How #SiliconValley envy is undermining #entrepreneurship In #South Africa

Header Image courtesy of krismcgarvey.wordpress.com

Significant investment in Mathematics, Science, and technology education is a must for Innovation driven economies. This investment needs to be complemented by research and development; enabling legislative and legal frameworks; political will; business linkages. All underpinned by market demand for the innovation produced.

In 2015, members of the Southern African Venture Capital Association did a total of only 43 deals, totalling $ 9.1m. The South African Department of small business development estimates that they will be supporting 51 incubators, with a total of 1791 start -up companies at the end of 2016. They have allocated $ 41.3 million, over 3 years, 2015-2018, to this end. Strategically, given the amount of resources invested in incubation and accelerator programmes and the hundreds of entrepreneurs they support, these programmes should be a healthy, continuous source of deals for venture capital, however this not the case.

The Global Entrepreneurship Monitor (GEM) reported that in 2014, South Africa’s discontinuance rate of 4.8% was higher than the level of business establishment resulting in a net loss of business and entrepreneurial activity.Total Entrepreneurship Activity dropped by 34%, from 10.6% to 7.0% of the adult population. While only 2.7% already of adults own/manage an established business.

To get an innovation centric economy firmly in place, South Africa needs to address the following factors that I believe are undermining entrepreneurship.

 1. The keys to building an innovation driven economy

• Demand side market drivers; big business does not buy nearly enough locally developed technology & Innovation based products to drive the development of innovation value chains.
• Education system. South Africa’s education system is failing; we rank 120thout of 140 countries In the World Economic Forum’s competitive index, in education. Education is a significant portion of the annual budget, 18.11% in 2015, but the output does not match the Investment; Dozens of thousands of high school graduates are barely literate or numerate.
• Value Chain Integration; The pockets of supportive entrepreneur hubs that exist need to be reengineered into integrated business value chains into which technology entrepreneurs can plug into. Although South Africa is ranked 33rdin the world in the quality of Scientific research and 38th In innovation, most of the patented technologies that are produced by centres of excellences such as the Centre for Scientific and Industrial Research are developed in isolation, outside of business and market demand and not in response to it, so in the end, it goes unused.

1. Social capital and network linkages.

The recent boom in the local enterprise app development market has spurred millions of dollars in investment from large software companies, big banks, corporatize social investment budgets, enterprise development funds and the South African department of small business development into free to access coding schools, accelerators and Incubators. The projected growth of the global enterprise app market is expected to reach $100billion by 2017, according to Tech crunch. In 2014, South Africa’s share of the global enterprise app industry was estimated at $518.45 million. It is expected to grow to $787.19million by 2017, only 0,79% of the global total.

So far, the consumer app market is dominated by free apps. Profitable consumer apps are mostly in gaming. Entrepreneurs who have not worked for a large enterprise, do not have the social capital, or do not have a gaming orientation, exist outside of these successful consumer app ecosystems and as a result, the mobile app technologies they develop are doomed. Contrast this with entrepreneurs who come out of the Silicon Valley system: most will have worked for a large enterprise, or have been closely tied to one, for at least some of their career. The networks they Silicon valley entrepreneurs build act as a support system and a contact base for when they strike out on their own.

1. South Africa’s current investment efforts ignore its strengths; the current focus on technology education and the local ICT Industry ignores South Africa’s key economic strengths and where it has a global competitive advantage. South Africa has the 12th most advanced financial services industry globally. Financial & business services, Manufacturing, Tourism & hospitality and Mining, make up the lion’s share (58.8%) of the country’s GDP. Last measured in 2012 by Stats SA, the ICT sector as whole, contributed only 2,9%  of GDP or $5.9 Billion Dollars. Given it’s limited contribution to GDP, any investment in South Africa’s ICT economy needs to be viewed as a tool to strengthen South Africa’s existing areas of global competitive advantage.
2. Existing Innovation does not solve South Africa biggest problems; Locally, the biggest demand is for basic products and services; food, energy, water, sanitation, housing, reliable transport systems, affordable telecommunication services, easily available & accessible technology infrastructure. Unless the technological innovation that entrepreneurs develop enable the delivery of basic services and better living conditions, the critical mass required by innovation based companies to become competitive, will remain elusive.
3. Beaurocrats hold the purse strings

The people that hold the purse strings in the broader entrepreneur funding ecosystem, public & private, are beaurocrats who do not have a direct history of entrepreneurship, an Intimate understanding of the local entrepreneur and or the day-to-day challenges they face. This has the result that:

1. No one funds Ideas, even though a number of people claim they are Angel Investors
2. The risk analysis for Investment in entrepreneurs seeking widely different interventions is the same

• Institutions are often unwilling to assist entrepreneurs unless they have an operational business or the entrepreneur can prove that their Idea will succeed without Intervention.

This marginalises many technology start-ups, relegating them to bootstrapping innovation on shoestring budgets.

Fortunately, this reality presents a great opportunity to engage failed entrepreneurs in developing meaningful, tailored, and impactful interventions along the entire value chain of entrepreneur support.

Dealt with collectively, these challenges have the potential to establish South Africa as a globally competitive innovation economy. However, this effort has to be systematic, continuous, coordinated, centred around South Africa’s economic strengths, and driven by local and international market demand.

This article is the fourth in Sandiso's  Solutions Series

Sandiso Ncube is the author of the "10 minute guide to starting a business; lessons entrepreneurs learn the hard way. Available here:

https://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Daps&field-keywords=the+10+minute+guide+to+starting+a+business%3B+lessons...