strengthen the development of the tech
aspiring nations that want to create a similar the strength of the ecosystem that supports
entrepreneurship ecosystem in Turkey.
impact, and the global conversation around tech entrepreneurship, while economic
regulation and innovation policies is framed In total, we interviewed
contribution 25 stakeholders
and innovation (representing
creation measures
different components of the ecosystem), spanning
around such practices. pointed to the results achieved.
public and private as well as institutional and individual
perspectives. The full list of participants is presented in
Countries that are more reliant on In our view, the inputs that form the
the Acknowledgments section.
manufacturing or natural resources are eager preconditions for success and the resulting
to capture a bigger share of the expanding outputs feed each other in an iterative
digital economy. In order to deliver on process, which determines the health of a tech
these aspirations, they are exploring ways to entrepreneurship ecosystem.
transform the fundamentals of their economic
structures and to deploy more resources to
cultivate competitive tech entrepreneurship
ecosystems. Establishing high-impact tech
entrepreneurship as a sustainable source of
employment is especially critical for nations 1
Selvam, M. and Kalyanasundaram, P. “Global IT/IT Enabled Services and ICT
with young populations and a need for new Industry: Growth & Determinants.” http://globalbizresearch.org/Chennai_
Symposium/conference/pdf/C549.pdf (accessed September 27, 2017)
sources of job creation. 2
World Bank. “Digital Dividends.” http://www.worldbank.org/en/publication/
wdr2016 (accessed September 27, 2017)
3
Schumpeter, J. 1942. Capitalism, Socialism, and Democracy. New York: Harper
& Bros.
4
Global Entrepreneurship Monitor (GEM) Global Report 2016/17, Global
Entrepreneurship Research Association 2017
4 Tech entrepreneurship ecosystem in South Africa Tech entrepreneurship ecosystem in South Africa 5
Factors such as the quality, connectedness,
and efficiency of a tech entrepreneurship OC&C’s framework for assessing tech
ecosystem – which we refer to as the inputs –
create the conditions for sustainable success. entrepreneurship success
Meanwhile, effectiveness in generating
tangible results such as growth, employment, FIGURE I: THE TECH ENTREPRENEURSHIP ECOSYSTEM IS REPEATEDLY STRENGTHENED WITH
the creation of wealth along with further TANGIBLE ECONOMIC RESULTS AND INNOVATION
innovation – the outputs – cultivates a stronger
ecosystem by attracting more of the required TECH ENTREPRENEURSHIP ECOSYSTEM RESULTS OF TECH ENTREPRENEURSHIP
inputs. This holistic perspective is reflected Market
Financial Skilled talent Networks
in the framework we used to assess tech capital $
$ potential
$
entrepreneurship success. Economic Innovation
Contribution Creation
Based on our assessment, we identified Culture Regulations ICT infrastructure
leading and emergent countries in tech
entrepreneurship, putting the USA, Singapore,
Israel and UK at the top of the list. Identifying
successful countries provided a filter for
selecting best practices as well as setting Describes the INPUTs necessary Indicates the OUTPUTs
performance indicators that aspiring countries to cultivate thriving tech entrepreneurship generated by tech
such as South Africa can use to assess their entrepreneurship
status, identify improvement areas, and apply
approaches that fit the nature of their own ECONOMIC INNOVATION
ecosystems. FINANCIAL CAPITAL SKILLED TALENT CONTRIBUTION CREATION
• Grants/subsidies • Educational • Size of tech e-ship • Innovation
While doing this we also put South Africa’s • Individual investors foundations ––Revenue created by tech
––Crowdfunding • Skills development ––Number of startups entrepreneurs
status in context, we have compared input ––Angel investors ––schools, courses, ––Share in GDP ––Number of
and output indicators for South Africa against ––Personal networks programs • Workforce innovative products,
––process,
• Venture capital ––on the job training employed in tech
––business models
a peer set of countries with comparable • Public funding • R&D and innovative entrepreneurship introduced in the
• Corporate skills • Growth rate country in a given
development stages, similar characteristics, or investment (CVCs • Attracting local ––Revenue, Number year
geographic proximity. and M&A) talent to tech • Value creation
• Securities market entrepreneurship ––Market cap, Unicorns
• Debt financing • Acquiring • Global reach
In the final stage of the study, we conducted international talent ––Share of int’l
revenues
extensive primary research in South Africa to ––Number of int’l
operations
complement the desk research. Whereas the NETWORKS CULTURE REGULATIONS
desk research served to develop the structure • Mentors and coaches • Society’s attitude to • Ease of doing
of the tech entrepreneurship ecosystem and • Accelerators / entrepreneurship business
incubators • Entrepreneurial • Compliance
identify current initiatives that are in place to • Diaspora networks aspirations and • Trading across
• International linkages appetite borders
cultivate it, we gained insights and understood • Events • Promotion of role • Digital policies
the context and impacts by conducting • University-industry models / success • Government R&D
partnership stories policies
bespoke research with ecosystem participants, • Tech transfer offices • Media coverage of
together with technology law firm EndCode. • Physical clusters entrepreneurship
––Co-working spaces
The policy recommendations that are part of ––Technoparks
this report are suggestions from the South
African entrepreneurial community for further
policy initiatives that will help strengthen the ICT INFRASTRUCTURE MARKET POTENTIAL
development of the tech entrepreneurship • Accessibility and • Digital literacy /
affordability of readiness
ecosystem in South Africa. Internet (mobile / ––individual use
fixed ) ––cloud migration
• Cloud & data ––digitization of gov’t
In total, we interviewed 25 stakeholders center experience services
(representing different components of the • Domestic market size
––B2B
ecosystem), spanning public and private ––B2C
––Public procurement
as well as institutional and individual • Local market
perspectives. The full list of participants is efficiency
• Internationalization
presented in the Acknowledgments section.
6 Tech entrepreneurship ecosystem in South Africa Source: Literature Research, OC&C analysis Tech entrepreneurship ecosystem in South Africa 7
Tech entrepreneurship
ecosystem – Inputs
The tech entrepreneurship ecosystem and its Benchmarks demonstrate a superior level of FIGURE II: TECH ENTREPRENEURSHIP ECOSYSTEM FRAMEWORK
components constitute the inputs in OC&C’s network development that is characterized by
tech entrepreneurship success assessment. the availability of entrepreneurial networks, Market
startup associations, accelerators, incubators, Financial $ Skilled talent Networks
potential
One definition of an entrepreneurial co-working spaces, technoparks, etc. There capital $
ecosystem is: $
are stronger innovation linkages between
academia and the private sector such as joint-
“a set of interconnected entrepreneurial venture/strategic alliance deals, and industry-
actors, organizations (e.g. firms, venture university collaborations.
capitalists, business angels, banks), institutions Culture Regulations ICT infrastructure
(universities, public sector agencies, financial In the best-practice countries, there is a higher
bodies), and entrepreneurial processes individual risk appetite, coupled with cultures
(e.g. the business establishment, growth, that are more supportive of entrepreneurship.
levels of ‘blockbuster entrepreneurship’, It is easier and less bureaucratic to start and
number of serial entrepreneurs, degree of run companies as an entrepreneur, and the
sell-out mentality within firms and levels of risk of failure is better managed. Source: OC&C analysis
entrepreneurial ambition) which formally
and informally coalesce to connect, mediate Supportive digital policies – laws related
and govern the performance within the local to data flow, cybersecurity, data privacy,
entrepreneurial environment.”5 IP protection, etc. – and strong innovation Role of the government in strengthening the tech
capacity steered by governments’ R&D
OC&C’s Tech Entrepreneurship Ecosystem policies provide a sturdy backbone for the
entrepreneurship ecosystem
Framework (Figure II) presents the attributes ecosystem. Open foreign trade policies
outlined above, and the way in which they While many actors are involved in the In the benchmark countries, the shift to
enable these countries to internationalize their
interact and influence one another. These ecosystem, the role of government knowledge-based industries has taken place
businesses.
seven components, working together, provide deserves attention. Government policy both via favorable policies that support the
the habitat needed to generate successful tech Another fundamental differentiator is reliable can affect all entrepreneurial actors and development of each component of the
entrepreneurships. fixed and mobile internet infrastructures at components of the ecosystem: resource ecosystem and greater government funding
affordable prices. Digital policies that support providers, entrepreneurial connectors within for high-growth firms.6 Governments have
Best-in-class countries are able to offer equity cross-border data flows lead to higher the ecosystem, and the entrepreneurial played a leading role in successfully facilitating
funding sources in greater volume and variety utilization of efficient, cost-effective global environment of the ecosystem. The tech entrepreneurship ecosystems through
(i.e. business angels, venture capital firms, cloud services. government’s contribution is important their impact on all seven components of the
and government investment funds). Deep and because of its direct impact on the ecosystem ecosystem.
efficient stock markets and the high frequency Lastly, we also see that leading countries through the creation of favorable terms and
of deals make the entrepreneurial challenge possess considerable (rich) market potential the provision of incentives for high-growth
financially worthwhile and are instrumental and those that don’t have a big enough startups. Moreover, government exerts
in drawing in more resources – in terms of market are globally oriented from the start. In its influence on all components to create
funding, skilled talent, and support – into the the domestic market, consumer digital literacy a constructive environment and facilitate
ecosystem. is of great importance as consumers are then interconnectivity between these components.
more likely to try new digital products, thus
These countries have a larger number of creating attractive market conditions for B2C
highly skilled employees and a labor force companies. In addition, advanced markets
created by education systems and talent are efficient and competitive, with minimum
attraction initiatives that support tech barriers of entry for business startups.
entrepreneurship. These ecosystems are
characterized by a greater pool of scientists,
engineers, and research universities that foster
an innovation culture. Mason and Brown, Entrepreneurial Ecosystems and Growth-Oriented
5 6
Global Entrepreneurship Monitor, Global Report 2016/2017
Entrepreneurship, OECD LEEP Program and Dutch Ministry of Economic Affairs
workshop paper, The Hague, Netherlands, Jan 2014.
8 Tech entrepreneurship ecosystem in South Africa Tech entrepreneurship ecosystem in South Africa 9
Executive summary
South Africa at a glance growth aspirations, and the total contribution 1. Financial $ 2. Skilled talent
of knowledge sectors to the economy.
With a GDP worth USD 294 billion, South capital $ $
Africa is the 40th largest economy in the The output indicators for innovation creation
world and the third largest in Africa. Gauteng – the volume of innovation generated by
Province is at the heart of economic activity, the country overall, and the amount of
contributing approx. 35 percent to national innovative products and services generated
GDP and around 42 percent to national by entrepreneurs – demonstrate that South
employment.6 Western Cape Province Startups need a mix of funding to support their South Africa’s history of uneven education
Africa outperforms many emerging market launch, growth, and scale. In South Africa, the means that much the population is still
accounts for 14 percent of the GDP and Cape peers, yet is still significantly behind the top
Town is ranked as the most entrepreneurial Gauteng funding landscape is fueled by the undereducated, an issue with far-reaching
performers. A comparison of South Africa’s large amount of government spending and impacts on employment, entrepreneurship
city in South Africa.7 Income inequality remains output performance against the benchmark
one of the highest in the world. The PPP- government-directed private sector spending, capability, and overall economic development.
set can be found on page 20. with angels and VCs playing a minimal role. Tech incubators focus on upskilling would-be
adjusted average income of USD 13,000
conceals large differences in income levels and The Western Cape ecosystem is funded by entrepreneurs, in part to fill these gaps.
South African tech entrepreneurship more traditionally configured VCs and angel
78 percent of the population has been poor at ecosystem overview – Inputs To combat this issue, the government focuses
some time.8 The fact that half the population investors, in part due to the large number of
South Africa’s tech ecosystem is remarkable for high-net-worth individuals who reside in the on the basics of literacy and math at the
is under the age of 24 is a particular problem, primary level. Poor education foundations
given unemployment at 27%.9 its strong government support and the number area.
of programs that target tech entrepreneurship. and low exposure to entrepreneurship have
South Africa’s government agenda is driven The government has also found a successful The sizable number of Gauteng incubators meant that there are few skilled developers
by economic inclusion initiatives, with the mechanism for stimulating private sector doesn’t translate to similar numbers of for tech entrepreneurship. Immigration
current National Development Plan focusing involvement: the EDS initiative, which awards angel and VC investments, in part due to could address this, and the government has
heavily on raising the quality of life of the points to private-sector companies that invest the relatively weak relationship between amended its immigration policy for highly
typical South African. Around 11 million in their smaller suppliers. As a result, there are incubators and angels/VCs. This is partly due skilled science and mathematics teachers,
new jobs are expected by 2030 and the both public and privately funded initiatives to the fact that VCs are generally quite risk- technicians, researchers, and graduates with
government is committed to building the that target job creation and increasing SME averse in South Africa, which is one reason high-priority degrees. However, this may not
capacity of individuals and industry, as well as capacity through incubation, mentoring, office the government created the program 12J, fully counteract the ‘brain drain’ of 19,000
expanding access to basics such as healthcare, space, advisory, grant and other support which gives tax relief to investors for investing skilled professionals to OECD countries.
infrastructure, and transportation. to entrepreneurs, particularly those from in qualified Venture Capital Companies
previously disadvantaged groups. (VCCs). These VCCs must observe a number Many in the ecosystem see fixing early
South Africa is an attractive destination within of restrictions related to investing in South education as the single biggest change the
Our review of the South African tech African startups, such as the requirement for government could make to grow the tech
Africa for living, tourism, and conducting entrepreneurship ecosystem with key
business, with a strong potential for attracting domestic registration of the startup and off- ecosystem. Ranked 137th in a survey of
participants identified three major areas for limit industries, including professional services education systems in 139 countries, South
regional and even global talent. improvement: (financial and management consulting) as well Africa’s poor education system is potentially
The results of tech entrepreneurship – Outputs • The foundations of the education system as alcohol, tobacco, weapons, and gambling. the biggest hurdle in the ecosystem.
On measures of tech entrepreneurship are unable to support the development of
tech entrepreneurship within South Africa While the Western Cape ecosystem resembles Experienced developers are highly sought
outputs, South Africa ranks below many of the international systems in terms of ambition, in after, particularly in non-tech industries that
top performing countries, but above several of on a broad scale.
the Gauteng ecosystem many entrepreneurs pay well, which effectively leaves many tech
its emerging market peers. • The rich network of support services are not thinking about the exit options for startups unable to hire them. Inexperienced
offered to young companies are not yet their startups. Instead they are focusing on developers by contrast, find it harder to find
The country’s position suggests that it monitored and have not yet managed to placements, suggesting that an opportunity
building businesses that are sustainable in
has good benchmarks to target better ensure maximum impact on entrepreneurs. exists to raise the skills of inexperienced
the long term. In addition, few startups are
performance in all of the economic developers outside of the university system,
• Much of the support has focused mature enough to IPO on the Johannesburg
contribution indicators used in our analysis – by fostering a ‘back office’ service capability
on creating early-stage startups and Stock Exchange (JSE), which has just 3% of
the prevalence of tech startups in the country, for software development that raises the skills
entrepreneurs, with little focus on mapping tech companies in its listings. As a result, most
the number of exits above USD 100 million, of existing talent and creates new employment
out the full journey of entrepreneurship and startups exit via strategic acquisitions, though
the number of ‘unicorns’, entrepreneurs’ opportunities for those with basic skills.
creating support initiatives along the way. a law in place that makes cross-border IP
acquisition taxable might be limiting options
6
“Contribution to GDP rising”, Sopa 29.2.2016 8
World Bank. “The World Bank in South Africa: Overview”. http://www.
for startups.
7
“Economic Performance Indicators for Cape Town” saoga.org.za worldbank.org/en/country/southafrica/overview (accessed October 25)
9
OC&C analysis based on Euromonitor
10 Tech entrepreneurship ecosystem in
research
South Africa
– Turkey Tech entrepreneurship ecosystem in South Africa 11
At the university level, the 45 publicly-funded The ecosystem in the Western Cape more South African entrepreneurs, particularly DIGITAL POLICIES
universities teach science, engineering and closely resembles ecosystems such as those in the Gauteng ecosystem, are more likely
technology (“SET”) fields and have research of OECD countries, with far less government to be lower income and require broader Digital policies are largely in line with
centers, although the quality of education is funding and more commercial angel and VC measures of support to build their business. international standards, and freedom
not uniform. University technology transfer funding. Entrepreneurs in the Western Cape Often supporting up to seven other of expression and fair competition are
offices (TTOs) are responsible for transforming maintain connections to international markets, household members, the stipends that some supported by policymakers, with freedom
research into market-ready innovations; yet often leveraging cultural or familial links to incubators provide is critical to sustain these of expression secured in the South African
more work needs to be done to facilitate this foreign countries such as the US, UK, and entrepreneurs but it may not be enough. Constitution and net neutrality outlined in the
transformation. Israel. National Integrated ICT Policy whitepaper.
Other laws related to cybercrime and
The Western Cape ecosystem seems to be
better developed, with two of the three 5. Regulations data privacy are in line with international
leading South African universities, a highly standards, though South Africa is finding ways
effective TTO, and an emerging innovation 4. Culture to localize them to align them better with local
specialist capability in the life sciences. needs.
Although strong IP protections exist, the
lack of a centralized system to identify
3. Networks BUSINESS PROCEDURES infringements and high costs of enforcement
may prevent startups from successfully
On cultural dimensions associated with Compared to its neighbors, South defending their rights. A dedicated court and
entrepreneurship, South Africa resembles Africa’s business regulation is relatively searchable system could enhance the ability of
the United States, especially given a focus straightforward, but bureaucracy may create startups to defend their IP.
on individuality, merit, and opportunism. delays and raise costs. South Africa ranks 74th
A preference for immediate rewards over in the World Bank’s Ease of Doing Business GOVERNMENT R&D POLICIES
The Gauteng tech entrepreneurship support
long-term gain is in part driven by the level of assessment, reflecting high regulatory
system is a rich network of innovation-focused
poverty and dependency in the country, where Much funding, infrastructure development,
hubs, incubators, accelerators, R&D centers, mandates and similarly high costs of doing
the poorest households can number as many and regulatory focus is directed at R&D, which
and universities. These programs mainly pro- business for basic business procedures. In one
as seven members. accounts for 0.7% of South Africa’s GDP.
vide internet access, co-working space, inno- study 40 percent of firms found government
vation support, mentorship, training, and even Despite these cultural features, the Total bureaucracy burdensome enough to limit Publicly-funded R&D focuses on basic research
stipends to budding entrepreneurs. The large Entrepreneurship Activity rate is just 6.9%, business growth. The government has and human capital development, while the
number of programs may create some confu- lower than its emerging market peers.41 This introduced support services, including private sector invests for product development
sion in the market, as overlapping initiatives may be due to a low tolerance for failure, consulting and registration support to combat and competitiveness.
may be difficult for startups to navigate, given though the large number of entrepreneurs this, but doesn’t yet offer a central portal with
the lack of a single portal that centralizes all who want to make a social impact may help Despite a high return and a dedicated focus
all the required information.
information. And while the sheer number of offset this, given a lower focus on financial by government programs and agencies to
support initiatives is impressive, the lack of an returns. South Africa’s history of economic improve the interface between public and
established assessment method means that private sector R&D, private R&D spending is
marginalization is being countered through
the ultimate impact of incubators is unknown. South Africa’s history has led to a ‘necessity low. This trend is probably due to the same
laws designed to protect workers’ rights
One area of concern is mentorship, a standard driven entrepreneurship’ culture, which is structural challenges that affect the wider
feature of innovation hubs. Well-funded Eco- and help prevent exploitation, and via strict
now being reoriented to an innovation-driven business environment including political
nomic Supplier Development (ESD) programs culture. There are few role models for this new minimum wage and severance requirements.
But the inflexible nature of these laws makes uncertainty, poor ICT and transportation
have attracted many mentors and service pro- type, but there is an opportunity to actively
viders to the ecosystem, yet few truly under- them difficult for startups to follow, and, as a infrastructure, bureaucracy, and a skills gap.
build an entrepreneurship-supportive culture.
stand the needs of entrepreneurs. Another cultural element to address is risk result startups, tend to delay hiring full-time
South Africa has introduced generous R&D
aversion, which affects both entrepreneurs and employees. This runs counter to government
In Gauteng, support service providers incentives for the private sector that can give
investors and might be keeping highly skilled goals for employment.
collaborate to service startups. As a result, tax relief up to 150% of qualified spending.
tech talent from choosing entrepreneurship.
entrepreneurs take advantage of multiple Bankruptcy protection is available New controls designed to reduce application
services and this can be extended for years. to entrepreneurs, but it can affect an fraud have made the process so cumbersome
entrepreneur’s ability to get credit and that many companies have drastically reduced
investment for up to 10 years afterwards. their use of the program and with it their
12 Tech entrepreneurship ecosystem in
research
South Africa
– Turkey Tech entrepreneurship ecosystem in South Africa 13R&D activity. The South African government South African fixed internet services Recommendations designed to strengthen the tech entrepreneurship ecosystem
is working with the World Bank on how to infrastructure is weak and few citizens have
streamline these procedures. at-home coverage. The government has set a The South African government has been strongly committed to supporting entrepreneurs and
target of 100% internet coverage in the cities. innovators in the tech ecosystem with a detailed and thorough offering of resources, funding,
TRADING ACROSS BORDERS Results have been mixed: overall rollout has private sector incentives, and regulatory oversight. Raising the effectiveness of existing efforts,
been slow, but a USD 10 million Cape Town and tailoring incentives to desired outcomes will aid the country in addressing the jobs and
South Africa’s location within Africa and links project added 500 km of fiber optic network. innovation priorities. Four areas of focus have been identified:
to Europe and other regions makes it ideal for CREATE REGIONAL
IMPROVE EFFECTIVENESS
testing and exporting innovations targeted The low-cost nature of cloud services has FOCUS ON BUILDING THE
OF ECONOMIC INCLUSION
INTRODUCE GROWTH STAGE
INNOVATION LEADERSHIP
FOUNDATIONAL SKILLS OF SUPPORT MECHANISMS TO
at low-income populations in other African made it a leapfrog technology that is attractive ENTREPRENEURSHIP
INITIATIVES THAT PAVE THE WAY FOR TECH
BY IMPROVING THE
COMMERCIAL OUTLOOK
nations. Yet, cross-border transactions are to South African public and private sector FOSTER AND SUPPORT ENTREPRENEURS TO SCALE
FOR INNOVATION
ENTREPRENEURSHIP
entities as a way to avoid the high capital
highly regulated, with requirements to report
requirements of building data centers.
all cross-border payments to the South African
South Africa now has data centers clustered
Reserve Bank (SARB), and register all foreign in Johannesburg and Cape Town, with
e-commerce companies for VAT. international providers building dedicated
Improve education Maintain focus on inclusion Create exemptions from
Expand the reach and
equality, via inclusion accessibility of internet
of the economically labor regulations for tech
sites. As much as 93% of the private sector and teacher education to create a significant
Exchange Control Regulations and IP laws disadvantaged into Black startups addressable market
plans to use cloud computing technology programs Economic Empowerment
closely monitor and restrict how currency and the government intends to migrate to the (BEE)
and IP can cross South Africa’s borders or technology as part of a 2017 commitment for Shift some support Adapt a sector
be acquired by non-public entities. The cloud-based e-government services. Build foundational skills in
mechanisms to growth- specialization approach to
reading and math through a
Intellectual Property Rights from Publicly literacy program
Create monitoring systems stage companies to focus establish first regional then
to evaluate the effectiveness on sustainable job creation global leadership
Financed Research and Development Act (IPR of existing programs and
Act) requires all acquirers of publicly-funded 7. Market potential identify best practices to
IP to cover all R&D costs before ownership Introduce entrepreneurship share across initiatives Strengthen the interface
within early education, Cross-fertilize South African between universities and
can be transferred. Within the private sector, provided there is a strong ecosystems to leverage best private sector companies as
practices stimulating growth
South African IP that is acquired by foreign foundation of reading and well as venture capital firms
math Create ‘one stop shops’
entities, either standalone or within a startup featuring standardized
acquisition, must be registered as a cross- information on both Foster linkages between Align IP regulation to
Teach functional business public and private sector
border capital exchange and approved by South Africa’s uneven broadband penetration expertise via certificate
private investors and incentives for IP licensing
entrepreneurship programs innovation hubs to increase
the SARB, which may be subject to taxation. - 3.2% fixed vs 58.6% mobile subscription programs to upskill the commercial savviness of
revenue and new business
starts
Recent amendments have relaxed the and only 24% of households with a computer potential startup workforce support programs
regulations somewhat, but cross-border - limits penetration to B2C internet market Reduce bureaucracy through Create linkages to African
regulations are sufficiently tight that many potential. However, B2B market potential Fill skill gaps with end-to-end monitoring Review existing tax markets around innovation,
exemption structure for VCC to create pathways for
startups register their IP in foreign jurisdictions. has been promoted through public and immigration targeted at of regulatory impact and
(12J) initiatives to ensure innovation and tech talent
targeting bottlenecks
private sector procurement programs and as developers and teachers they’re aligned to desired revenue and new business
much as 12 percent of South Africa’s GDP is outcomes for investment starts
now spent on small business procurement.
Increase exports and cross-
These initiatives have been accompanied by border collaborations by
6. ICT infrastructure programs and initiatives to support startups supporting growth-stage
delivering on these commitments. Yet, ‘market companies to attract foreign
interest
access’ is still seen as one of the primary Legend
challenges for tech entrepreneurs. Much of FINANCIAL CAPITAL SKILLED TALENT NETWORKS CULTURE REGULATIONS ICT INFRASTRUCTURE MARKET POTENTIAL
this is due to the structure of the market, where
large, established companies dominate the Details of the specific recommendations under each group can be found on page 58.
private sector and Small, Micro, and Medium
ICT’s contribution to South Africa’s GDP was Enterprises (SMMEs) contribute just 35 percent Conclusion
around 3 percent in 2014.47 Mobile data to GDP. South Africa’s impressive progress is founded expanding access to basics such as education,
packages are out of reach for many South
on an economic inclusion agenda that employment, and ICT services.
Africans, and are both slower and costlier than South Africa’s unusual mix of culture,
focuses on creating jobs and opportunities Shifting the focus from the number of
in other BRICS countries. languages, and socio-demographics makes it
through innovation and entrepreneurship. entrepreneurship programs to their
well positioned to create a specialist capability
The scale of this support has the potential to effectiveness will ensure that impact
for solving problems related to poverty, health,
make South Africa an outsized contributor to is maximized and that the aims of the
and access to products and services.
global innovation, but first it must continue government are met.
to improve the lives of its citizens by
14 Tech entrepreneurship ecosystem in
research
South Africa
– Turkey Tech entrepreneurship ecosystem in South Africa 15Table of contents Table of figures
South Africa at a glance 18 Figure 1. Macroeconomic indicators for South Africa 18
Figure 2. Global competitiveness index scores of S. Africa 19
The results of tech entrepreneurship - Outputs 20
Figure 3. Profile of Top 100 tech startups in the South African ecosystem 24
South African tech entrepreneurship ecosystem overview 24
Figure 4. Black Economic Empowerment Act of South Africa 26
Insights into ecosystem components 32 Figure 5. Major actors within the South African ecosystem 27
1. Financial capital 32 Figure 6. The innovation and technology funding instruments of South Africa 28
Figure 7. Number of investors per million urban population 32
2. Skilled talent 36
Figure 8. Finfind - a portal for startups seeking capital 35
3. Networks 40 Figure 9. Financial market development in selected countries 35
4. Culture 44 Figure 10. TIMSS Maths scores for 10-year-olds 37
Figure 11. Quality of scientific research institutions 39
5. Regulations 48
Figure 12. Accelerator density 40
6. ICT infrastructure 54 Figure 13. The innovation agency of the Gauteng Province - Innovation Hub 41
7. Market potential 58 Figure 14.CSIR links innovations to commercially applicable solutions 42
Figure 15. University/Industry research collaboration 43
Recommendations designed to strengthen the tech entrepreneurship ecosystem 60
Figure 16. Entrepreneurial intentions and perception of e-ship 46
Conclusion 66
Figure 17. Cross-border IP transactions and IPR act 51
Acknowledgements 67 Figure 18. R&D expenditure as a percentage of GDP 53
Appendix 68 Figure 19. Mobile/fixed broadband penetration 56
Figure 20. Cloud computing and innovation creation relationship 57
Disclaimer 71
Figure 21. Market size 58
Figure 22. Government procurement of advanced tech products 59
Figure 23. Policy recommendations designed to strengthen the South Africa tech
entrepreneurship ecosystem 60South Africa at a glance
South Africa is the 40th largest economy in for basic income, with government transfers Much of the government’s development efforts government also expects to stimulate job
the world, with a GDP worth USD 294 billion, the main source of income for all but the top relate to reversing the effects of apartheid, creation by lowering the cost of doing business
and it’s the third largest in Africa, after Nigeria two income quintiles.11 To help combat this which included institutionalized segregation and raising the capabilities of the workforce to
and incentivize living wages, minimum wages and economic inequality along racial lines. produce and commercialize innovation.
and Egypt. Within Africa, it benefits from
developed infrastructure and its economy will come into effect in 2018.11 Government programs have therefore focused
After impressive strides in the past two
is largely driven by natural resources such on giving opportunities to businesses owned
decades, economic growth and social
as mining of gold, diamonds, and platinum. The peaceful transition that marked the or operated by members of previously improvements appear to be slowing.
In recent years there have been economic country’s emergence from apartheid ushered disadvantaged groups, alongside traditional This suggests a shift in focus from basic
challenges arising from a number of issues in a new era of development and inclusion. development goals, such as increasing development to making existing programs
including a nationwide drought, weak Free elections, economic inclusion initiatives, economic growth, improving access to health work better.
consumer demand, and political uncertainty. and relative peace between ethnic groups and education, and introducing improvements
Taken together, GDP per capita shrunk by a has helped the country recover from its to infrastructure. These policies, though
FIGURE 2. GLOBAL COMPETITIVENESS INDEX
modest 1% from 2014-2017.10,11 past, and currently it serves as an attractive restrictive at times, are expected to develop SCORES OF S. AFRICA
destination within Africa for living, tourism, as the country evolves and matures. Moderate
South Africa’s population of 55 million has a and conducting business. Since the 1990s, political instability and corruption, as well as Score Rank
power and wealth concentration continue to (1-7) (138)
striking amount of diversity and the country the government has been working actively to
boasts 11 official languages. The average incorporate more South Africans into formal exist, albeit at lower levels, despite government
GLOBAL
income of PPP-adjusted USD 13,000 conceals employment. This is especially critical given attempts to stimulate development and
COMPETITIVENESS INDEX 4.5 47
large differences in income levels and 78 that half the population is under the age of 24 economic growth.
percent of the population has been poor “at 13
, and the unemployment rate is 27%.14 There
least once”. Income inequality remains one of is evidence for successful social programs –
12 High unemployment at 27 percent is the most
INSTITUTIONS
the highest in the world, with a Gini coefficient poverty has been halved from 34% to 17% pressing social issue.13 The swelling workforce
is overwhelming the number of new jobs The quality of legal and
of 0.69 and with the wealthiest 20% of the since 1996 by introducing social welfare administrative framework
created with 2.6 youths entering employment
population responsible for more than 65% of programs. This was achieved by creating a that regulates interactions 4.5 40
for every adult leaving, as indicated by a ratio
the country’s consumption.8 Lower-income more favorable economic environment, and of the population aged 15-19 to those aged 55-
between government, firms
citizens are heavily reliant on the government expanding access to housing.12 and people
59.9 In 2017, only 31,000 new jobs were created
for a workforce that increased by 427,000.11
The large differences between groups in INFRASTRUCTURE
FIGURE 1. MACROECONOMIC INDICATORS FOR SOUTH AFRICA
access to education have also limited the Existence of extensive and
ability to raise employment levels and create efficient infrastructure to 4.2 64
Value Rank Percentage entrepreneurship success. supply required services
(192)
GDP (USD), 2016
The business environment is large and MARKET SIZE
294 B 39 SME contribution to varied, though a history of mining and natural
36% Size of the economy
GDP, 2014 resources still remains a critical part of the 4.9 30
GDP per capita Consumer expenditure economy. SMMEs make up just 35% of GDP. 6
13 K 89
(PPP adj. USD), 2016 as a % of GDP, 2016 60%
The National Development Plan currently in
effect focuses heavily on raising the quality of MACROECONOMIC
Population (millions),
55 25 Stock market cap as a ENVIRONMENT
2016
% of GDP, 2015 323%
life of the typical South African, with a target 4.5 79
of 11 million new jobs by 2030, building Stability of the economy
Rate of population the capacity of individuals and industry, and
aged 15-19 over those
2.60 Stock market traded as expanding access to basics such as healthcare, GOODS MARKET
aged 55-59, 2016 137%
a % of GDP, 2015 infrastructure, and transportation.15 The EFFICIENCY
Intensity of local
competition, ease of
4.8 28
Source: IMF, World Bank, Global Entrepreneurship Monitor, Euromonitor, AT doing business, tax rates,
Kearney, Economist, World Economic Forum 10
International Monetary Fund. “World Economic Outlook October 2017”. 15
Endcode. “Legal and Policy Landscape Impacting Entrepreneurship and Tech imports ratio and buyer
https://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx Entrepreneurship in South Africa”. October 2017 sophistication in a country
(accessed November 9, 2017)
11
OECD Economic Surveys: South Africa. July 2017
12
World Bank. “South Africa Economic Update: Innovation for Productivity and
Inclusiveness”. September 2017
13
Global Entrepreneurship and Development Institute. “The entrepreneurial
ecosystem of South Africa: A strategy for global leadership.”
14
World Bank Dataset. Unemployment, total (% of total labor force) (modeled
ILO)
18 Tech entrepreneurship ecosystem in South Africa Tech entrepreneurship ecosystem in South Africa 19South Africa vs.
benchmark countries
TECH STARTUP PREVALENCE IN A COUNTRYa Tech startup longevity
(1=highest, 0= lowest)
PER MILLION URBAN POPULATION
ISRAEL (IL) 214 0.49
SINGAPORE (SG) 176 0.68
UNITED STATES (US) 160 0.48
The results of tech UNITED KINGDOM (UK)
FINLAND (FI) 101
122 0.53
0.68
entrepreneurship
INDIA (IN) 92 0.59
SPAIN (ES) 50 0.57
UNITED ARAB EMIRATES (AE) 40 0.68
– Outputs GERMANY (DE)
ROMANIA (RO) 24
34 0.68
0.58
KOREA (KR) 20 0.32
On measures of tech entrepreneurship CHILE (CL) 20 0.41
outputs, South Africa ranks below many of the POLAND (PL) 19 0.76
top performing countries, but above several TURKEY (TR) 16 0.16
of its emerging market peers. The country’s CHINA (CN) 12 0.57
position suggests that it has good benchmarks SOUTH AFRICA (ZA) 10 0.36
to target for better performance in all of the BRAZIL (BR) 8 0.37
ECONOMIC CONTRIBUTION
economic contribution indicators used in RUSSIA (RU) 6 0.42
our analysis – the prevalence of tech startups NIGERIA (NG) 3 0.60
in the country, the number of exits above INDONESIA (ID) 3 0.68
USD 100 million, the number of ‘unicorns’, SAUDI ARABIA (SA) 2 0.76
entrepreneurs’ growth aspirations, and the
total contribution of knowledge sectors to the NUMBER OF EXITS OVER USD 100M
economy. The output indicators for innovation 2012-16
creation – the volume of innovation generated UNITED STATES (US) 1,946
by the country overall, and the amount of UNITED KINGDOM (UK) 215
innovative products and services generated by GERMANY (DE) 65
entrepreneurs – demonstrate that South Africa CHINA (CN) 49
outperforms many of its emerging market INDIA (IN) 40
peers, yet it still has a way to go to match the ISRAEL (IL) 37
top performers. BRAZIL (BR) 20
SPAIN (ES) 16
SINGAPORE (SG) 15
FINLAND (FI) 10
RUSSIA (RU) 7
KOREA (KR) 6
TURKEY (TR) 6
SOUTH AFRICA (ZA) 6
POLAND (PL) 5 Other countries in scope of tech
INDONESIA (ID) 5 entrepreneurship study
CHILE (CL) 4
NIGERIA (NG) 3
UNITED ARAB EMIRATES 2
SAUDI ARABIA (SA) 1 Note: The definitions of the output indicators can be found
ROMANIA (RO) 0 0 in the appendix
a. Density shows proportional values among ecosystems.
Scales are only comparable within each indicator
20 Tech entrepreneurship ecosystem in South Africa Tech entrepreneurship ecosystem in South Africa 21ENTREPRENEUR’S GROWTH ASPIRATION SCOREb INNOVATIVE OUTPUT DENSITY
A scoring based on percentage of entrepreneurs with a sophisticated growth strategy aspiring The abundance of knowledge creation and intangible assets in a country (out of 100)
to grow at least 50% in the next 5 years and attract VC funding (1=highest, 0=lowest)
75 69 67
1.0 1.0 1.0 60 59 57
0.8 0.8 0.8 0.8 52
0.7 0.6 0.6 0.6 0.6 47 44
0.5 0.5 0.4 0.4 0.3 38 38 35
0.2 0.2 0.2 29
0.1 28 27 27 25 25 22
20 18
SG AE US SA IL CL TR UK FI DE CN RO ZA PL RU KR ES NG IN BR ID
ECONOMIC CONTRIBUTION
INNOVATION CREATION
44.2 30.7 34.2 5.3 22.1 34.2 48.1 28.4 17.7 21.5 26.7 39.2 27.6 28.3 18.7 21.6 9.7 20.9 5.2 4.4 2.4
HIGH JOB CREATION EXPECTATION (% OF ENTREPRENEURS) KR CN DE UK FI US IL TR ES SG RU PL CL ZA BR IN AE RO SA ID NG
Other countries in scope of tech entrepreneurship study
ABILITY TO CREATE GLOBALLY RECOGNIZED CONTRIBUTION OF KNOWLEDGE
“UNICORNS”c SECTORS TO THE ECONOMY ENTREPRENEURIAL INNOVATION CREATIONd
Technology start-ups with over USD 1 billion valuation in benchmark countries ICT & High-tech exports, international data flows and Rate of entrepreneurs involved in new product or service creation
IP receipts (1=highest, 0=lowest)
Benchmark country set
57%
37% 33% 33% 31% 30% 29% 29% 28%
0 28% 27% 25% 24%
P O W E R E D b y S E R V I C E™ 279 1,164 22% 18% 13% 12%
0.33 5%
$ 0.67
Total Total
value 1
number
(USD B) CL US UK KR TR IL FI CN IN PL AE DE ES ZA ID SA BR RU
Other countries in scope of tech entrepreneurship study
Note: The definitions of the output indicators can be found in the appendix
b. A scoring based on percentage of entrepreneurs with a sophisticated growth strategy aspiring to grow at least 50% in the next 5 years and attract VC funding
c. Unicorns in tech-related categories are taken into consideration
Note: The definitions of the output indicators can be found in the appendix
d. Some benchmark set countries are not shown due to data availability
Source: OC&C analysis based on World Bank, GEM, GEDI, Crunchbase, INSEAD, McKinsey, CB Insights
22 Tech entrepreneurship ecosystem in South Africa Tech entrepreneurship ecosystem in South Africa 23South Africa tech
entrepreneurship ecosystem
The South African startup ecosystem is one of In South Africa, two types of tech At the other end of the country the Western Black Economic Empowerment has been a
the most vibrant in Africa, producing a number entrepreneurship ecosystems operate, each Cape is home to the thriving Cape Town and powerful initiative that is shaping the economy
of innovative companies and serving as a with its unique players, drivers, and market Stellenbosch ecosystems, both known for as well as the private and public sectors. As
destination for entrepreneurs who want to start focus. The Johannesburg/Pretoria ecosystem their innovation focus and more international a program designed to promote economic
their own ventures. Given the need to reduce in Gauteng Province is run by government ambitions. The Cape Town ecosystem is inclusion, it functions as a point-based system
unemployment and inequality through wealth investment as well as private sector funds by some calculations twice the size of the to allocate preference for government tenders
creation, the government has recognized directed toward entrepreneurship as part Gauteng ecosystem.12 The funding landscape to companies that are owned or managed by
the important role that startups and SMMEs of government programs. Johannesburg’s in the Western Cape more closely resembles South Africans from previously disadvantaged
can play, and has developed a sophisticated status as an entrepreneurship hub is that of more mature ecosystems, made up of groups (referred to as “black”, though not
infrastructure around these companies. At gaining international prominence and the angel investors, family offices, and venture necessarily of African heritage). Perhaps no
35%, SMMEs make up a particularly low city was home to 180 startup events in capitalists rather than government funding. other program has had as large an impact
proportion of the economy for an economy 2016. It also hosted the prestigious Global on the growth and shape of South African
of South Africa’s size, and this number may be Entrepreneurship Congress 2017.12 Pretoria’s Given the strong government involvement industry. However, the broad approach used
declining.8 This is a problem for job creation, location as one of the seats of government in the Gauteng ecosystem, the ecosystem to allocate points and give preference may
as their link to reducing unemployment and is key to this status, which is why it is at the in this province is more closely examined. be further improved to redistribute wealth to
income inequality is strong.12 center of the country’s efforts for economic While the Cape Town ecosystem has a larger the most economically disadvantaged South
development via entrepreneurship. projected number of startups, it functions Africans.
largely independently and is less reliant on the
government. Similarly, the Enterprise and Supplier
Development (ESD) program creates
The South African government’s mandates incentives for established companies to
to improve the economy include raising invest in the training and development of
FIGURE 3. PROFILE OF TOP 100 TECH STARTUPS IN THE SOUTH AFRICAN ECOSYSTEM employment levels, increasing its debt rating, their smaller supply chain participants, either
and strengthening governance. Alongside directly or indirectly via ESD providers. Large
Business Model Breakdown Location Breakdown Sector Breakdown this, the government is also focused on companies must spend 3 percent of annual
the economic inclusion of previously profits on suppliers included in the program.
Mixed
Others SaaS & Iaas disadvantaged groups. Two related initiatives This program is the largest driver of funding
– the Black Economic Empowerment (BEE) for the country’s large number of innovation
C2C
15% 14% 42% and Economic Supplier Development (ESD) hubs and incubators, unlocking ZAR 12 billion
2% programs – are key to this agenda. Though not (USD 900 million) in capital for companies to
Advertising &
11% Big data exclusively directed at the tech and innovation fund empowerment initiatives.16
44% B2B
28% sectors, these programs have triggered
Marketplace 16% 9% significant improvements in the Gauteng tech
39% Content (VMG)
58% startup ecosystem.
7%
Johannesburg 6% 7% 2%
B2C Cape Town e-finance
e-retail Social platforms
High tech
VMG: Video, Music, Games
Source: OC&C analysis based on Crunchbase 16
“First National Bank, Endeavor South Africa. “The Entrepreneurial Dialogues:
State of Entrepreneurship in South Africa”. http://sablenetwork.com/pdf/The%20
Entrepreneurial%20Dialogues%20-%20State%20of%20Entrepreneurship%20
in%20South%20Africa.pdf (accessed October 26, 2017)
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