Ecosystem Deep Dives #19: South Africa - Still room to grow
While often considered one of Africa's most developed start-up ecosystems, South African start-ups still suffer from unnecessary red-tape and difficulties expanding beyond its borders.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!

Dichotomies
South Africa is considered to be part of “Africa’s Big Four”, a group including Egypt, Nigeria and Kenya which account for 80% of all start-up fundraises on the continent. The South African start-up ecosystem is often considered to be one of Africa’s most developed, owing to strong corporate involvement, developed business infrastructure, and ties to Europe. Additionally, the country also hosts the Southern African Venture Capital and Private Equity Association (SAVCA), one of the continent’s oldest VC organization.
Corporate involvement in the ecosystem is best exemplified by Naspers, which began as a newspaper more than a century ago and is now one of Africa’s largest company. In 2018, Naspers launched Naspers Foundry, a start-up fund aimed at South African start-ups which kickstarted local success stories such as SweepSouth.
Despite having one of the continent’s most vibrant start-up ecosystems, South Africa is still rife with socio-economic issues, due in large part to the legacy of apartheid and widespread governmental corruption. South Africa is often cited as one of the most unequal countries in the world, and start-ups are far from a panacea for the country’s woes, especially when fundraising patterns tend to reproduce historical racial inequalities. Nevertheless, a strong and vibrant start-up ecosystem has proven to be a key component of any healthy economy, so let’s dive into what makes South African start-ups special.

Ecosystem layout
South African start-up activity is mostly clustered in Cape Town and Johannesburg, even though other cities such as Pretoria and Port Elizabeth also enjoy some start-up liveliness. In 2021, South Africa became the first African country to enter Start-up Blink’s Ecosystem Report top 50, coming in at 48th place. However, South Africa is yet to produce a “unicorn”, the name given to start-up valued at over $1 billion.
Cape Town, also referred to as “The Mother City”, is home to almost 2/3rds of South African start-ups. The city’s above-par internet infrastructure and high concentration of start-up support organizations (SSO’s) make it the ecosystem’s focal point.
“With an internet penetration of 63%, one of the largest open-access fiber networks in Africa, and a bustling community of investors, Cape Town is home to almost 60% of South Africa’s startups. The city also has the continent’s highest number of accelerators, with more than 20 programs and 25+ co-working spaces.” - Start-up Genome 2021
Cape Town hosts some of the ecosystem’s most renown start-ups, including:
Yoco (fintech): A point-of-sale payments provider for small businesses in Africa. Recently raised an $83 million Series C.
Jumo (fintech): A company that offers financial services to entrepreneurs and businesses in emerging markets. Recently raised a $120 million round and is valued at $400 million.
Takealot (e-commerce): South Africa’s leading e-commerce store. Raised more than $230 million.
On the other hand, Johannesburg also boasts a lot of start-up activity, especially in the fintech space. The city is also home to the national stock market (JSE), and hosts many of the ecosystem’s investors.
“Johannesburg is also home to an array of active investors like Dazzle Angels, Edge Growth, Grovest, SA SME Fund, The People’s Fund, and Kalon Venture Partners. The Seed Academy and the WDB Growth Fund both offer programs to support founders, including a fully funded business accelerator for women.” - Start-up Genome 2021
Legislative roadblocks
While having developed financial markets and relatively established business infrastructure, South African start-ups still face a plethora of administrative red-tape and hurdles. One of them is the very tight exchange control regime and regulations surrounding “loop structures”, which refer to the ownership of a South African asset by a foreign entity. These are crucial in the start-up world, as many foreign investors only invest in Delaware entities, requiring start-ups to operate a “Delaware flip” in which they make their local business entity a subsidiary to a Delaware entity. Some African start-ups such as Kenya-based Raise even specialize in Delaware flips.
Indeed, until very recently, South African start-ups could not create a foreign entity making it hard to attract foreign capital. The legal changes to address this issue actually made the problem worse, as the sale of the South African subsidiary to the Delaware entity would be treated as a, albeit false, liquidity exit and subject to taxes. Furthermore, it is also very hard for South African start-ups to transfer their intellectual property to other international jurisdictions, making investors frisky due to the potential complications of an acquisition.

A South African Start-Up Act?
These roadblocks, coupled with other issues, have led South African ecosystem actors to push for a South African version of a “Start-Up Act”, similar to the ones passed in Tunisia and very recently, Nigeria. The purpose of this act would be to centralize fiscal and legislative reforms surrounding start-ups, while providing a bridge for the ecosystem and the government to converse.
Efforts to push this through are led by some of the ecosystem’s main players, including AfricArena, Digital Collective Africa, Endeavor South Africa, Loudhailer, SAVCA, Silicon Cape, SiMODiSA, and Wesgro. I4Policy, an organization specializing in the implementation of African start-up acts, is also involved.
“And so, we — along with the other start-up ecosystem stakeholders — advocate for several relaxations to legislation, including exchange controls and capital gains tax. Other relaxations include simplifying procurement policies with which to scale up the involvement of start-ups in the economy; direct funding of start-up businesses through the automatic reinvestment of PAYE and VAT; and the easing of labour and immigration laws to make hiring and movement of talent easier.” - Call lead by Endeavor South Africa.
The act will also be used to integrate disadvantaged population from townships into the national start-up ecosystem. To stay updated on their progress and read more about their propositions, feel free to check out South Africa Start-Up Act’s website.
Government support
While the government has clearly stated its desire to support South African start-ups, policies put in place to do so are often scattered and not always effective. A perfect example of this would the implementation of the 12J VCC program, which was supposed to encourage investment into local VC’s but turned out being used by wealthy individuals for tax breaks on real estate investments. The program was recently discontinued.
However, not all government have flopped in this way and the South African government still offers a variety of grant schemes which you can check out here. The fact that grants for SME’s and start-ups are mixed together, when both are fundamentally different in their needs, purpose, and scale makes the necessity of a national Start-Up Act all the more blatant.
“Lack of policy linkage and support for start-ups within the context of the NDP (National Development Plan) means that incentives and support for start-ups essential to achieve high-growth potential is either non-existent, or lost in the general discourse loosely grouped alongside everything resembling small enterprises, and tagged as SMEs. This despite overwhelming global evidence that only a small percentage of small enterprises referred to as high-growth firms, achieve the objectives of job creation, economic transformation and competitiveness.” - Start-Up Act Position Paper 2021
Fundraising landscape & numbers
One of the South African ecosystem’s main advantages is its very dynamic local fundraising scene. Angel groups such as Jozi Angels, Dazzle Angels and SABAN are active (even though some say there is a still a scarcity of tickets <$250,000). On the VC side, Naspers Foundry, Newtown Capital, Savant, 4DI capital, Knife Capital, and Launch Africa are some of the most active players.
As for the sectors South African start-ups innovate in, fintech unsurprisingly takes the largest part of the pie, with impressive fundraises such as Jumo ($120 million), Tyme Bank ($109 million) and MFS Africa ($100 million) taking place in 2021. Other star start-ups include Aerobotics (Agtech), Clickatel (chat commerce) and Snapplify (edtech).
South Africa is also one of the continent’s ecosystem with the most active acquisition scenes. Recent notable acquisitions include Zipco acquiring BNPL start-up Payflex and First National Bank acquiring local fintech Selpal.
Mergers and acquisitions worth US$52B were completed in South Africa during the first half of 2021, with the value of deals growing by 958% from 2020 with the tech sector in the lead according to Refinitiv Data that provides financial markets and infrastructure data. - Further Africa
Conclusion
The South African start-up ecosystem is unique, due first and foremost to the country’s demographic makeup, but also due to the fact it has a seemingly developed ecosystem without having any clear governmental support. The implementation of a concise start-up act should help clear things up and unleash the ecosystem’s full potential. Also important to keep in mind will be how ecosystem actors will integrate disenfranchised communities into the ecosystem, in order to truly show the societal impact of a vibrant start-up ecosystem, at scale.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!