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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The Vital Roles of Startup Accelerators in Africa

“Startup accelerators support early-stage, growth-driven companies through education, mentorship, and financing…The accelerator experience is a process of intense, rapid, and immersive education aimed at accelerating the life cycle of young innovative companies, compressing years’ worth of learning-by-doing into just a few months.”

Harvard Business Review, “What Startup Accelerators Really Do”

In the simplest terms, an accelerator’s primary goal is to propel startups forward at a pace that exceeds what they would otherwise be able to achieve on their own. Traditionally, accelerators provide support via an immersive and practical education experience. In addition, accelerators can support startups through financial means.

According to the Harvard Business Review, accelerators are bringing measurable results to startups. These trends are also evident in Africa, where the startup economy continues to expand across the continent.

In addition, African tech startups have bucked the notion that foreign investment is slowing around the globe. One example of this is the increasing investments made by global accelerators in African startups. From San Francisco to Hong Kong, international accelerators are taking notice of the unique opportunities provided by African tech startups and making sizeable investments.

This article looks at four such global accelerators that are making an impact on Africa’s economy. These organizations are helping many innovative African startups take their operations to scale.

  1. 500 Startups

500startups logoBased in Silicon Valley with offices in Mexico City and San Francisco, 500 Startups has invested in over 1,500 companies from more than 50 different countries. In addition to its accelerator program, 500 Startups also provides seed capital and Series A funding to startups in amounts ranging from $50,000 to $500,000. The company holds nearly $200 million in assets.

Of course, the company’s accelerator program has also received recognition. Spanning a period of four months, the program provides $100,000 in funding in exchange for a 5% stake in the company. Many startups compete to participate in the accelerator program, which accepts around 2 percent of applicants. The program also includes mentoring, hands-on education, and designated office space for collaboration and work.

African startups accepted into the program have included Sweepsouth (South Africa), Kudobuzz (Ghana), Podozi (Nigeria), and other startups based in Kenya and Egypt. The company is also helping to support Ghana-based startups by hosting a $1 million entrepreneurial boot camp in the country.

  1. Nest

nest logoNest is a venture capital (VC) firm based in Hong Kong. More specifically, the company is an early stage VC firm that specializes in startups within the financial technology, health technology, and urban technology spheres. The company is relatively new to the African startup scene, and its accelerator model is a bit different: it runs accelerators on behalf of large corporations and other entities.

Accelerators are 12 weeks in length and are designed to “support the needs of high potential and fast-growth startups” with a focus on enabling entrepreneurs to quickly take their businesses to scale. Nest is supported by IBM to execute a variety of accelerators for startups.

African companies that have benefitted from Nest’s accelerator model include SuperFluid (Kenya) and Creditable (South Africa). The company is looking to include more Africa startups within its Asia-based programs.

  1. Startupbootcamp

startup bootcamp logoNamed “The Best Startup Accelerator of 2014,” Startupbootcamp comprises 15 different accelerator programs focusing on 15 different industries, such as fintech, energy and smart transport, e-commerce, digital health, the Internet of Things (IoT), and others. One of the best-known accelerators within the startup community, Startupbootcamp hosts accelerator programs from Mumbai to Miami.

It too has been impressed by the progress made by African startups.

As a result, the company has invested in the Tanzanian startup BimaAfya—a mobile “micro-health” insurance product. The company has ramped up operations on the continent and has held several mini boot camps in South Africa as well.

Startupbootcamp’s accelerator programs focus heavily on practical knowledge and education via mentorship. The company maintains a wide mentor network, offering entrepreneurs the opportunity to connect with more than 100 investors, mentors, and potential business partners during the three-month program.

  1. Techstars

techstars logoTechstars launched in the United States in 2006. Today, the organization is viewed by many as the standard for accelerators.

Techstars has invested in over 750 companies, of which 90 percent are still in business or have been sold. The company has poured more than $2 billion into startups and has a market capitalization that exceeds $5 billion.

Its accelerator program involves a three-month mentorship that offers “hands-on guidance and support throughout the entire program and beyond.” Techstars offers a mentor network that encompasses more than 3,500 business executives across numerous industries.

Less than one percent of applicants who apply for a Techstars accelerator are accepted, making it one of the most selective accelerator programs out there. The African startup that set the bar was Kenya’s Bamba Group—a company that provides SMS communications services as well as data collection and analysis for market research.

On the African continent, Techstars partnered with Barclays Bank, agreeing to run the banking behemoth’s accelerator program in Cape Town, South Africa.

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3 of the Most Promising Cities for Tech Startups in Africa

In various African nations, a number of demographic and economic shifts have occurred in recent years, resulting in a burgeoning business landscape. Startups have and will continue to play a prominent role in this process, according to market analysts.

VC4Africa published a report showing that the majority of startups have had success in generating revenue, and another large percentage have secured external investments in their products and services. More specifically, those businesses that have gained the most ground are in the technology field.

The young population in Africa—almost three-quarters of which are younger than 30—has influenced this trend, at least in part. Entrepreneurs have demonstrated an increasing ability to identify and fill gaps in the market based on consumer demand. Business owners in South Africa, Nigeria, and Kenya raised a combined $150 million in investment funding in 2015 alone.

Entrepreneurs in South Africa led the way in securing $54 million in investments by building investor confidence. Nigeria and Kenya, which raised $49 million and $47 million, respectively, stand out for their advancements as leading nations for technology. In fact, South Africa, Nigeria, and Kenya have been compared to some of the most thriving markets in the world. Following is an overview of each city.

  1. Cape Town, South Africa – The Silicon Cape

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Image courtesy David Stanley | Flickr

Securing venture capital support and angel funding has proven difficult for many nations on the African continent. Thus, the track record for obtaining funding is one of the greatest strengths of entrepreneurs and startup owners in Cape Town. Local business executives point out that funding numbers could increase even further with the introduction of strategic tax breaks.

Alongside the funding prowess of startups in South Africa, the availability of resources—particularly with regard to IT infrastructure—has greatly contributed to the high standing of Cape Town. In 2011, the city boosted its bandwidth by roughly 1,000 times. Combined with other cost-saving innovations, this move encouraged exponential business growth in the area.

The local university system also attracts its share of investors to the area. For example, Samsung backs a tech laboratory at the University of Cape Town, where staff, students, and researchers develop mobile applications. Another example is Naspers funding a full-scale media service development lab at Stellenbosch University.

Finally, one of the biggest elements in the success of Cape Town, and the push for referring to it as the “Silicon Cape,” stems from community support. Local nonprofits, such as the Silicon Cape Initiative, have formed to promote the economic growth of the city by developing an international business network and attracting new talent to the region.

  1. Lagos, Nigeria – The Silicon Lagoon

Lagos, which is situated right on the coast of the Gulf of Guinea, is a large urban city that has grown significantly in the last few decades. Estimates place the population at somewhere around 21 million, up from 1.4 million in 1970. Some believe that Lagos is contending with Cairo for the honor of the most populous city in Africa.

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Image courtesy satanold | Flickr

The size of Lagos and the opportunity that it represents for scaling a business model is one of the most appealing factors for entrepreneurs in Nigeria and internationally. In addition, the size of Lagos’ GDP—which is larger than the entire economy of Ghana—has attracted some of the best minds in business.

Close proximity to two local universities has also generated interest in launching new business ventures in Lagos. Yaba College of Technology, the University of Lagos, and The Federal Science and Technical College each produce a lot of talent, and the local environment encourages many of these individuals to remain and start their careers.

Within the growing business scene, the Yaba district has evolved into what some have referred to as “Yabacon Valley,” and Lagos has more broadly received the title “Silicon Lagoon.” Such comparisons with Silicon Valley have drawn a lot of attention from venture capitalists to the Nigerian coast.

  1. Nairobi, Kenya – The Silicon Savannah

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Image courtesy Ruth Hartnup | Flickr

Much of the tech development that has surfaced in Africa over the course of the last 10 years has come out of Kenya. The introduction of mobile money and a model for tech incubation, coupled with global crowdsourcing and government support, have strengthened the industry in Kenya. A growing population and consistently improving GDP have also been contributing factors.

Information and communication technology (ICT) is projected to constitute as much as 8 percent of Kenya’s GDP by 2017. Within that economy, Nairobi, the nation’s capital, is a leading player, attracting startups and international tech giants (such as Google, Microsoft, and IBM) alike.

Part of what is driving this exploding market is the prospect of improving the nation’s economy. Some entrepreneurs are currently focused on developing technology that is capable of reducing cyber security concerns, while others hope to develop a new mobile voting platform to help with future elections. In addition, the highly anticipated 5G technology is expected to revolutionize communication and business in Kenya and throughout Africa.

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African Tech Startups: Raking in the Money

“The market in Africa is relatively unique in the sense that there are two major motivations. Investing in a market which globally has the largest growth potential is a huge draw, but so is the opportunity to have a significant positive impact, and accelerate the rate of development in countries which need it the most.”

– Simon Bransfield-Garth, CEO of Azuri

In 2015, African-based tech startups set a new record by amassing over $185 million in investor capital. According to various sources, tech startups in 2016 are on pace to eclipse this amount.

Many international investors are excited about the promise of smart and savvy tech companies on the continent. In fact, technology leaders such as Microsoft founder Bill Gates; Facebook founder and CEO Mark Zuckerberg; and Steve Case, the cofounder of America Online (AOL), are all joining the rush to stake a claim in this sector.

There are numerous reasons why industry giants such as Gates, Zuckerberg, Case, and others are attracted to Africa’s tech startups. This article explains three of these reasons behind this phenomenon and presents two examples of the continent’s thriving tech markets.

  1. Significant return opportunity

businessmanOutside of a small minority of charitable investors and benefactors, people invest in Africa to realize significant returns. To this end, Africa provides numerous profitable investment opportunities.

Many of Africa’s countries (for example, Nigeria and Kenya) are home to the fastest-growing economies in the world. These nations’ current economic expansion is being fueled directly by a proliferating middle class, who have seen their job prospects increase and their disposable incomes rise.

Africa’s large, young, and tech-savvy demographic is also driving its economic expansion. Both Bill Gates and Mark Zuckerberg have cited Africa’s young and educated citizens as a primary motivating force behind their investments.

  1. Social impact

While numerous African countries are privy to their homeland’s fast-evolving economy, a disproportionate number of African citizens must confront daily social ills. Some prominent investors are reportedly investing in the continent to help alleviate these omnipresent problems.

Such investors, including both Zuckerberg and Case, see their investments as not only a keen business decisions, but also potentially life-changing actions. Financial technology and alternative energy solutions are two startup sectors that are highly attractive to investors; this is partially due to the enormous difference that success in these industries can make in the daily lives of many African citizens.

  1. A “final frontier” marketplace

Africa is one of the last remaining places of economic significance that has not yet achieved widespread technology adoption. Consequently, enormous growth potential exists in multiple technology spheres.

Emerging African economies are spearheading a shift in investor attitudes—an observable shift away from the traditional, saturated market playbook of “low-risk, low-return,” to one of higher-risk but much higher return. Furthermore, many African nations have made notable progress in one area very important to investors: business-friendliness. Insiders state that reducing red tape and improving transparency has helped stimulate startup growth.

Startup Case #1: Off-Grid Electricity

solar arrayPerhaps no other economic sphere encompasses the aforementioned market advantages of Africa more aptly than off-grid electricity. With over 600 million of Africa’s citizens lacking a source of power, investing in off-grid electricity startups can lead to potentially-massive returns while achieving a massive social impact.

African innovations, including “pay-as-you-go” electrical services, have enticed many foreign investors into committing significant amounts of startup capital. This investment capital is being dispersed to various energy startups using a number of different technologies.

Solar startups are the recipients of more than one-third of all energy startup capital. One former startup that has witnessed remarkable success is M-KOPA Solar, a solar energy firm based in Kenya that many credit with popularizing pay-as-you-go electricity throughout the nation. Founded in 2011, the company has since expanded the sales of its home solar systems beyond Kenya to Tanzania and Uganda. According to the company’s website, M-KOPA has connected over 400,000 households.

Startup Case #2: Financial Technology

Second in total investment funds only to off-grid electricity, financial technology, or “fintech,” startups offer a compelling case for investment because they provide sizeable potential returns and create a positive social impact. Another trend inviting additional startup capital is mobile phone adoption. In Sub-Saharan Africa in particular, “mobile money accounts” are quickly gaining popularity, thereby allowing many Africans to access financial services for the first time.

Citing Africa as an example in the organization’s 2014 Global Findex database, World Bank Group President Jim Yong Kim stated: “Access to financial services can serve as a bridge out of poverty. We have set a hugely ambitious goal . . . But we can do it, and the payoff will be millions of people lifted out of poverty.”

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3 Ways the US Supports Promising African Entrepreneurs

“I’m here because, as the world gathers in New York City, we’re reminded that on so many key challenges that we face – our security, our prosperity, climate change, the reduction of conflict – Africa is essential to our progress. Africa’s rise in not just important to Africa, it’s important to the entire world.”

–  United States President Barack Obama

Many African countries are experiencing tremendous economic growth, and while more work remains to be done, the future seems promising. One factor that has contributed significantly to Africa’s success is the number of bright, hardworking entrepreneurs on the continent. These entrepreneurs have successfully launched startups in a number of economic sectors, including finance, financial technology, solar and alternative energy, education and training, and many others.

Leaders of nations around the world understand and appreciate the importance of an economically-viable Africa. As such, these countries have committed significant resources to stimulate an African economy brimming with potential.

This article examines three of the organizations the US government has established to help buttress Africa’s growing economy. In particular, it discusses a number of commitments made to assist African entrepreneurs.

  1. YALI and the United States African Development Foundation

YALI logoIn December 2013, President Obama started a program called the Young African Leaders Initiative (YALI) to “provide virtual resources and vibrant physical spaces to equip young African leaders with the skills and connections they need to foster change in their communities and their countries.” Members of YALI have access to virtual training in leadership and entrepreneurship, as well as a Facebook group, through which they can connect with other young leaders.

In August 2016, the United States African Development Foundation (USADF) awarded 50 African entrepreneurs from 20 countries a total of $1.25 million. These new business owners will use the money as seed capital for growing their respective companies and social ventures. Since 2014, USADF has awarded more than $2 million of grant funding to 95 YALI entrepreneurs.

  1. African Women’s Entrepreneurship Program

Women comprise a significant number of Africa’s entrepreneurs and business leaders. To empower this important demographic, the Obama administration designed and implemented the African Women’s Entrepreneurship Program (AWEP). The rationale behind the initiative’s founding is that, while African women provide a disproportionate AWEP logoamount of the continent’s labor, they often lack or are denied access to the necessary resources needed to drive economic growth. Furthermore, while Africa’s female entrepreneurs have made significant contributions, they remain economically disenfranchised in several areas, such as Sub-Saharan Africa.

To counteract the obstacles to African women’s full economic participation, AWEP establishes networks of women entrepreneurs. Through these connections, women business owners can grow their companies, increase trade, improve the business environment, and give voice to important issues in their communities. Entrepreneurial sectors represented by AWEP include agri-business, fashion, food processing, and home décor and textiles.

  1. United States Agency for International Development

The United States Agency for International Development (USAID) focuses its efforts on “expanding and deepening partnerships with African governments, businesses, universities, and civil society— as well as with the new generation of African leaders, thinkers, entrepreneurs, and innovators, who are leading the transformation of their USAID logosociety.” Currently, USAID supports a variety of African energy entrepreneurs, particularly those who aim to provide electrical power to Africans who are off the grid.

In August 2015, President Obama announced the awarding of up to $100,000 to 11 energy companies from Ethiopia, Ghana, Kenya, Nigeria, and Tanzania. Via a collaborative partnership with General Electric (GE) Africa and the USADF, USAID has committed to supporting novel energy solutions with the goal of expanding access to affordable, reliable, and sustainable power sources.

Entrepreneurs benefitting from the funds are working on a number of energy solutions, such as home solar systems, solar-powered mini-grids, and micro-financing of assorted energy technologies, predominantly for rural communities. Of the projects that received funding, five specialize in solar systems, three are biogas regeneration projects, and one is constructing a small hydro-electricity power plant. As these firms complete their projects, nearly 10,000 Africans will gain access to electricity and power for the first time.

Future US Commitments in Africa

President Obama spearheaded all three of the abovementioned organizational mechanisms supporting African entrepreneurs. Because the President is nearly at the end of his term, it is difficult to predict whether or not such efforts will continue after he leaves office.

Fortunately, the administration has been working closely with the private sector in efforts to keep the projects funded. The Overseas Private Investment Corporation (OPIC), for example, plans to contribute $200 million as part of a $450 million loan from Equity Bank Group to small and medium-sized African enterprises focused on young people and women over the next four years.

In collaboration with Deutsche Bank, USAID undersigned $25 million of the $50 million to be distributed to social enterprises in developing nations around the world, including Sub-Saharan Africa. According to the White House website, these funds will be used to support entrepreneurs in the energy, financial services, and health sectors.

At the Global Economic Summit (GES) of 2015, the President reemphasized the importance of private sector leaders supporting entrepreneurs around the globe, including in Africa. At the conclusion of GES, it was revealed “private sector companies…committed to train and mentor over 1 million burgeoning entrepreneurs and pledged nearly $700 million of capital.”