Startup Hubs Around The World: Cape Town
Another emerging hub for startups is Cape Town, South Africa. This formerly sleepy town is seen by some as Africa’s most happening location for technology startups. Among the many reasons for this rise are the falling bandwidth prices, an increase in funding availability and a new generation of entrepreneurs willing to take risks.
In our continuing investigation of startup hubs around the world, we will take a look at 1) the location, 2) the tax incentives, 3) legal incentives, 4) investors, 5) specialization of the area, 6) local resources, and 7) startups to watch in Cape Town.
According to entrepreneur Justin Stanford, founder of security company ESet Southern Africa and CEO of the investment holding company 4Di Capital,
“There has been an explosion in start-ups over the past three years. People are moving down to Cape Town from Johannesburg and we’re seeing some quitting their jobs to become entrepreneurs.”
Cape Town is the second most populated urban area in South Africa. It follows Johannesburg and is at par with Durban. The city was noted as the 10th most populous city in Africa as of 2014 and holds status as a primate, or leading, city with as much as 64% of the Western Cape’s population. The city serves as the provincial capital for the Western Cape and is also the legislative capital of the county, with the National Parliament based there.
The city has always been popular with tourists and visitors for its majestic natural setting. This includes the harbor, the Cape Floristic Region and other landmarks such as Table Mountain and Cape Point. Another point of interest is that the city is extremely multicultural and is a popular destination for immigrants and expatriates. The city has been named the best place to visit by major world newspapers such as The New York Times and The Telegraph.
Advantages of Choosing the City
Cape Town boasts the highest number of successful information technology companies in all of Africa. This has led to the city becoming an important hub for industry for the whole continent. This also means that the IT industry is playing an important role in South Africa’s economy. In 2010, it was estimated that this industry was growing at an annual rate of 8.5% and was worth about R77 billion (about $6 billion) nationwide.
In addition, the city was also named the most entrepreneurial city in South Africa. The average for entrepreneurial pursuits was three times higher in Cape Town than the national average. The city’s 18- to 64-year-old demographic is 190% more likely to pursue a new business while those from Johannesburg are 60% more likely to do so. These figures compare to the national average.
A strong entrepreneurial ecosystem has led the area to be tagged as the Silicon Cape, homage to Silicon Valley. According to a 2013 report published by Wesgro, City of Cape Town and PwC, there are a few reasons for this comparison:
- Cultural Overlap with Silicon Valley
- Global entrepreneurs see some interesting similarities in the two areas. These include basic things such as the area being a networking hub for both wealthy entrepreneurs and technology geeks. The meeting locations for both these groups of people happen to be quirky coffee shops set against interesting architectural backdrops, speaking to creative and unconventional spirits often seen in tech entrepreneurship. Another key overlap is the local universities. Encouragement for research and academic innovation carry over to the surrounding business hubs.
- There are many examples of strong successful entrepreneurs from this region, much like Silicon Valley. These include cloud computing leader Amazon Web Services, the first authority to issue Secure Socket Layer or SSL certificates to public entities outside the US (Thawte), and many others.
- Community Support
- Over the years, there have been many initiatives in the region to support the startup ecosystem. These include Bandwidth Barn, Silicon Cape Initiative, SABLE, RLabs, MIH Media Lab, Start-up Weekends and IBM Innovation Center.
- Access to Funding
- While this is a weaker area in Africa in general, the Western Cape region is a little ahead of the others and is considered somewhat better off. Special mentions in this report include Knife Capital, 4Di Capital, Invenfin, World of Avatar, and AngelHub, among others.
- University Research
- Another benefit of the region is that technology companies often fund research at local universities. An example is a Samsung funded lab for the development of mobile applications at the University of Cape Town. Other such examples are seen in the Center for Information and Communication Technologies for Development and the Center for IT and National Development in Africa. Both these centers research the use of technology to address development issues. These centers receive funding from a Berlin-based Institute called Hasso-Plattner, but also receive support from Microsoft and Nokia.
- IT Infrastructure
- As of 2011, the city completed a R125 million ($10 million) and 500 km optic fiber network project. This led to a bandwidth increase of 1000 times for the entire city. The project aimed to first provide broadband services to local municipal services at a lower cost and then lease the rest of the capacity out to other network users.
The tax rules and regulations are still an evolving area for potential entrepreneurs and investors. According to FNB CEO Michael Jordaan, in addition to an established reputation as an IT and asset management hub in Africa, Cape Town needs to build up the venture financing voids and offer better tax breaks to ensure that entrepreneurial activity continues to grow.
This year, the Minister of Finance announced lower tax rates for micro enterprises which fit the criteria for a special tax dispensation. This announcement is part of a few different efforts by the government to offer better tax concessions to small businesses. Measures include an increased threshold to qualify for tax payment and a lower maximum rate. In addition, the South African Revenue Service plans to create small business desks in its offices to help small businesses meet tax requirements.
For venture capitalists, there are also some new rules including tax-free grants for small businesses. Any organization that is working on supporting small businesses also qualifies for tax relief. Though the expected slow growth of the economy allows little room for any major tax concessions, there is still the option to provide support for micro enterprises. This is so because the tax netted by the turnover tax is a very small amount. This was a few million rand in 2013/2014 as compared to the R179 billion (about $14 billion) from corporate tax for the same period. The government has also announced that there will be no more Small Business Corporation (SBC) tax from the beginning of next year and a tax credit will take its place instead. This move may be detrimental to those small businesses that are creating jobs. Other similar countries are working on expanding their special tax dispensations instead. Bolder tax incentives and breaks may be more supportive of the startup ecosystem in the long run.
One positive move is the electronic tender portal introduced by the national treasury in April. This move will help small businesses work for the government in more affordable and transparent ways.
Emerging economies seldom encourage foreign entrepreneurs to set up shop in the country. There is a fear that local jobs will be stolen and the visitors may be non-taxpayers. While many of these economies are making a change to encourage new businesses, South Africa is not one of these so far. In 2013, a bill was withdrawn which was aimed to ensure that all new businesses obtained licenses to operate. There is speculation that this was done to control increasing numbers of foreign traders. In 2014, fresh immigration regulations also came into play which allow a business to be set up only if the staff is 60% South Africans or permanent residents of the country. This is up from 5 people previously. There also needs to be proof that the business will benefit South Africa. This may end up stopping new ideas and talents from entering into the economy, which is seen by many as stagnating.
Another legal issue centers on intellectual property. Any IP created in South Africa has a difficult time making its way out of the country as the government does not let go of tax incomes. This is a very protectionist method that makes global exits difficult and bound by much red tape.
Below are a few basic investment options in South Africa.
Though this avenue for securing funding for a startup may not be as developed in South Africa as it is in the US or Europe, there are some options available to the entrepreneur. Angel investors are present in groups to cover probable risks of early stage investment. There is also a rise in popularity of global angel investors through online platforms such as Seedrs (UK), SeedInvest, AngelList (US) and Startup Stock Exchange (global). Some local options include:
- AngelHub – This is a network of angel investors who pool their funding as well as expertise and networks to help startup growth.
- Michael Jordaan & Mike Ratcliffe – Entrepreneurs themselves, these two have made an angel investment in a social wine review service called Real Time Wine.
The government of South Africa is making attempts to support new businesses, but the initiatives are often diverging and there is no single point of entry. This makes the government support route a challenging one for new businesses. Some good options include the Department of Trade and Industry’s pilot programs such as Support Programme for Industrial Innovation (SPII) and the Small Enterprise Development Agency (SEDA). The Industrial Development Corporation also supports industrial development projects through financial means. Technological innovation is developed and nurtured by the Technology Innovation Agency. The official destination marketing, investment and trade promotion agency for the Western Cape (Wesgro) also works to promote entrepreneurship.
This is the first choice for many early-stage startups which happen to be both high potential and high risk. A list of such firms can be found at South African Venture Capital & Private Equity Association (SAVCA). Known tech startup investors include:
- Hasso Plattner Ventures Africa
- 4Di Capital
- Intel Capital
- Knife Capital
These firms are more focused on taking the business further along its development than a venture finance firm does and helping to structure it for optimal financial performance. Some key ones for South Africa include:
- Ethos Private Equity
- Acorn Equity
- Horizon Equity
- Sanlam Private Equity
Another option is bank loans which are generally the last option for most entrepreneurs because of the strict criteria for funding options. According to independent research by BMI and the competition commission in 2011, only 24% of startup businesses are funded through banks. Some banks are, however, working on getting their hand into the entrepreneurial ecosystem.
Crowdfunding is a popular means of raising money all over the world with a number of global platforms readily available. Among these are platforms that are specifically supportive of new businesses and allow the growth of an investment portfolio through small individual investments. There is minimum risk in this type of investment. The method is not always successful for all businesses, so it is often used in conjunction with other methods. The most popular platform for crowdfunding in South Africa is Crowdinvest, while RainFin is another compelling but smaller option.
Stellenbosch University and the University of Cape Town are top South African universities. In fact, these are known for their premier technical facilities and excellent talent throughout Africa. The central team that developed an integral part of Amazon Web Services hails from the region. This naturally means that tech-based startups are strong in the area and are more prominent than in other areas. Specifically, Cape Town has been identified as an up-and-coming hub for technology and life sciences in a report from a study conducted by the Global Technology Emerging Markets. The two universities also have concentrations of students with a combined education in medicine and engineering, making them uniquely poised for many global organizations. According to the report:
“Cape Town stood out because of a combination of factors, including favorable business climate, skilled talent particularly in engineering, an emerging startup culture, excellent infrastructure, presence of quality institutions of higher education, and favorable rents in a global context (25 per cent of those in the San Francisco Bay Area) and particularly in contrast to Johannesburg.”
Some local resources organizations for the startup ecosystem are listed below. These companies are helping to raise the region’s profile as a startup hub and area of innovation.
- Bandwidth Barn – This is a leading ICT business incubator worldwide and has been in operation since 2000. The company is a wholly-owned subsidiary of CiTi. It’s over 50 successful graduates bring in revenue of more than R800 million (about $62 million) yearly to the economy.
- Silicon Cape Initiative – This is a non-profit private sector community organization that has been functional since 2009. The aim is to build up an ecosystem in the Western Cape to bring in local and foreign investors, talent and entrepreneurs.
- SABLE – This is the South African Business Link to Experts and is an accelerator. The group is an international one and is dedicated to supporting South African entrepreneurs.
- SMILe – This is the UCT Samsung Mobile Innovation Laboratory and is Samsung’s premier innovation unit in Africa. The aim is to help increase mobile innovation and skills development.
STARTUPS TO WATCH
A few top startups to watch for from the region are discussed below:
Mellowcab. Among the many taxi startups coming out of South Africa, Mellowcabs is showing great potential. International players such as Uber are making the market tougher to crack and Mellowcab has a unique model and targets a niche. The rides are all free and the costs are offset through banner ads on the vehicles. These are 100% electric vehicles and the green side of the business is an added advantage.
Gust Pay. Wearable tech is the next big trend and Gust Pay is placed well to take advantage of this trend with its mobile payment app and NFC wristband technology. The wristband technology makes mobile payment convenient and efficient. A test run was conducted at the 2013 Rocking the Daisies festival in Cape Town. The tech has applications for large-scale events such as conferences and sports games.
SPOTTM. This is another Cape Town-based mobile startup. It is a crowdsourced crime fighting app. The tech is real time and allows victims or witnesses of crime to report the felony to thousands of people in the area. The idea is like a neighborhood watch on a larger scale.