Venture support organisations: Lighting a path for entrepreneurship in South Africa

The rapid growth of venture development organisations, both locally and across the globe, is a welcome addition to the entrepreneurial landscape. This worldwide trend – especially with regards to those based at academic institutions – has massive potential to contribute to the development and growth of South Africa’s entrepreneurial and small business ecosystem.
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The rapid growth of venture development organisations, both locally and across the globe, is a welcome addition to the entrepreneurial landscape. This worldwide trend – especially with regards to those based at academic institutions – has massive potential to contribute to the development and growth of South Africa’s entrepreneurial and small business ecosystem.

“These factors are mutually reinforcing, and South Africa needs entrepreneurial start-ups and companies to create the new jobs of the future.”

Entrepreneurship in South Africa

Recent research by Ethne Swartz, Jonathan Marks and Caren Scheepers from GIBS shows that while development of this ecosystem is necessary, in emerging economies such as ours, contextualisation is key.

“Countries have idiosyncratic histories and development trajectories, with an array of stakeholders participating and shaping local ecosystems,” points out Swartz. “Since the mid-1990s, South Africa has developed into an all-inclusive democracy that has welcomed the challenge of global competition. However, the country’s embrace of entrepreneurship has been more problematic.”

Swartz and Marks argue that the country’s legacy of Apartheid has spawned cultural, institutional and structural barriers to entrepreneurship that explain our poor performance compared to other emerging economies. Some change is evident however – Global Entrepreneurship Monitor (GEM) data from 2003 to 2016 suggests that awareness about entrepreneurship has increased, perceptions about entrepreneurial careers have improved, and entrepreneurs are regarded more positively.

However, this type of positive change has been found lacking in South Africa’s economic cycles, with the country suffering from persistent low growth, high unemployment rates and high inequality since the late 1990s. “These factors are mutually reinforcing, and South Africa needs entrepreneurial start-ups and companies to create the new jobs of the future,” states Swartz.

Access to funding

One of the primary challenges for small businesses remains access to finance and financial skills – in fact, this is one of the most frequently cited obstacles to entrepreneurship. Market inefficiencies also extend to risk capital: poor institutional quality and governance in South Africa have negatively impacted the development of venture capital in the country. Lack of government effectiveness, corruption and conflicting government policy objectives have all sent confusing messages to potential investors, resulting in inefficiencies around investor structures.

“Start-ups in the country have limited funding options such as angel investors, crowdfunding and venture capital, but one of the legacies of Apartheid is that many entrepreneurs, without social connections to those who make decisions about financing, lack access to these sources,” says Marks. “The country’s geography also imposes an obstacle, with entrepreneurs residing in remote areas unable to access resources so easily. The support and finance gap for these entrepreneurs therefore remains acute.”

As such, universities potentially provide the means to reach some of these entrepreneurs, and nascent university-based venture support organisations are playing a critical role in this regard, bridging gaps to financial and other knowledge resources.

Partnering for change

There is considerable evidence indicating that academic entrepreneurship (bringing academia and private sector research and development closer together through knowledge transfer) is doing well. Here lies the paradox however.

Universities are steeped in tradition and history while entrepreneurship requires disruption and flux. University incubators and accelerators are the meeting point of these – offering opportunity and access, a practical approach and a focus on developing and supporting entrepreneurship in action.

Accelerators and incubators are emerging at universities around the country, such as the University of Pretoria (UP), the University of Cape Town and Stellenbosch University. The latter’s LaunchLab was created in 2015 as an innovation initiative between the institution and corporate partners such as Nedbank.

Since inception, LaunchLab has graduated 15 organisations in areas such as agritech, food, paid media, cleantech, edutech, fintech, big data, smart cities and safety. As one of Africa’s leading university-backed incubators, LaunchLab aims to build the next generation of sustainable, high-impact companies tackling the world’s toughest challenges in agri, climate and health – with a heavy dose of engineering and data science thrown into the mix.

“One of the primary challenges for small businesses remains access to finance and financial skills – in fact, this is one of the most frequently cited obstacles to entrepreneurship.”

“Entrepreneurial ecosystems thrive when data is available about the entire range of funding sources appropriate to different types of businesses. The research possibilities that exist locally are extensive. This is an opportunity that we believe needs dedicated attention and focus.”

Another 45 start-ups are currently enrolled in the programme in 2020.

TuksNovation

UP has various on-campus initiatives including an incubator at their Mamelodi campus that provides a maker-space for township residents who require access to resources. TuksNovation is a hi-tech business incubator operating on the main university campus that provides specialised product and business development support to start-ups.

The Entrepreneurship Development Academy

The Entrepreneurship Development Academy at GIBS (the business school of UP), specialises in entrepreneurship education and training, and partners with public and private sector clients to implement development programmes for a wide range of entrepreneurs across different stages of growth and various sectors.

The Bertha Centre for Social Innovation and Entrepreneurship

The Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town’s Graduate School of Business aims to build capacity and knowledge – with partners, practitioners and students – to advance the discourse and systemic impact of social innovation. In collaboration with UCT GSB, the centre has integrated social innovation into the business school curriculum, established a wide community of practitioners and awarded more than R8m in scholarships to students across Africa. The Bertha Centre has had a substantial impact across the academic, social and entrepreneurial landscape in the Western Cape, including launching an on-campus accelerator supported by MTN.

Higher learning institutions such as the University of the Witwatersrand, Nelson Mandela University in Port Elizabeth and the University of the Western Cape are all adopting similar strategies to encourage start-ups, while simultaneously establishing technology transfer offices to support faculty and students.

Wits, as an example, has created an innovation district focused on digital start-ups in partnership with Cisco, IBM and Microsoft, among others.

The Technology Innovation Agency

Not to be outdone, South Africa’s Technology Innovation Agency provides guidance and encourages links with universities and start-up ecosystem partners in the US, Germany and UK. As a national public entity, the TIA serves as the key institutional intervention to bridge the innovation chasm between research and development from higher education institutions, science councils, public entities and the private sector.

Focusing on technology development from proof of concept to pre-commercialisation, the TIA has established the Seed Fund, the Technology Development Fund and the Commercialisation Support Fund to assist in fulfilling this mandate.

Government initiatives

Government is also active in encouraging knowledge transfer between angel investment ecosystems in America and emerging angel hubs in Gauteng and the Western Cape. An example of this is the collaboration between the US Embassy and the Universities South Africa Entrepreneurial Development in Higher Education (EDHE) initiative.

Kick-started by an $83, 000 grant from the US Embassy in late 2018, the US-SA Higher Education Network aims to explore public-private partnerships between US and local universities with an emphasis on commercialisation, technology transfer and job creation, ultimately helping to develop university-linked enterprises and build a network of individuals from South Africa and the US who are engaged in university venture creation initiatives.

According to Swartz, the collaboration encourages angel investment, closer partnerships with US educational institutions and ecosystems, the building of collaborative research, and the development of an entrepreneurial exchange platform for American and South African students with direct access to potential investors, among others.

Financial sector involvement

South African banks and financial sector companies are also increasingly visible partners in the entrepreneurial ecosystem. Rand Merchant Investments, part of the First Rand Group, has formed Alpha Code, a fintech club to support the growth and development of the fintech industry in South Africa, providing much-needed support, mentorship and investment. Another important contributor to the local venture funding landscape is the Section 12J Venture Capital Company. An initiative of the South African Revenue Services, it offers a tax efficient vehicle for start-up investors, provided that the funds are invested in SMEs within an agreed period of time. The capital gains received on the funds are tax-free. Ventureburn has estimated that 136 funds had been launched by January 2019 alone, raising an estimated $240m.

As Marks and Swartz note in their research, these partnerships are extensive but it is still unclear as to how substantive they are. Furthermore, it remains to be seen what model will emerge for sustainable engagement on entrepreneurship for South African universities collaborating with higher education institutions from around the world.

“We envision more research opportunities to emerge from tracking the outcomes from the EDHE initiative and generating insights based on the contexts in which specific EDHE activities are implemented,” they state.

An exciting new development has been the recent announcement of an R8.4mgrant to support the work of the US-South Africa Higher Education Network. The grant will allow UP and the University of Venda, working with Rutgers University-Newark in the US, to increase the number of students from both countries engaged in exchanges, collaborative research and other partnerships, in the critical fields of science and technology, engineering, mathematics and agriculture.

In addition, government has also implemented a development programme for eight historically disadvantaged institutions of higher learning. Data on entrepreneurship initiatives at these institutions will also help to provide the basis for stakeholders to make informed decisions about university-based initiatives that support entrepreneurs in some of the poorest communities in the country.

Success stories

As can be seen, the local entrepreneurial ecosystem is sparking investor interest, with a number of successes emerging. One such example is SweepSouth, a digital platform company that provides domestic worker services. SweepSouth has received $6m in five rounds of investment – benefiting from initial angel investment in South Africa as well as placement with an accelerator in the US.

Additionally, Naspers Foundry, a local South African fund, announced an investment in the company. The Naspers Foundry was created by media giant Naspers to invest in ventures in the social entrepreneurial space in the country.

SweepSouth is not alone. In 2019, a Crunchbase report on local female founded companies listed 91 organisations and 148 founders. Entrepreneurs secured $28 million over 58 funding rounds. These companies include those with at least one woman founder and with their company operations based in South Africa. Of these companies, 3% have been acquired – a major breakthrough for women entrepreneurs in the country.

The need for research

“While other examples of women-owned companies are emerging from the ecosystem, similar research is needed on other entrepreneurs in the country to provide insights on the emergence of companies such as SweepSouth,” says Marks. “We also need to track the connections between venture development organisations on university campuses, and the providers of both debt and equity funding in South Africa.”

Swartz and Marks believe that a sustained research focus on venture development organisations in the country could provide fertile soil for research data, with the potential to ultimately inform government policy.

“We also need to track the connections between venture development organisations on university campuses, and the providers of both debt and equity funding in South Africa.”

An example of a successful outcome in government policy can be found in the case of how venture capital in South Africa was started.

The South African government cultivated the development of venture capital – which was jumpstarted by the Industrial Development Corporation from 1999 – through a public-private partnership in the Small Business Development Corporation (later called Business Partners) from 1980 to the present. The South African Venture Capital Association (SAVCA) was formed in 1998 as an association for venture capital and private equity organisations.

While the venture capital community is well represented, there remains a lack of data on business angel investment. Some research by SAVCA indicates that angel investors in the country seek returns on their investments, and that social impact and mentoring are strong drivers for those making investments. However, being a continent rich in possibilities, more is needed in this regard.

“There is a lack of good quality and verifiable data about the funding landscape in South Africa,” concludes Swartz. “Entrepreneurial ecosystems thrive when data is available about the entire range of funding sources appropriate to different types of businesses. The research possibilities that exist locally are extensive. This is an opportunity that we believe needs dedicated attention and focus.”

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