Cape Town

This Is What You Need to Know about Cape Town: Africa’s Most Innovative Startup Ecosystem

Cape Town is fast cementing itself as the biggest continental hub for tech startups […] The Mother City is rightfully living up to monikers such as “The Silicon Cape” and the “Digital Gateway to Africa.” – Jacques Coetzee, ventureburn

Cape TownCape Town, South Africa has historically been known as an attractive tourist destination, and it’s quite easy to see why: excellent food, beautiful topography, and friendly people are among the reasons why this South African city is on the bucket list for many avid travelers.

The city, however, is garnering a large amount of attention for another reason: it has quickly established itself among Africa’s most advanced startup ecosystems. Many factors contribute to this: a large talent pool, solid academic institutions, and a great infrastructure, among others.

This article analyzes the emergence of Cape Town as Africa’s leading startup ecosystem from various angles, including the perceived advantages of being a startup there. Why do more South African startup companies settle in Cape Town than any other region in the continent? How has the city become Africa’s prime locale for startups?

We support this rationale by describing four components that are crucial for budding businesses, and how Cape Town measures up.

Access to Venture Capital

It takes a special kind of investor to commit significant sums of money to an unproven business. To do so is often perceived as highly risky among many in the investment community. This is where venture capital (or “VC”) comes into play.

Venture capital can be defined as “Startup or growth equity capital or loan capital provided by private investors (the venture capitalists) or specialized financial institutions…for a new or growing business.” It turns out that Cape Town has plenty of these vital individuals.

According to various studies, South Africa is the continent’s most abundant nation in terms of available VC, with Cape Town repeatedly cited as the prime locale for VC activity. Funding and finances are among the top concerns for startups, as a sizeable period of time is usually required to realize profitability.

As such, VC support makes it more likely entrepreneurs will “make the leap” into becoming a startup. VCs such as AngelHub, Venture Capital for Africa (vc4a), Knife Capital, and other reputable VC firms make the daunting process of establishing and maintaining startup operations a bit easier.

Good Business Infrastructure, Including IT

A good infrastructure is essential to business operations. This does not necessarily refer to the well-established modes of communication, transportation, utilities, water, and sewage – which are, by the way, often underappreciated elements of conducting business successfully.

Rather, infrastructure refers to  internet and IT infrastructure, both of which are world-class in South Africa, and Cape Town specifically. In 2011, the city finished an optic fiber network that spans 500 kilometers, making fast web connection both more ubiquitous and less expensive. Additionally, Cape Town is home to the most IT-based companies on continent.

Patricia de Lille, Cape Town’s mayor, states the importance of business infrastructure to the city: “We believe that we are becoming a center for global business that stretches beyond old boundaries. We seek to position ourselves as a place where the world can access Africa and Africa can access the world, providing sophisticated tertiary services, reliable infrastructure and advanced commercial and banking practices.”

An Educated Workforce, Excellent Academics

Solid academic institutions seem to permeate startup ecosystems around the globe, and Cape Town is no exception. Indeed, it is often within these very institutions where innovators build their own success stories, as Mark Zuckerberg did at Harvard.

And Cape Town – specifically, the Western Cape – is the location of some of the top universities, both in South Africa and the world. Within just a 60-kilometer radius, four such schools are present: Cape Peninsula University of Technology, University of Cape Town (UCT), University of the Western Cape, and Stellenbosch University (SU).

Both SU and UCT produce a large number of patents each year, with 59 and 52 patent applications in just the last six years, respectively. These patents are referred to as South Africa for Patent Cooperation Treat (PCT) international registrations. PCT’s are notoriously difficult to get, and are regarded as a crucial step in the commercialization of an invention that is adopted on an international scale.

A City That Appeals to Innovators

As mentioned, Cape Town is considered one of the world’s leading tourist destinations. The landscape is adorned with beaches, forests, mountains and other geographical treasures.

Besides the beauty that is Cape Town, its environment is incredibly attractive to innovators and entrepreneurs. Paul Graham, founder of the highly-successful company Y Combinator, says the following: “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.”

While Graham may be overgeneralizing, most of the “nerds” that he is referring to will probably agree with most, if not all, of these observations. Those in Cape Town will probably state that the beautiful city offers these things and many more.

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economics

A Revolution: Africa’s High-Tech Money Companies Are Innovative Disruptors

“This time around, traditional bank-to-bank competition is not the issue. This new wave of competition is coming from both nimble, innovative, cloud- and mobile-first startups as well as the major technology players largely unencumbered by policy and regulation.”  – David Lynch, Director at DBS Bank, describing the vulnerability of traditional banking institutions.

“Fintech,” or financial technology, companies singularly focus upon the development and application of cutting-edge technology to make banking services more accessible and efficient. These companies are also offering services similar to traditional banking systems that have, for the most part, dominated the global banking sphere for well over a century.

DBS logoProminent banks, such as the aforementioned DBS in Hong Kong, recognize the vulnerability of their respective business models as a result of innovations coming out of fintech startups across the world. As a result, many traditional banks are coming to the realization that a proactive approach to innovation is a necessity to compete in this rapidly-evolving economic sector.

There is perhaps no other area of the world where this trend is more evident than in Africa. By most accounts, Africa’s brick-and-mortar banks have been slow to realize the disruptive innovation and competitive threat that fintech startups pose.  One prominent South African entrepreneur put it this way: “The banking sector in Africa is going to be disrupted faster than anywhere else in the world.”

Two primary reasons for this disruption are: (1) the rapid adoption of smartphones, and (2) the disproportional number of unbanked people. Some areas of Africa, such as South Africa and Kenya, have among the fastest-growing populations in terms of smartphone usage, but lag far behind in terms of banking services. Statistically, it is estimated that only about one-third of sub-Saharan Africans have bank accounts, while over two-thirds have a mobile phone.

However, demographic trends do not fully tell the story of the rapid rise of fintech in Africa. This article examines the innovative nature of fintech startups and their wide-reaching effects on the global marketplace.

Africa and Fintech Success

Arguably, fintech companies have had the most successful track record of any startup sector in Africa. In a span of under a decade, fintech startups have built user-friendly, easily-understandable digital platforms for millions of people.

As mentioned, the primary driver behind the fintech phenomenon is the wide adoption of digital technology. In perhaps no other place in the world has mobile access proliferated at such a remarkable pace. As a result, African businesses are building their brands, and African consumers are well-informed. Some financial institutions also see an opportunity to increase efficiency and reduce operating costs.

While there are a number of factors contributing to the rise of fintech in Africa (e.g., mobile access), there exist prominent drivers that have spearheaded these efforts. These include no business license requirements; an enhanced mobile network infrastructure; streamlined access of mobile applications (apps); increases in processing capabilities, and customer-centric business models, among others.

While there are a number of success stories related to the fintech industry, some stories have garnered disproportionate levels of attention. Recently, Barclays Rise – a global startup initiative of Barclay’s Bank focusing on fintech – began operations in Cape Town, South Africa. Additionally, the banking conglomerate has drastically expanded its presence within Africa (more on this below).

BitPesa, a digital money transfer and exchange platform, has become one of Africa’s prominent startup stories. Recently, the company expanded, opening offices in the cities of Lagos, London, and San Francisco. The enterprise recently received another round of funding in efforts to scale its operations and research potential new markets.

Africa’s Fintech Revolution

Put simply, fintech is drastically altering the way that everyday Africans use and manage money. Innovative disruptions from the fintech industry took hold following the 2008 global recession, blindsiding the established banking order.

fintechThe continuing economic development on the African continent effectively created an opportunity for innovative companies to reach a previously-underserved population: people without banking services. As a result of this insight, fintech startups have blossomed into a leading catalyst for economic development throughout the continent.

The scale at which fintech startups have disrupted banking practices in such a short period of time has been nothing short of astonishing. Accenture, a leading global consulting company, estimates that over one-third of worldwide financial services revenue is at risk due to innovations from fintech companies.

One example of the rapid proliferation of fintech innovation is the presence of Barclays in 13 African countries. According to the company’s financial statements, Barclays’ 2015 revenue was 25.45 billion British Pounds (33.3 billion U.S. dollars). The company currently employs over 140,000 people in over 50 countries.

Arian Lewis, Barclay’s Head of Open Innovation, summarizes the company’s stake: “People in Africa do banking on their mobile phones, but our talent base is all built on bricks and mortar banking. So we’re thinking, are we actually a tech company? To make that shift you have to approach talent that sits at the front end of that change curve.”

5 of the Leading Fintech Startups Supported by Techstars

Financial technology, commonly referred to as fintech, has the power to boost African economies. The continent, as of 2015, still runs predominantly on a cash system. However, the growing use of mobile devices, which far surpasses the number of existing bank accounts, opens up opportunities for entrepreneurs to develop a payment service. Such a service could address challenges, like sending money to relatives, and also make it convenient to do so from any location and at any time of day.

In support of the fintech movement, Techstars launched its partnership with Barclays Accelerator in Cape Town in 2016. Unlike other opportunities that focus a great deal on South African startups, the 13-week program welcomed applicants from all over Africa. The following are among those that made the first cohort:

1. Social Lender

social lender logoAn extension of Sterling Bank and serving members only within the financial institution’s social media communities, Nigeria-based Social Lender evaluates a person’s social reputation score to determine eligibility for lending quick cash. Scores, determined by social credit officers, represent the length of time a person has been actively involved in the bank’s social network and the quantity of information he or she shares on social media platforms, among other factors. Members can request funds through the Social Lender Platform, which is supported by Facebook and Twitter. Depending on the person, requests upwards of 10,000 Naira are obtainable, though transaction fees do apply. If approved, he or she will receive funds through their existing banking channels. Repayments are equally as easy: the amount must be returned within 30 days. Social Lender eases the process by accepting multiple types of payment options, including mobile money transfers and transactions made at a brick-and-mortar financial institution.

2. iNuka Pap

Headquartered in Kenya, iNuka Pap was named a Spark* Changemaker in 2015 and a Sinapis Fast Track Fellow in 2014. The organization, led by chief executive officer and insurance sales veteran Waweru Kuria, offers financial support to savings and credit cooperative (SACCO) members and microfinance institutions. The company serves those in need of funds to cover hardships. The microloans, available as cash advances, are accessible through the company’s mobile app, but require a daily minimum contribution of $0.02 by its users. In addition to iNuka Pap cash advances, the startup helps people gain access to emergency power and airtime advances as well as micro-insurance services. All are available instantly.

3. bimaAFYA

bimAFYA logoCatering to the underserved population, Tanzanian company bimaAFYA leverages its relationship with EdgePoint to help people obtain micro-health insurance. Its company operates solely over mobile devices and uses automated systems to walk people through steps, such as registering for services, paying insurance premiums, adding dependents, and selecting coverage options. The self-serve approach begins with a call to the company at *150*57#. After successfully registering, the insured will receive a bimaAFYA number through short message service (SMS), also known as text messaging. From there, the number must be presented at health care facilities accepting bimaAFYA insurance, along with a formal identification card bearing the person’s name and photo, to receive service. The health care provider is responsible for verifying insurance, providing care, and sending billing information to the company to obtain payment.

4. WizzPass

Easing entry and exit to parking garages throughout South Africa, WizzPass is a mobile app that eliminates the need for tickets, access cards, and biometrics. Instead, tenant parking management companies use the app to give people codes that must be entered each time they access or leave a facility. The app does not require an Internet connection and instead uses Bluetooth technology. The result is a more secure and user-friendly system that saves management companies money while delivering real-time visitor and tenant data. WizzPass also expects its service, which is a form of cashless payment that charges fees directly to a credit card rather than requiring a person to input money, to alleviate parking pains for tenants and business professionals as well as consumers heading to a shopping mall to buy goods. Its CEO, Bradley Hornby, aims to expand the cashless service into other areas, like gas stations and vending machines, in the future.

5. SimbaPay

simbapay logoOperating on a mobile app, SimbaPay is available through the Apple and Android app stores. The DigiCert-secure app is a registered party in the European Union, and the company is considered a payment institution by the Financial Conduct Authority and maintains membership with the Association of UK Payment Institutions. It has been recognized by notable media organizations, including Forbes, the BBC, Daily Nation, and Business Day.

SimbaPay enables people to make instant deposits into mobile money and bank accounts in Kenya and Nigeria. Mobile money transactions require M-PESA, a mobile money transfer service that serves millions of people. Money transfers are available between 10 to 5,000 pounds at no cost, and identification processes are completed entirely through the app. Users do not have to worry about their information being stored, as SimbaPay’s policy is never to keep credit or debit card data on its servers.

7 Common Bookkeeping Mistakes Among Startups

One of the most important factors for continued viability for a startup in Africa, as well as other areas of the world, is excellent accounting practices. Great accounting practices depend on excellent bookkeeping. Startups should decide in their earliest stages how to approach bookkeeping and ensure that they continue to keep their books up to date. Bookkeeping allows companies to balance incoming and outgoing funds quickly and to analyze where they may be spending money unnecessarily. Even with a proactive approach to bookkeeping, mistakes are common. Following are some of the most common mistakes made by African startups and entrepreneurs in other countries around the world:

  1. folder-98462_1280Not creating or following a filing system. Companies need to quickly find purchase invoices and other financial documents. In a company’s early stages, it may seem easy to keep track of these documents without a set system, but this approach will quickly become overwhelming. For purchase invoices, entrepreneurs should keep paid and unpaid documents separate in order to avoid missing payments, and they should remain diligent about immediately moving the invoice to the paid folder after payment. Orders should be filed alphabetically according to the supplier’s name and then arranged by date so that people can quickly find any document.
  1. vault-154023_1280Not having a separate bank account. Individuals in the early stages of a startup frequently use their own account and only create a business account later on down the line. However, this approach can complicate taxes and makes it impossible to access a comprehensive financial record. As soon as an entrepreneur creates a name, a separate business account should be created in order to keep better track of money coming in and out of a business. In this way, accounting professionals can check the account against the company’s books to ensure that no discrepancies go unnoticed. Such discrepancies can have a range of consequences down the line.
  1. receipt-575750_1280Not keeping all purchase receipts. For larger purchases, it makes sense for business owners to keep this record. However, small purchases can also add up over time, and a failure to save these receipts can make accounting very difficult. Even when business owners account for these expenses on their books, they must still save the receipts to back up their books should an external or internal audit become necessary. Mistakes happen in bookkeeping, but saving your receipts means that discrepancies can be verified and corrected. Again, these receipts should be filed away according to a specific system, whether by date, company name, or both.
  1. Not instituting a system of checks and balances. A system of checks and balances helps to protect companies against theft and fraud. Larger corporations almost always have these sorts of systems in place, but small businesses owners sometimes remain unsure of how to implement them effectively. Multiple sets of eyes should look at a company’s finances and bookkeeping practices so that errors can be recognized quickly. Businesses that accept cash remain especially vulnerable to theft and fraud, making it especially important for these companies to create a system that verifies the amount of money received, recorded, and then deposited into a bank account. Daily reports can help flag discrepancies before they become irreconcilable.
  1. Not keeping all books up to date. When companies begin putting off their bookkeeping and believing that they will catch up later, they run into major issues. Companies need to remain diligent about entering information on the books immediately. This measure allows entrepreneurs to keep better track of potential issues and gives them more time to respond to problems. For example, imagine a situation in which several invoices come in on a Monday, but the company has not yet received some expected payments. When the books are up to date, a business owner knows to hold off on paying some of the bills until income is received. If the books are not regularly updated, a business owner risks overdrawing the account.
  1. euro-870757_1280Not taking the time to analyze financials. Bookkeeping is important because it creates a complete record of a company’s financial situation. Making this information useful requires analysis. Startups may feel like they do not have the time or resources necessary to complete such analyses, but this approach results in blind leadership. Through regular analysis, entrepreneurs have the information and feedback they need to help the company grow. This information shows which products or services generate the most money and reveals potential areas for cutting costs. Historical analyses also play an important role in creating budgets and financial forecasts, which can be used to attract new investors.
  1. Not investing in a consultant about bookkeeping. Few entrepreneurs have the accounting background necessary to create a flawless bookkeeping system from scratch. Typically, investing in a consultation will end up saving you money in the long run. When companies wait until they encounter problems to ask for help, they will ultimately pay more, as that professional sorts through practices to uncover the root of the issue. In the early stages of a company, a consultation will ensure that the business owner has adopted best practices and is set up for success. The consultation also builds a professional relationship should additional consulting be needed in the future.

5 Key Steps to Better Accounting Practices for Startups

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5 Key Steps to Better Accounting Practices for Startups

One of the biggest challenges facing startups in Africa, as well as in other parts of the world, is the issue of accounting. Without setting up proper accounting practices from the outset, companies can quickly encounter serious issues that have the potential to unravel an entire organization. Accounting can easily become a complicated and overwhelming topic, especially for entrepreneurs who have a number of other responsibilities. The following are small steps that can be taken to create a comprehensive approach toward accounting that all startups should follow in order to keep themselves solvent for the long run. Through good accounting practices, entrepreneurs will be more likely to appeal to investors and other sources of capital, including crowdfunding.

1. Track All Business Expenses

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Track All Business Expenses

In order to keep a solid financial record, companies need to clearly account for all of the money that it spends. The information can help to monitor growth, create financial statements, prepare tax returns, and identify which functions are costing the company the most money. From the very beginning, entrepreneurs should establish a system for tracking and organizing receipts, whether they use old-school filing or keep online records. Several services exist for keeping such records. Expenses include meals for business meetings; travel for business purposes; and costs for home offices, gifts, and even vehicle-related expenses. All money spent to support the business should be accounted for on a balance sheet.

2. Open a Business Bank Account

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Open a Business Bank Account

All too often, entrepreneurs try to support a business with personal bank accounts or decide to forego an account altogether. Through combined personal and business accounts, tracking a company’s performance becomes incredibly difficult. With a business account, entrepreneurs can quickly see what capital the company has and even look at the recent transactions to help in other accounting practices. Checking accounts are vital for making and accepting payments, but savings accounts can help for tax planning purposes. Business credit cards are a great way to build credit for the company for in case of an emergency.

Entrepreneurs should always do their homework before opening an account, since not all banks have the same policies or offer the same deals. By comparing the account structures at several different banks, individuals can choose a deal that works best for their needs. Typically, the fees associated with business accounts vary quite a bit from those for personal accounts, but these additional expenses should not encourage people to continue using a personal account in lieu of opening a business account.

3. Learn About Bookkeeping Systems

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Learn About Bookkeeping Systems

Bookkeeping is different from accounting. From a business perspective, accounting focuses on the progress of the business and uses compiled data to create financial statements. On the other hand, bookkeeping is the day-to-day recordkeeping that makes accounting possible. Through bookkeeping, businesses record and categorize transactions and then use this information to reconcile bank statements to ensure that no errors have been made.

Several different methods of bookkeeping exist, and entrepreneurs should choose which approach to take in the earliest days of the company. Each approach has its own pros and cons, so the decision largely depends on personal preference. For startups, the two primary options include DIY solutions and outsourced departments. Quickbooks, Wave, and other software solutions make the process slightly easier and provide tools to help people who are unfamiliar with bookkeeping. At the same time, there is still a risk of keeping books incorrectly. Individuals with a background in accounting or especially simple transactions could also use an Excel spreadsheet. In terms of outsourcing, companies can hire someone locally on a part-time basis or use cloud-based solutions like Bench Accounting.

As a company grows, it may become financially prudent to invest an in in-house, full-time bookkeeper who can also double as an accountant. In these cases, entrepreneurs should ensure that the person has the training and experience necessary to perform the job.

4. Identify Tax Obligations

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Identify Tax Obligations

Tax processes vary from one country to another and become more complicated if people intend to conduct business across international lines. While the thought of preparing taxes may seem overwhelming, entrepreneurs need to be diligent in learning about local policies. Some people may want to hire an expert to ensure that they thoroughly understand their obligations. A small oversight can have incredible financial ramification later down the line. Tax responsibilities typically depend on how the company is registered and the number of employees. Sometimes, taxes are paid annually. Other times, tax payments may need to be made at small intervals, whether quarterly or bi-annually.

Tax preparation involves implementing sales tax procedures. The policy may vary between countries or even jurisdictions in one nation, and the issue becomes more complicated with ecommerce. However, the entrepreneur is ultimately responsible for collecting this tax, and failing to do so can quickly minimize profit margins.

5. Set Up a System for Accepting Payments

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Set Up a System for Accepting Payments

When people want to pay for a product or service, a company needs a reliable method of collecting that money. A number of solutions exist for accepting credit card payments or for transferring funds digitally. These methods are typically safer and easier to track than cash transactions, but they can cost a great deal of money. Processing fees are often associated with these payment acceptance methods so entrepreneurs may need to build these fees into their pricing in order to protect their profit margins.