HOW TO TURN SOUTH AFRICA INTO A NATION OF START-UPS

The need for South Africa to create a more supportive environment for entrepreneurship and start-ups to build a competitive and fast-growing economy. Access to funding, particularly venture capital (VC), is crucial for the growth of the start-up ecosystem and fostering innovation. The article suggests that South Africa’s retirement industry, with its significant assets, could be a potential solution to address the funding gap.

The Western Cape, known as an innovation hub, has been actively working to attract more VC funding to boost the local economy. However, recent developments, such as Naspers halting its South Africa-focused VC fund and concerns about funding start-ups amidst rising interest rates and global recession fears, have raised questions about the availability of sufficient funding.

To ensure that local start-ups and small and medium-sized enterprises (SMEs) have the opportunity to thrive, the article suggests several measures. Firstly, efforts should be made to close the funding gap, potentially by offering first-loss guarantees and incentives to encourage more pension funds to invest in VC. Reducing regulatory burdens on VC investments, providing tax breaks or guarantees to support risk-taking, and creating favourable conditions for start-up financing are also proposed.

Pension funds have been cautious about investing in start-ups due to perceived risks. However, there is a growing interest among South African pension funds in VC, with some already committing funds or expressing interest. The article highlights the success of pension fund investments in the VC industry in the US, Europe, and Nigeria, which have contributed significantly to the growth of successful enterprises and start-up ecosystems.

South Africa’s current position in terms of start-up funding falls behind countries like Nigeria, Egypt, and Kenya. The article emphasizes the need for targeted policy interventions and explicit guidelines to stimulate pension fund investments in VC and establish South Africa as a top start-up hub. Clear policies, incentives, and support are essential to harness the potential of start-ups in driving economic growth, job creation, and socioeconomic impact.

Overall, the article emphasizes the importance of addressing the funding gap for start-ups and suggests leveraging South Africa’s retirement industry as a potential source of investment through targeted policy interventions. By providing a supportive environment and access to funding, South Africa can boost its start-up ecosystem, foster innovation, attract foreign investment, and accelerate economic growth.

The way forward

In the Western Cape, the provincial government has been on a drive to attract more VC funding into the region to boost the local economy and job creation.

Late last year, Western Cape premier Alan Winde led a delegation to Europe and one of the main goals was to promote the tech ecosystem in the province and explore closer cooperation with VC funds in London. VC is one of the few financial service sectors dominated by the Western Cape, partly because of the strong tech development ecosystem around the province’s leading institutions, such as Stellenbosch University.

Broadly, most VC flows into the technology sector, including fintech and education technology, according to a recent industry report by the Southern African Venture and Private Equity Association (Savca), the industry association and public policy advocate for private equity and venture capital in the region. It correctly emphasises that increasing investment into high-growth, early-stage businesses is key to fostering economic growth and innovation, and is imperative to tackle challenges of poverty, inequality and unemployment.

This is also in line with the National Development Plan, a government blueprint for eliminating poverty and reducing inequality. The plan has ambitious goals for small firms — including a target of 90% of employment opportunities to be created by this sector by 2030. To get anywhere close to this target, we will need to establish a thriving entrepreneurship and start-up ecosystem. For this, we need VC and pension funds more than ever. It’s an urgent conversation we should be having as part of efforts to respond to some of the burning questions and challenges we face today.