The Western Cape’s Stellenbosch, renowned for its wineries and scenic views, is set to draw not only tourist crowds, but investors looking to tap into the town’s thriving technology sector.
Stellenbosch – dubbed South Africa’s local Silicon Valley– is expected to see more deal flow in the town situated about 50km east of Cape Town.
The town has attracted the nickname because of its cosmopolitan lifestyle, leading universities and high concentration of incubator programmes that are synonymous with California’s Silicon Valley region.
Efforts to roll out free Wi-Fi to create the first digital city on the African continent have been successful in Stellenbosch, which is also home to Africa’s largest mobile social network Mxit.
The recent deal announced by international GPS specialist Garmin to acquire Stellenbosch-based start-up iKubu, which develops a bike radar system, is expected to encourage global tech companies to do more scouting in Stellenbosch.
Says Zachariah George, CEO of technology advisory firm U-Start SA: “Deals similar to the Garmin – iKubu deal are plentiful. Technology companies offering solutions in medical practice, financial services, online marketplaces and education are in vogue.”
Wesgro investment promotion portfolio manager with an ICT & special projects focus James Milne agrees with George, adding that innovation is evident across the board. Western Cape-based companies like WiGroup and Entersekt are gaining traction in the financial services sector while Mellowcabs has claimed its place in the transportation sector, Milne adds.
“What is important is driving a culture of innovation initially, and then perhaps identifying certain industries to drive policy and incentives to enhance our [South Africa’s] strengths,” Milne told Moneyweb.
Other African markets such as Kenya and Ghana have trumped South Africa in prioritising ICT. CEO of the Cape Innovative and Technology Initiative Ian Merrington says South Africa’s neighbours have included the ICT sector in policy making and have public-private partnerships right.
“The national ICT policy will always be the starting point but at the end of the day the political will to follow through and implement will be the deciding factors… We would like to see a focus on ICT within the National Development Plan, ideally as a strategic sector,” Merrington explains.
However, technology ideas have no weight without financial backing – the biggest Achilles heel for innovators. The incentives are low and many technology entrepreneurs have become risk averse in a fast-moving industry with many disruptions, says Clinton Liederman, manager of RLabs, an incubation hub based in Cape Town. On average, it takes up to three years for an innovation by a start-up to be commercially viable, he says.
The funding challenges also speak to the mandate of investors and venture capital players. Most investors have “fairly stringent” investment mandates and are not willing to take the risk of investing in what is essentially a concept, says Milne. “If you look at businesses that are post-revenue and gaining traction, then yes there is certainly potential for accessing finance, both locally and abroad.”
The heightened interest by foreign investors is supported by figures from Wesgro’s 2014 research which indicates that global foreign direct investment (FDI) into the ICT sector between January 2003 to November 2013 totalled R429 trillion, representing 2 116 projects. During the period, South Africa amassed 166 projects of the total, representing capital investment of R31.2 billion. On a province basis, the Western Cape saw 33 investment projects to the tune of R8.3 billion.
The onus is on entrepreneurs to plug in their innovations and value proposition. George says where entrepreneurs go wrong is by spending years developing a product without thinking about the route to market and no lucrative exit strategy – arguably the biggest bottleneck for growth.
Merrington says some innovators do have an exit strategy, but they tend to be participants who have been in the market for a while and have other start-ups behind them. “Many first time innovators are mainly focussed on getting their vision to become a business,” Merrington explains.
The problem for start-ups does not speak to the actual innovation itself. “We don’t have a shortage of technological ability in South Africa. We have some really good developers, people that are very strong technically. But where we struggle is commercialising ideas into a market-ready product or service,” says George.
The moment entrepreneurs crack this code, they then become more appealing to investors and consumers. “Our market is so small, there are 4 – 5 million people realistically in the entire county from a consumer standpoint. So you need to develop a technology that appeals outside South Africa.”