The tech sector in SA is still a hot place to be [Opinion]

South Africa’s economic outlook may be gloomy, with annual growth forecast to barely past 1.5% over the next three years, but things are still hot in SA’s tech startup sector — so hot you’ll need a pair of shades when talking about it.

Away from failing state-owned enterprises, power outages, burning trains, poor service delivery and grinding corruption, the country’s tech startups are blazing away.

It might as well be another world they’re on.

Netting big bucks

Start with investments.

According to the Southern African Venture Capital Association (Savca), VC investments grew 31% to over R1.5-billion in 2018, up from R1.1-billion in 2017. The number of investments also grew, from 159 to 181 (see this story).

The investment value and number of deals may well have continued to grow in 2019.

This year — like previous years — saw startups land some big ticket sizes, with names like RapidDeploy, which earlier this year opened a US office to market its cloud-based first-responder platform to service client there. The startup announced in February that it had landed a R167-million deal.

This year the fintech sector again hit it big, with startups Lulalend landing R90-million and Nomanini, R59-million, from local and international investors.

This, while on-demand domestic cleaning platform SweepSouth closed an over R60-million round, which included a R30-million investment from Naspers’s R1.4-billion venture capital (VC) fund Naspers Foundry, which was announced in June (see this story).

Other big names included aerial diagnostics startup Aerobotics, which netted R29-million to expand its drone offering to citrus farmers in the US, and edtech startup Snapplify’s R29-million deal from new kid on the block Hlayisani Capital.

Big exits

There were some big exits too. Most notable were Kenyan company DPO’s acquisition of Cape Town based fintech PayFast and Vodacom’s acquisition of 51% of Pretoria based Internet of Things (IoT) startup up IoT.nxt.

The size of the deals were not disclosed, but are likely to run into the tens, if not hundreds of millions of rand – or at least over R100-million, in the case of US based CM Group’s acquisition of Adii Pienaar’s Conversio. Pienaar was involved in founding WooThemes, which was acquired by Automattic for a reported over $30-million in 2015.

VC funds on the money

This year also saw big raises from several local venture capital funds – including Kingson Capital, which has now closed a raise for a R1.4-billion fund (and made six deals) and Vinny Lingham’s Lion Pride Agility Fund, which is raising R500-million and has already made three deals. Hlayisani Capital is looking to raise R500-million and has already invested in six deals this year, most of them in tech-enabled companies.

South Africa’s first female angel fund, Dazzle Angels, is also nearing launch, having done due diligence on several deals.

But perhaps the most impressive fund this year has been the R1.4-billion SA SME Fund, which draws its contributions from listed companies and from the Public Investment Corporation (PIC), which oversees the investment of government employees’ pensions.

The fund invests in VC and venture funds, that in turn invest in small businesses, including startups.

In October the fund’s CEO Ketso Gordhan said the fund is set to be one of the country’s biggest institutional investors by the end of this year, having already approved R1-billion of its capital for investment in a number of funds. It aims to be fully invested by the end of this year.

With a mandate to invest 75% of its capital in black-owned companies, the fund looks sure to propel the country’s rising number of black tech startups.

This is good news.

More black tech startups

South Africa’s tech startup sector is still dominated by white males. But things are changing.

A 2018 Ventureburn survey of 153 tech startup founders, found that the percentage of black founders is growing (see this story).

In all, 56% of the 153 startup founders surveyed by Ventureburn at the time, listed themselves as black – up from 46% in a 2017 survey by Ventureburn of 260 founders and 26% in a 2015 survey of 197 startup founders.

Despite this, when compared to their white counterparts, black-owned tech startups are still struggling.

While 15% of white founders reported that their startup were profitable, just seven percent of black founders could say the same about their business.

And just six percent of black founders reported that they were able to tap angel or VC funding, compared to 11% of white founders who said they were able to land such funding when founding their startup.

It’s clear that to become more representative of the country’s population, more funding and support must go to black, as well as female founders.

Look to big tech, not government

But help is more likely to come from big tech companies, than the government itself.

While the new Minister of Small Business Development Khumbudzo Ntshavheni announced a number of measures earlier this year to ratchet up support to small business (including the introduction of new measures to boost state funding to such firms), the department’s past performance in helping small firms has been dismal (see this story and this one).

However, a number of tech multinationals have introduced support programmes to help grow and fund black-owned tech startups.

The government in a way is helping. It’s allowed multinationals that are prevented from giving up equity in their firms to black participants, to score BEE points if they instead spend the equivalent value on training and funding black employees and entrepreneurs.

Leading the pack is IBM with a R700-million equity equivalent programme. Last month Amazon Web Services (AWS) announced a R365-million programme to help train black tech entrepreneurs (see this story).

This, combined with an increasing number of accelerators offering help to startups, will likely continue to drive the growth and investment that the country’s tech sector has seen of late.

Africa brightening up

The situation for tech startups in Africa is looking pretty good too. Egypt’s tech startup scene has blown up (see this story).

Shortly before it listed on the New York Stock Exchange this year, Jumia became the continent’s first unicorn. Some may say it’s not an African company (its founders are French and it’s registered in Germany). Nigerian fintech Interswitch in November reportedly became the continent’s second unicorn after a recent investment.

Alibaba founder Jack Ma reckons Africa will lead the world’s next digital revolution and Twitter’s Jack Dorsey even wants to move to the continent for a few months next year (he won’t say yet which country he will temporarily locate to).

So, startups, sit back, light up the candles and pour yourself a gin and tonic. And while the rest of the country slowly falls apart just remember how hot things are in the world of tech startups.

Read more: SA’s Hlayisani Growth Fund mulling 12 deals after having invested R200m so far
Read more: Here are SME minister’s new measures to boost small business finance
Read more: Adii Pienaar sells Conversio in reported over R100m deal to major US company
Read more: ‘SA SME Fund set to be among country’s biggest institutional investors by year end’
Read more: Kingson Capital grows SA VC fund to over R1.4bn with additional capital
Read more: Cape Town startup SweepSouth raises R50m in new funding round
Read more: SA edtech Snapplify snaps up over R29m in expansion capital from funders
Read more: Competition Commission approves Vodacom acquisition of SA startup IoT.nxt
Read more: SA had bumper VC year in 2018 with investments up 31% over 2017, reveals report
Read more: SA fintech LulaLend raises $6.5m from the IFC, Quona Capital
Read more: Female focused Dazzle Angels close to making first investment
Read more: DPO acquires SA’s PayFast in reported multi-million rand deal
Read more: SA startup RapidDeploy raises $12m from Samsung Next, GreatPoint Ventures
Read more: New Vinny Lingham linked R500m VC fund currently mulling 15 investments [Updated]

*Correction: Subsequent to the publication of this opinion piece, SweepSouth co-founder Aisha Pandor confirmed with Ventureburn that its round was in fact valued at over R60-million and included a R30-million investment from Naspers’s R1.4-billion venture capital (VC) fund Naspers Foundry, which was announced in June. The piece has been adjusted to reflect this.

Stephen Timm is the editor of Ventureburn.