Cape Town is Battling its Nation’s Economic Woes to Become Africa’s Tech Capital

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South Africa is suffering an economic crisis. Growth has slowed to 0.3%, its slowest since 2009, and unemployment is at a 14-year high of 27.7%. Manufacturing and agricultural job markets have shrunk. The government is now South Africa’s largest employer.

But the gloom has accelerated a shift towards entrepreneurialism and tech, that has been concentrated on Cape Town–whose university culture, arguably unrivaled across the whole African continent, has helped breed a new generation of ultra-proactive young graduates.

And it’s no accident that Africa’s most innovative city is also one of its prettiest.

There are few statistics that don’t point to Cape Town’s domination of South Africa’s tech market. 59% of the country’s startups are based in its surrounding Western Cape state. The next largest bloc are concentrated in Gauteng, the home state of Johannesburg. Three quarters of all VC deals went through the Western Cape in 2015.

Neither are Capetonian exits unheard of. It has an impressive roster of deals, from 1999’s purchase of Thawte by Verisign for $575m, to Fundamo’s $110m acquisition by VISA in 2011 and, more recently, iKubu’s sale to Garmin in 2015.

That money has helped spark a boom in local accelerators and incubators that are bringing the city’s tech talent closer together. Silicon Cape, Accelerate Cape Town, French Cape Town, LaunchLab, AlphaCode and many others have sprung up in recent years. Coworking spaces like Workshop 17 and Spin Street House have also popped up recently, to cater to the city’s growing fleet of young laptop-wielding digital entrepreneurs.It has never been easier for Capetonians to develop a tech project.

Its universities are key. In the University of Cape Town (UCT) and Stellenbosch University, Cape Town is home to Africa’s first and third-best higher education institutions, according to the Times Higher Education World University Rankings. South Africa plays host to six of the continent’s 15 top centers.

Philip Marais, CEO of LaunchLab, believes that a combination of innovation on campus, and a crumbling job market, has sped up Cape Town’s tech progress.

The simple reality is that graduates need to be self-starters these days,” he says. “There are not enough jobs to go around and a degree is not enough of a differentiator anymore. Therefore if a university is attracting entrepreneurs and actively incubating businesses it is creating employment opportunities for its students and also creating a self-starter culture on its campus.

“Also, just like corporates, universities run the risk of being disrupted by technology which gives another good reason to be supporting and engaging with a startup culture,” adds Marais. “The future of the universities may lie in one of the startups they incubate.”

Stellenbosch University has a raft of initiatives, such as its Media Lab and Innovus, an industry interaction and innovation company. Its Innovation District is home to some of Cape Town’s brightest potential entrepreneurs, and “will set Cape Town apart going forward,” says Marais.

UCT has also been busy forging ties between education and business. These include the Solution Space, Bertha Centre for Social Innovation and Entrepreneurship, Raymond Ackerman Academy of Entrepreneurial Development, d.school, UCT Technology Transfer Office, UCT Career Centre and with a PGDip course in entrepreneurship and MPhil specializing in inclusive innovation.

Fintech is garnering the most domestic attention right now. There is barely a bank that is not supporting some sort of fintech program, and a number of national pain points appear ripe for innovation. For one, the South African banking market is surprisingly advanced. BankServe, a clearing between banks, appeared in the country in the 1980s, but only arrived in Britain ten years ago.

We’ve got an incredibly advanced banking and insurance market,” says AlphaCode’s Dominique Collett. “Which people are quite surprised about given we’re a developing country. Our financial services skills can compete with the world’s best.”

Startups are not just a nice bauble for South African banking, Collett argues: they’re necessary. “There is no foreign appetite for South African businesses because of our volatile currency,” she says. “There are also strict exchange controls, so getting money outside the country is really difficult. Which is why fintech has been dominated by banks and insurers who have come into the market. And they’re not the best owners of fintech businesses.”

Some striking fintech firms are emerging, however, to address the issues. Luno is a Bitcoin wallet that grew out of Stellenbosch University, while Ikhokha won last year’s MasterCard Innovation Award in Hungary. RainFin, too, has won many fans worldwide with its innovative lending platform.

As with many developing hubs, however, the city suffers a substantial funding gap. Local entrepreneurs have “sufficient domestic capital available to give their ideas some form of initial traction, but not to scale their ventures adequately (and) internationally,” says Keet Van Zyl, co-founder and partner at Knife Capital.

“I believe the Cape Town ecosystem is also collaborating well together and this creates more opportunities for entrepreneurs; there are less gaps in the value chain,” adds Marais. “Cape Town also provides a lifestyle that suits entrepreneurs and software developers.”

Cape Town’s status as South Africa’s most desirable city to call home is rarely challenged. It was ranked the 94th best place to live by this year’s Mercer Quality of Living Survey, placing fourth in Africa and the Middle East behind Dubai, Abu Dhabi and Durban.

Nicknamed ‘The Mother City’ due to its wild array of natural sights–from mountains and forests to beaches and thriving aquaculture, Cape Town is a place for young people who like to play hard. Nightlife is improving, and the local food and drinks culture is enjoying a boost alongside the development of entrepreneurialism and startups.

The local government is also working hard to improve things. Cape Town has allocated R222 million ($16.9m) to develop its broadband infrastructure over the next three years. A new Red Tape Reduction campaign, created by the Western Cape government, is aimed at cutting barriers to building new companies. The state’s 12J structure legislation also allows tax reductions for investors.

On a national level, things aren’t so rosy. Corruption and scandal remain a daily staple of the South African political makeup. The links between Jacob Zuma’s government and the controversial Gupta family have brought scorn from all corners of society, and issues of race and inequality still plague the national conversation.

Government has certain R&D incentives and programs in place to bring ideas to proof of concept…But for a country where the unemployment issue can really only be turned around via entrepreneurs creating their own jobs, government has not fully embraced the challenge,” says Van Zyl. “Startups and tech entrepreneurialism are promoted from the podiums as it strikes the right chord, but in reality very little is done on the ground to actually advance the cause given the magnitude of the challenge.”

Van Zyl looks to neighboring Namibia for some inspiration, where pension funds must invest at least 2% of the market value of the fund in “unlisted investments with certain criteria to stimulate SMEs and the VC industry…I would institute a reform on intellectual property restrictions to make South Africa an enabling environment for IP-rich companies.”

Byron Tudhope is founder and writer at Tech Cape Town, a local industry portal. He is also a seasoned entrepreneur, having recently developed the personal assistant Hey Jude app. Tudhope believes that Cape Town is already well on the path to becoming a global tech hub–“in many ways (it’s) very similar to San Francisco,” he says–but sees a number of social struggles on the horizon.

“The quality of tech being built in CapeTown is on par with the best in the world,” he says. “The biggest challenge currently is growth of the industry. There are not enough developers to keep up with the market demand.

“I think the City’s biggest drawbacks are income inequality and housing,” adds Tudhope. “I think the most effective way to narrow the income gap is to provide education to people who can’t afford it. I think offering tax breaks and subsidies to industry if they provide training and internships is the way to go. This also helps with the lack of developers to expand the industry.”

A significant gender divide is also being tackled by groups such as Kato Technology, a “tech disseminator” aiming to expand the scope of entrepreneurialism across South Africa. “We are going to be educating the public about tech solutions, and show people how they can develop their own own solutions to local problems and develop a product from that in order to solve the same problems for others,” says the company’s community manager Robyn Farah. “We are also working very hard to bridge the gender diversity gap, and encourage, and support, more females to create their own tech companies.” 

IP, which cannot currently be exported abroad, and tight skilled visa laws are also creating an industry bottleneck that could hamper Cape Town’s development if left unaddressed. Simodisa, a local lobbyist, is working to change those positions. “If we can pull that off, I think it could really change the local ecosystem,” says Collett.

For now, though, despite the considerable issues, Cape Town is a thriving tech city–far outstripping its domestic rivals and almost anything on the African continent. Entrepreneurs have already changed the city’s economic makeup. If they can break through South Africa’s national troubles, they will have a global powerhouse at their fingertips.

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  • Chad Lee Bryson

    When you lay it all out like this you really see how complex the situation is. I’m wrestling this very question myself in my own research. It’s interesting because historically market forces in South Africa have never operated outside of the domain of political imperatives, and these imperatives have necessitated restrictions on growth and national sovereignty. What I want answered is whether tech entrepreneurship in SA offers an alternative, one that serves the ends of political imperative through the co-incidence of innovation but without encumbering capitalist development.