Is South Africa the best place to start your start-up?

Is South Africa the best place to start your start-up?

Summary: For those wanting to set up a tech company, there's a lot to consider. ZDNet takes a look at some of the major start-up hubs in EMEA and what each can deliver for those wanting to get their own IT business off the ground. Next: Cape Town.

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For many in the IT industry, the dream is to set up a tech start-up and grow it into the next Google or Apple. Individual start-up scenes are thriving in EMEA, but from staffing to rent, exit potential to government support, there are huge differences between countries. Which country is right for your fledgling tech company? ZDNet examines some of the major hubs in the region, and what each can bring to the start-up table.

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Cape Town is South Africa's second city, and its biggest start-up hub. Image: Shutterstock

When entrepreneurs Vinny Lingham and Justin Stanford created the Silicon Cape business network for tech investors and start-ups from Cape Town in 2009, they hoped to draw perhaps 100 people to the launch event. More than 1,000 turned up, clearly demonstrating the surge in entrepreneurial energy in the city and the surrounding areas.

Since then, Silicon Cape's community has grown to more than 6,000 members. Sleepy Cape Town is quickly emerging as Africa's most happening place for technology start-ups, thanks to falling bandwidth prices, an increase in the availability of funding, and a new generation of risk-taking entrepreneurs.

Dozens of new tech start-ups across sectors including information security, mobile payments and mobile social networking have launched themselves into the market. "There has been an explosion in start-ups over the past three years," says Stanford, founder of security company ESet Southern Africa and CEO of investment holding company 4Di Capital. "People are moving down to Cape Town from Johannesburg and we're seeing some quitting their jobs to become entrepreneurs."

Cape Town has given birth to a few significant tech start-ups over the years. Certificate authority Thawte - established by space tourist and Ubuntu Foundation founder Mark Shuttleworth in his parents' garage in 1995 - was bought by VeriSign for $575m in 1999. Last year, Visa acquired Cape Town-based mobile banking technology company Fundamo (founded in 2000) for $110m.

But these success stories are the exceptions rather than part of a wider movement. Thawte had a limited impact on the Cape Town tech ecosystem because the conditions were still not ripe for start-ups to flourish, says Stanford. South Africa lacked the affordable, fast connectivity that is the lifeblood of the tech start-up, and cheap cloud and open-source services were not yet commonplace.

Bandwidth boost

With the landing of new submarine telecom cables off South Africa's coastline starting with Seacom in 2009, bandwidth prices began to tumble, removing one of the most significant barriers to the global competitiveness of the country's IT industry. That was catalyst for the explosion of Cape Town's tech scene.

"Like San Francisco, we have the right mix of people to get things happening – geeks, young people and people with money" — Justin Stanford

So why Cape Town, rather than the quicker-paced commercial hub of Gauteng province, where most of South Africa's large systems integrators and telecoms networks are headquartered? For many of the same reasons that the centre of gravity for tech start-ups in the US is Silicon Valley rather than New York, says Stanford.

"Like San Francisco, we have the right mix of people to get things happening – geeks, young people and people with money," says Stanford. These people are drawn to Cape Town by its natural beauty, the lifestyle the city offers and the world-class Stellenbosch and Cape Town universities. It helps, too, that Cape Town is the most efficiently run city in South Africa, he adds.

Stanford – who is not yet 30 and skipped university to launch his first tech start-up at the age of 18 – says that a younger generation weaned on Silicon Valley success stories is rapidly moving into Cape Town's business world. More young people than ever are embracing an entrepreneurial career path as a result, he adds.

Venture capital

Venture capital is one piece of the puzzle that has started to fall in place – there was never much to go around in South Africa in the past. Now, it's not just wine sloshing around in the vineyards around Cape Town, but also old money flowing to interesting investments. The venture capital scene is still small – but there is far more enthusiasm for tech investment than there was a decade ago, says Stanford.

Just last week, Stanford's 4Di Capital venture capital fund secured investment from E Oppenheimer & Son, a family trust for the South African mining dynasty. Other investors in the fund include Reinet Fund – chaired by Johann Rupert, one of the richest men in South Africa and chairman of Swiss-based luxury-goods company Richemont as well as of investment firm Remgro.

In Stellenbosch, a university town about 50km from Cape Town, you'll find the offices of World of Avatar, an investment firm whose shareholders include family trusts of Paul Harris and GT Ferreira, two of the founders of South African financial services giant First Rand.

The fit between old economy businesspeople and tech upstarts isn't always a comfortable one - as evidenced by rock star CEO Alan Knott-Craig, who recently quit World of Avatar and its flagship investment, the mobile messaging platform Mxit, after a dispute with Harris. But at least there is money flowing into the sector.

Another encouraging development is the creation of angel investor networks such as Angel Hub South Africa, says Chris Vermeulen, general manager at The Bandwidth Barn business incubator. But venture capital or angel funding remains in fairly short supply, he adds.

Another factor in favour of Cape Town's tech industry is that it seems better at marketing and organising itself than the industry in Gauteng. Industry associations such as Silicon Cape, the Cape IT Initiative (CITI) and Business Process Enabling South Africa (BPeSA) Western Cape have all helped to drive the industry's growth over the past few years.

Incubator

CITI founded The Bandwidth Barn in 2000, and it is today one of the most established and successful business incubators in South Africa. Unusually for an incubator, it's a private sector, rather than a government or university, initiative.

An economic impact study in 2010 showed that a cross-section of companies still located in the incubator and those that hatched contributed R800 million (about $90m) to the Western Cape's economy, says Vermeulen. The Bandwidth Barn – soon to be rebranded as The Barn - started out as a shared services centre aimed primarily at supplying connectivity and other business to small tech companies.

Bandwidth in South Africa is still expensive and slow by developed world standards, but the incubator is today about more than connectivity, says Vermeulen. Today, it focuses on "three areas where the magic happens - space, community and learning".

The business of running a business

Techies are often bad at the business side of running a start-up, which is where The Barn comes in with mentoring, commercial advice and marketing services, Vermeulen says. For example, the organisation plans to open a small public relations and design agency staffed by students from a nearby college to help its tenants.

Thanks to its growing stature as a business process outsourcing and offshoring hub, the Western Cape has drawn investment from a range of international companies over the past few years, among them Amazon, the UK's Serco, and India's WNS.

"I'm very positive about what we can achieve if we can get the government out of the way" — Justin Stanford

A steady growth in international investment has given the province's economy a boost, but the downside is that start-ups are competing with well-funded multinationals for a relatively small skills base. Salaries are starting to rise and competition for the top skills can be fierce. "There's a bit of a fight over talent between start-ups and the large players," says Stanford.

Stanford points to a stifling South African regulatory and legislative environment – particularly stringent foreign exchange controls – as the biggest challenge that Cape Town start-ups face as they try to grow into global businesses.

This is one obstacle that hasn't fallen away since Shuttleworth's breakthrough success – he too was a vocal critic of South African forex regulations before he left the country to live in London. "We're at an early point of nascence, but I'm very positive about what we can achieve if we can get the government out of the way," says Stanford.

Topics: Start-Ups, Emerging Tech, IT Employment, Tech Industry

Lance Harris

About Lance Harris

Lance Harris is a writer with more than 18 years of experience. Over the years, Lance has written about technology in business, the business of technology, and the African telecommunications industry for many of South Africa’s top business and IT publications.

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3 comments
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  • This is the problem with small countries/towns

    Here is the problem:
    " but the downside is that start-ups are competing with well-funded multinationals for a relatively small skills base. Salaries are starting to rise and competition for the top skills can be fierce. "

    Maybe Cape Town is the best place to have startup in Africa, Stockholm is the best place in Sweden and Tallinn is the best place in Estonia but globally they are not serious players.
    paul2011
  • Is South Africa the best place to start your start-up?

    No. It's a good place to get murdered though.
    AnalogJoystick
    • Absolutely!

      Yeah, the startup scene in our shanty towns is really cut-throat. Deadly competition!
      WoganMay