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Cape Town is fast cementing itself as the biggest continental hub for tech startups. It’s a growing trend, confirmed by a number of research surveys and articles over the past decade. The Mother City is rightfully living up to monikers such as “The Silicon Cape” and the “Digital Gateway to Africa“. However, the reasons why the South African city is ranked where it is are a bit more complicated, and therefore debatable.
Alongside Johannesburg, Cape Town is the most populated urban area in South Africa. Of the Western Cape’s total population, 64% reside in the city. We’ve therefore rounded up stats which reflect the conditions of the province as a whole, where Cape Town and Stellenbosch are often regarded as the leading knowledge hubs.
The most accurate way to measure Cape Town’s ranking as a startup hub, relative to the rest of South Africa, comes down to the following factors: the amount of startups headquartered, the number of venture capital (VC) firms and their activity, and the amount of support programmes available.
So before we dive into the why, let’s take a look at how the province fare relative to the rest of the country:
1. More startups call it home
Research shows that there are more startups in the Western Cape than in the rest of South Africa. The Ventureburn Startup Survey 2015 found that the majority (59%) of startups are based in the Western Cape. PwC similarly showed that most of South Africa’s “emerging companies” are based in the Western Cape (56%), followed by Gauteng (34%).
2. More venture capital available
Startups have better access to VC in the Western Cape. A recent study by the Southern African Venture Capital and Private Equity Association revealed that the Western Cape has the most VC activity in South Africa. With 75% of all South Africa’s VC-type deals, the province has rapidly overtaken Gauteng (20%) within the last five years.
Compared to the rest of the continent, between 2010 and 2014, startup database CrunchBase found that South Africa leads in the total number of venture rounds recorded, followed by Nigeria, Egypt and Kenya.
3. More support structures
As PwC’s Emerging Company Survey found, there are more support small business development and innovation programmes in the province than elsewhere in the country. These initiatives include CodeX, AlphaCode, the Bandwidth Barn, RLabs, Grindstone Accelerator, Launch Lab, the Silicon Cape Initiative, and many more.
Given these findings, we’ve now established that the province leads as the startup hub, relative to the rest of the country, and the overall continent. But why are there more startups and fund managers based in and around Cape Town than in the rest of Africa?
Founder of one of the world’s most successful incubators Y Combinator, Paul Graham, famously wrote that the recipe for a startup cluster is having a great university near a town that smart people like. As tongue-in-cheek as this may sound, he backs this statement up with a couple of “ingredients” we can use to frame our approach. The fundamental layers required to “reproduce” a Silicon Valley-like hub include universities, personality, nerds, youth, time, competition, and “no bureaucrats”.
Personality that appeals to ‘nerds’
As Graham argues, a startup cluster has to be a place where “investors want to live, and students want to stay after they graduate.” Few can argue that the city’s combination of forests, beaches, mountains and hipster coffee shops fail to appeal to both locals and tourists.
Named one of the world’s top travel destinations by the Guardian and the New York Times, the city also boasts a bustling culture of creativity which led it to take the crown as World Capital of Design 2014.
Cape Town’s coffee-loving, laid-back hipster culture fits Graham’s theory perfectly. “Most nerds like quieter pleasures. They like cafes instead of clubs; used bookshops instead of fashionable clothing shops; hiking instead of dancing; sunlight instead of tall buildings,” he wrote.
According to Mercer’s 2014 Quality of Living Survey, Cape Town is ranked 90th out of 460 cities and is considered the city with the fourth highest quality of living in Africa and the Middle East after Abu Dhabi (78), Port Louis (82), Durban (85).
Top universities as catalysts for knowledge hubs
It’s no secret that some of the world’s most successful startup stories were born out of universities. Whether directly or indirectly, universities have a tendency to attract innovation from all corners. Facebook was founded while founder Mark Zuckerberg was at Harvard University, whereas Google, Cisco, Yahoo, Instagram and many others have their roots in Stanford University.
The Western Cape is home to four top-ranking universities within a 60km range of each other, namely University of Cape Town (UCT), Stellenbosch University (SU), University of the Western Cape, and Cape Peninsula University of Technology.
The criteria used to measure the institutions’ statuses looks at the following: Quality of Education; Alumni Employment; Quality of Faculty: Publications; Citations; Broad Impact, and Patents. The latter is an important measurement, indicating scientific and technological innovations.
SU and the UCT lead the pack in South Africa for Patent Cooperation Treaty (PCT) international over the past five years. These PCT registrations are generally regarded as the first step towards protecting, and an important step towards, commercialising an invention on an international scale.
Anita Nel, who heads SU’s technology transfer office InnovUS, tells Ventureburn that this commercialisation of IP, and the creation of multiple university spin-out companies, have the potential to modernise the commercial nature of entire city regions.
This attracts not only other startups in that field to the region but also the presence of large multi-national companies, resulting in more funding for the university as well as the creation of science parks. Eventually these overlapping innovation districts become highly functional ‘knowledge regions’.
Looking at leading global universities in Leuven, Oxford, Cambridge, Boston and Finland, Nel found that the first step in the establishment of such a knowledge region is “for a critical mass of spin-out companies in a specific industry to emanate from universities in said region.” This ultimately fuels a chain reaction that leads to the creation of a knowledge region.
‘Startups beget startups’
Graham argues that people who work for startups tend to start their own. Similarly, people who get rich from startups fund new ones. Startup clusters therefore tend to take on a life of their own once they get going. “Startups beget startups,” he wrote.
As depicted in the diagram below, which is illustrated by Nel, mass spin-out of companies from universities attracts entrepreneurs from outside the universities. This is soon followed by VCs, angels, incubators and eventually large multinational companies which seek to acquire innovation in the region.
We’ve seen most of South Africa’s top entrepreneurial success stories originate from the Cape, feeding back into the ecosystem. The Western Cape’s startup history can be traced back to 1999 when US-based VeriSign acquired Mark Shuttleworth’s Thawte in a stock purchase from for US$575-million. The following year, Shuttleworth formed HBD Venture Capital, a business incubator and venture capital provider. The firm then saw through profitable exits such as Fundamo, CSense Systems and Clicks2Customers. Today, VC firm Knife Capital is in charge of the firm’s portfolio, and lead the exit of iKubu to Garmin in 2015.
Organic growth and competition
The story continues. Through either experience or inspiration, many more fund managers and startups have originated ever since the days of HBD Venture Capital and VeriSign. SAVCA earlier this year found that 21 public and private VC fund managers and angel investors completed 168 new deals amounting to a total value of R865-million, the bulk coming from the Western Cape.
Resonating with Nel’s illustration above, Graham believes that the organic growth of VCs causes startups to form around them, which ends up drawing in more startups through acquisitions. In order to achieve this organic growth, Graham pointed out, a thriving startup hub needs to have no bureaucrats.
The Western Cape Government has over the years implemented regulations and policies to lessen the burden of procedures for businesses. These include the Red Tape Reduction Unit, which seeks to remove bureaucratic blockages to make it easier and more cost-effective to do business; the Western Cape Premier’s Entrepreneurship Recognition Awards which recognises top entrepreneurs; and providing various resources on access to financing.
Initiatives like these — and a culmination of the above — have led the World Bank to rank Cape Town, along with East London, as is the best city to start a business in South Africa.
Cape Town still has a long way to go
According to the Innovation Cities Index, Cape Town has kept its rank as Africa’s most innovative city over the past decade, with Dar es Salaam and Dakar referred to as “rising cities” regionally.
However big an achievement this may be, Cape Town still only ranks 128th of the total 445 cities listed. Other emerging markets like China, Brazil, Poland, Serbia, Turkey, Malaysia, Russia and Czech Republic still outrank the South African city. Given the global competitive nature of our modern world, Cape Town still has a long way to go to ultimately make an impact as a knowledge economy. At the same time it should be noted that other cities or provinces can look at the Mother City as an example if they wish to be relevant in the future.
Image by David Stanley via Flickr