A new fix

South Africa’s startups are turning out to be the silver lining in a struggling economy

Obsession
Africa Innovators
Quartz africa
Obsession
Africa Innovators
Quartz africa

In recent weeks South Africa’s economy has faced one trial after another leaving investors worried about the state of the government and its leadership. But in the midst of all the economic dreariness and bad news the local startup scenes of Johannesburg and Cape Town in particular have kept ticking along and might even play a role in reinvigorating investor confidence in Africa’s most advanced economy.

A case in point is Silvertree Capital, one the country’s leading consumer internet backers, which said earlier this month it plans to invest $10 million into African economies, targeting South Africa as its main priority, as well as Nigeria and Kenya. The South African business incubator’s significant investment comes after its parent company Silvertree Internet Holdings announced a 330% per annum growth for 2015, bringing in $10 million in revenue.

Manual Koser, founder of Silvertree Internet Holdings, says they’re making this commitment even though it’s a tough environment currently, with strong macro-economic headwinds in South Africa and Nigeria.

 “The South African startup scene is slightly insulated, because it started small, and is beginning to show real promise.” 

“We see the opportunity outweighing the risks by quite a significant margin,” says Koser. His team is making a classic ‘Africa rising’ bet and investing for the long-term in the expectation that the continent’s growing middle class becomes a strong consumer market. “We’re fully aware of the opportunities that the African consumer market is presenting us so we position ourselves accordingly.”

It seems an overly optimistic position to take in present economic circumstances. Business confidence in South Africa is at a five-year low says Rand Merchant Bank’s Bureau for Economic Research. This means the private sector is less likely to invest in the economy and this has stifled job creation. South Africa’s ailing economy—with expected growth of about 0.7% for 2016—is naturally unappetizing for investors at first glance.

Yet, South African startups could very well inject some life back into the economy.

The startup sector in South Africa tends to be overlooked internationally in favor of exciting new tech hubs in Nairobi and Lagos. However, the country has produced some real global competitors like WhereIsMyTransport, who’ve expanded into London; VIGO, a website-building platform that has entered the Asian market; and things are looking positive for SweepSouth, the first South African startup to have recently caught the attention of 500 Startups in Silicon Valley.

In fact, last year South African startups raised some $54.6 million, the highest on the continent according to data collected by Disrupt Africa.

Weak rand, strong outlook

Another South African venture capital firm, Knife Capital, earlier this month posted revenue of 65 million rand ($3.9 million) from its second Grindstone accelerator program. Over a year-long period, Grindstone took 12 businesses under its wing subsequently creating 70 jobs in 2015, and recorded a 64% growth year-on-year.

Simon Hartley, founder of Wumdrop, an on-demand courier startup based in Cape Town says the dollar to rand exchange rate is the only small concern in a “generally rosy outlook”.

“Some, but not all, of the software architecture we use is billed in dollars. We can mitigate that by beginning to charge some of our white label clients in dollars, or by accessing and using services charged in rands,” says Hartley.

“The South African startup scene is also slightly insulated, by virtue of the fact that it started small, and is beginning to show real promise with exits in 2015, ramping up from 2014. Indications so far are that the number of funding vehicles available to new and existing founders is set to grow in 2016, not shrink,” adds Hartley.

While some investors are betting on locals consumers, others in South Africa think the weak rand is a real opportunity to build at low local costs. The hope would be to make a better return by backing startups with the ability to sell services internationally—particularly to western markets.

Brett Commaille, lead partner at AngelHub Ventures based in Stellenbosch, in the Western Cape, says the current economy in South Africa affects what they are looking for. “There’s a clear preference for businesses that demonstrate their ability to sell in foreign markets and grow despite the tough economic conditions,” he says.

“The South African startup scene has come a long way, with young businesses learning rapidly, gaining confidence in their ability to launch globally significant businesses from SA, and occasionally getting it right despite some challenging conditions. “We are believers in that ability but very few have what it takes to go the distance,” says Commaille.

Roger Norton, a trustee at South Africa’s oldest private sector technology community, the Silicon Cape Initiative, says innovation thrives in tough times. “Startups are never easy, but when markets are tough you get much better customer feedback and that helps startups focus on solving problems better. It’s times like these when successful startups can really stand out.”

Founded by Vinny Lingham and Justin Stanford back in 2009, and inspired by California’s own Silicon Valley—the Silicon Cape Initiative does not invest in startups, but focuses on connecting entrepreneurs with angel investors within the information and communications technology (ICT) sector, and supporting them.

An increasingly larger percentage of deals are happening in the Western Cape and while still small and young, the ecosystem is thriving and growing, says Norton. “We are also excited about various stakeholders that are supporting the tech ecosystem, including academia, corporates, government and individuals.”

Norton is especially bullish about the future of the sector.

“We are steadily seeing increasing numbers of exits and funding rounds year-on-year. The number of VC funds is increasing in the local market and the quantity and quality of startups is on the rise.

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