An ecosystem in turmoil: inside South Africa’s startup problems

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When you think about the number of tech communities popping up everywhere, the question no one seems to ask is whether or not the ecosystem they are in is sustainable. When you think about it scientifically, in a marine ecosystem, if one link is missing the entire ecosystem suffers.

It is easy to watch the meteoric rise of a growing tech scene, full of promise, innovators and 10-million people ready to make the same mistakes. It’s easy to get caught in the savoir faire because everyone has the right words every time.

Things seem to be that way in South Africa’s tech ecosystem. It is a place where newness and sameness have become common place, things are happening but at the same time things aren’t. Innovators are rising but they seem to be the same people. The world is taking notice, but of all the wrong things.

Entrepreneurs, investors and key players in the industry sense there is a hold on the ecosystem, and that hold could lead to the eventual death of the country’s burgeoning tech scene. There are contributing factors to the ecosystem’s impending demise: the need to look at innovation, where it is headed, and how it is being packaged for the South African market as well as the global stage. There are also government challenges that entrepreneurs and investors face that make moving forward a less-than-smooth ride. Investors need funds to help grow the ecosystem and then there is the community itself.

Projects pop up from time to time to help sustain the ecosystem and foster growth — projects like this and this — but for some reason they have disappeared. With untimely ends (and unexplained disappearances) like these, one can get the impression that the lights are dimming on this ecosystem.

Daring to fail — an ecosystem gripped by fear

Failure doesn’t work here: unlike most of its counterparts, South Africa’s tech scene does not celebrate failure. Those who fail mask it in quick buyouts with easy mergers. It seems trying is not good enough, a roaring success must follow.

According to Nic Haralambous, founder of African mobile strategy firm ForeFront Africa, there is a “fear of failure” among entrepreneurs.

“I think the challenges are pretty far-reaching and include a fear of failure from an entrepreneur perspective,” he says.

But it is not a fear that stems just from the entrepreneur’s abilities. Haralambous reckons that it is a “lack of funding, horrible government regulations, and red tape that often cripple a fledgling business and fundamental skills being developed in South Africa”.

Even journalists are guilty of this — the tone of “we knew this would fail” sometimes seeps into stories and startups become afraid of trying again and opening up.

It’s hard to blame entrepreneurs for not being better risk-takers when the odds are stacked up against them. In South Africa, failing on a monetary level that involves bank loans leaves a 30 year “black mark” on your record, but in the United States this mark only lasts three to four years.

An industry broken by lack of funds

There is money here, but there isn’t. Investors want to invest but they have no money, and startups try to make it with international investors but find it hard to compete in that market — most of the time.

According to Rapelang Rabana, founder of Yeigo Communications, this is the biggest hindrance to South Africa’s tech scene. There is just not enough money in the ecosystem.

“What is damaging the ecosystem is the lack of funds being allocated to venture capital, and the lack of seasoned entrepreneurs and early-stage investors running the few that do exist,” she says.

This sentiment is echoed by former Mxit boss Alan Knott-Craig Jnr. He says that “the main problem [with the ecosystem] is a lack of people who have made lots of money in tech in South Africa. This is the sort that is at the core of the Silicon Valley investor scene.”

The money issue is a particularly problematic one. It’s a question of access.

“South Africa in particular is not short of money at all. The money is just not accessible,” says Rabana.

For the entrepreneur, it is a problem that requires a partnership to solve, she says:

I don’t believe the private sector alone can change it, and a government partnership and major investment is required to kickstart venture capital and entice the right expertise into the country. The right companies will get funding when the right people are sitting on the other side of the table.

With lack of funds, it’s hard for an entrepreneur to truly achieve anything and bootstrapping is a debatable option.

Together but alone — a community torn by competition

Launch48

Though healthy competition is encouraged in any industry, when it comes to South Africa’s tech scene it may be a serious problem.

“In spite of South Africa being the home of the Ubuntu concept, for some reason our ecosystem doesn’t abide by these simple truths,” says Haralambous.

He argues that the community needs to learn to work together better, failing and succeeding together — expelling all sense of jealousy.

“We are all connected and if I fail, you fail a little bit too, but if I teach you what I’ve learned from my failure then we all succeed. The more we all succeed, the more success will grow into the core of our ecosystem. For some odd reason entrepreneurs are overly protective of their ideas and jealous of other’s success,” he says.

But some entrepreneurs are trying to change that. Wesley Lynch of Snapplify is a big fan of helping the ecosystem grow through peer recommendation. Lynch understands what his company does well, and will take on clients for that. He is also happy to point clients in the direction of competitors he believes can do what he cannot. It’s a society of give and take but not everyone is giving, just taking.

“Any negative competition is bad. And there is some. Even competition between Johannesburg and Cape Town. It’s all silly. The high growth startups that we focus on need to compete globally or at least in the African context and we should be competing on that scale not in our small isolated markets,” says Lynch.

Each tech space thinks of itself and propagates itself. Silicon Cape wants to rule South Africa’s tech scene and Johannesburg is bugged down by big corporate and big money. Somehow the two never meet halfway and find ways to collaborate.

Gustav Praekelt, founder of the Praekelt Foundation and JoziHub, pegs it down to organisation.

At JoziHub, we don’t believe that there is more startup activity (or venture capital), in Cape Town than in Johannesburg. However, the VC and startup community has been much more effective at organising themselves with initiatives like Silicon Cape, as well as providing focal points for entrepreneurs and startups to meet and collaborate (like 88Mph, Umbono, Bandwidth Barn). Johannesburg and Gauteng certainly have as much startup activity going on, but it is diffuse and much less organised. At JoziHub we are creating a focal point for entrepreneurs and startups to collaborate and form a community.

According to Alexandra Fraser of Invenfin and head of the Silicon Cape Initiative, things are changing. She reckons more people are coming forward to drive the ecosystem.

“Since taking over the role of Chairperson of Silicon Cape, I have been amazed at the number of people who have chosen to become actively involved in our community and are driving initiatives of their own in conjunction with Silicon Cape. It seems to be increasingly about building value for the broader tech community.”

Fraser thinks the best way forward for South Africa’s tech scene is collaboration.

“The only way we can create a sustainable tech ecosystem both locally and nationally is through collaboration. We are actively partnering with other Cape-based organisations to combine resources and collaborate as much as possible. On a national level we are creating partnerships and building ‘Silicon Bridges’, as described by Mike Butcher at Net Prophet. Through these partnerships we can learn from one another and increase the depth of the relationship between the Cape Town and Joburg tech communities.” she says.

She argues there is a fair amount of collaborating in the space, at least in the VC space.

“The VC community in South Africa is fairly small and because we operate in a very different environment to Silicon Valley we face our own challenges. As a result we have good relationships, are all actively involved in building the industry through SAVCA, share learnings and seek advice, because if one of us succeeds we all succeed.”

A good lesson for entrepreneurs to learn.

An ecosystem bound by the coils of exclusivity

Bridge

To the casual observer and to most insiders there is a gaping hole of diversity when it comes to tech, especially in Cape Town’s Silicon Cape region. Yes, a community we are, but it is a community built and sustained by the same people.

Journalist Mandy de Waal posed a question to a room full of Silicon Cape’s chosen startups at a media round table last month. “Where are the black people?” In a society like South Africa it’s a tricky practice to meander the race issue. But also, “Where are the women?” A question that gets asked more than others.

Diversity is an uncomfortable issue but a necessary one. An ecosystem that relies on the same people to survive surely cannot be sustained for long?

Fraser agrees. “The only way we will grow is by being inclusive,” she tells me. “We have to shift our attitude from one of ‘what I can get’ to ‘how can I contribute and actively participate.’”

According to Roger Norton at the Silicon Cape Initiative, it’s not a case of exclusivity. The organisation is a purely voluntary-based initiative, hoping to foster the growth of Cape Town’s tech scene by taking time out of their normal day jobs.

He reckons it is a case of access and opportunity.

“You’re less likely to be very passionate about technology if you are not a ‘digital native’ and have not been using it for a long time. It’s not impossible, just less likely,” he says. “This is also exemplified from the startup point of view where many of the top black candidates are swept up by corporates for BEE points and the sacrifice to go at it alone in a startup is less likely.”

But is it good enough? Surely not all innovative and ingenious black people are gathered up by corporates? As the self-appointed glue of the ecosystem, surely the Initiative can do more to engage the people who may not know of its existence, and call on the community for recommendations as it is the community’s responsibility too? Death will surely come if it remains a community of “we like what we know and we know what we like”.

Does the government even care that tech is important?

Recognising the gap in the industry and helping fill and fix it is crucial at this stage. In the emerging markets, Israel has been heralded as the startup nation, an ecosystem that has been built over the course of 20 years. Time and their government helped.

“I am a huge fan of what Israel did and how they built up a market from scratch in less than 20 years,” says Rabana. “The government acknowledged the dire need for VC and that they didn’t have the expertise, but had the money.”

There is perhaps a lesson or two for South Africa in what Israel did, she says:

They setup co-investment schemes with experienced VC companies significantly reducing the risk of coming into the new territory, did not try to be greedy and made it very attractive for them to come knowing that once they are in, the market could finally develop. Africa needs this kind of foresight to cultivate a VC market of any significant scale.

But helping solve the money problem is one aspect of the government’s role in this. There are regulatory issues that also need to be addressed if the ecosystem is to avoid an untimely death.

As Haralambous points out:

We need to focus on fixing the government regulatory issues (supporting Mark Shuttleworth’s case against the SARB is a good place to start) as well as begin educating high-school and university students about building businesses and changing the world, not gunning for the salary. We also need to learn to share more and communicate more openly with one-another to build a cooperative community.

Comparison always ends in death

Silicon Valley

In a community where the same tech expats are hailed for their success and in-country successes remain unsung heroes, there is a fatal flaw. South Africa wants to be the next Silicon Valley, and here it is a race to produce the next Mark Zuckerberg.

South African tech entrepreneurs are pegged with the world’s biggest successes and aspire to emulate them. Some of these startups are actually solving real world problems — real world applications that Facebook, Twitter or Instagram don’t solve. Yet those are the companies these startups hope to emulate, creating a false sense of success.

Silicon Valley is an industry that was built over 50 years and benefits from basic resources that South Africa doesn’t have. If South Africa started thinking of itself as an ecosystem with new rules and connected by ideas with a real focus on collaboration, there is no doubt it would become an ecosystem to watch.

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