According to data curated by Maxime Bayen, GSMA Ecosystem Accelerator’s Insights Director, just in the last 7 months, January to July 2019, African startups have succeeded in raising close to $225 million in funding. While South Africa had 33.3 per cent share of the startups invested into in Africa during this period, Nigeria’s shares represented about 24%. Maxime Bayen pulled together a total of 44 start-ups from nine African countries for his enquiries.
The list was mainly dominated by startups from South Africa, Nigeria, and Kenya. While South Africa saw a record number of 15 startups on the list, 10 startups were from Nigeria while 8 were from Kenya. Uganda got three, Ghana and Egypt got two, while Mauritius, Zimbabwe and Zambia one each.
Here Is Why The Above Facts Are Interesting:
- Although 2019 is not yet over, it does appear that Nigeria has displaced and is now leading others, including Kenya (Africa’s top startup funding destination in 2018) as the top ecosystem with the highest amount of funding this year. However, should 2019 end with Nigeria’s total fundraising amount still below $250 million (including Kobo360’s $20m recent funding from Goldman Sachs), Nigeria comparably would trail Kenya’s performance in 2018. Kenya in 2018 raised a record $348 million in startup funding, the highest ever amount raised by any African startup ecosystem in years. The current year figure would also mean that 2018 was the best year for African startups in terms of the total funding raised.
- The above facts are also interesting because even though Nigerian startups secured the most funding, more South African Startups secured funding above $1 million compared to other startup ecosystems, with over 30% of the startups that raised funding above the $1 million threshold in Africa found in South Africa.
Below, we consider why more startups in South Africa are raising funds compared to other startup ecosystems.
A Large Presence of Local Investors And Equity Funds
South Africa unlike, other African startup ecosystems, has a very large presence of local investors such as venture capital funds, angel investors and other private equity funds who are increasing their stakes in local startups.
Indeed, while other African startup maintain little or no presence of sigificant early stage investors, South Africa has more of these ventures. Top South African companies in 2016, for instance, launched the R1.4-billion SA SME Fund, a VC fund to co-invest alongside various investors (not solely VC investors). SA SME Fund CEO Ketso Gordhan further said the fund would invest over R1-billion or 75% of its R1.4-billion funds in black-owned small and medium-sized enterprises, including tech startups.
Just recently, South Africa’s SME Fund and the government’s Technology Innovation Agency (TIA) also announced a public-private partnership to co-invest R350 million across three venture capital funds. A Memorandum of Understanding (MOU) was signed between TIA and SME Fund at the Innovation Summit in Cape Town on Friday 13 September, 2019. The partnership sees over R350 (over $23 million) invested in three venture capital funds. These fund managers will invest in a portfolio of early stage businesses and provide capital, as well as other support, to the entrepreneurs, to help them commercialise technologies and grow their businesses. The South Africa’s SME Fund’s mandate to the three fund managers includes a requirement that they invest at least 50 percent of the fund into businesses owned by black entrepreneurs.
Notable active VCs in South Africa include AngelHub Ventures which today provides pool funding, expertise and networks to foster startup growth. The firm has supported startups such as GoMetro, Snapplify and AmaLocker. 4Di Capital through its Early-Stage Technology Fund 1 is aimed at startup investment opportunities with big growth potential at the seed and early stages in the mobile, enterprise software and web sectors. 45i Capital apart from running Grindstone Accelerator, has invested in Sensor Networks and Aerobotics. Knife Capital’s recent achievements include the exit of radar startup iKubu to Garmin in 2015. In 2017 Knife Capital invested in its first international deal, increasing its investment in 2018 in healthtech 5nines Technologies. Business Partners in 2012 launched a R400-million VC fund. Armed with that, it made investment in 19 South African startups. Business Partners funds startups in the clean energy, agri-processing, biotech and ICT sectors up to R25-million. Kalon Venture Partners has invested in companies such as SnapnSave, i-Pay and The Sun Exchange. See this article for more information. Edge Growth has a pool of over R900-million of early stage venture capital and has invested in more than 45 deals since launching its first fund in 2010. Its investment include funds for startups Sweepsouth, Mobenzi, Pioneer Academies and Everlytic. Invenfin is an early-stage venture capital fund that looks at ventures across all industries. Some notable portfolio members include ArcAqua, Ad Dynamo and Bos Brands.
The table below shows that more South African investors invested in local startups than any other African local investors doing same for their local startups between January and July, 2019.
S/N
|
Name of Startup
|
Country (Headquarters)
|
Country (Headquarters) of Lead Investor |
| 1 | Andela | Nigeria | London |
| 2 | SolarNow | Uganda | US, Tanzania |
| 3 | BitPesa | Kenya | Japan |
| 4 | Shortlist | Kenya | US |
| 5 | WhereIsMyTransport | South Africa | Mexico |
| 6 | Flow | South Africa | South Africa |
| 7 | M-Tiba | Kenya | France |
| 8 | RapidDeploy | South Africa | US |
| 9 | TeamApt | Nigeria | Nigeria |
| 10 | Sokowatch | Kenya | Ghana, US |
| 11 | Retail Capital | South Africa | South Africa |
| 12 | Daystar Power | Mauritius | Nigeria |
| 13 | PEG Africa | Ghana | European Union |
| 14 | mPharma | Ghana | Ghana, US |
| 15 | OneFi | Nigeria | Kenya |
| 16 | Aerobotics | South Africa | South Africa |
| 17 | Valr | South Africa | Seattle, US |
| 18 | Flexclub | South Africa | South Africa |
| 19 | Farmcrowdy | Nigeria | Atlanta, US |
| 20 | Kudi | Nigeria | San-Francisco, US |
| 21 | Centbee | South Africa | Antigua and Barbuda |
| 22 | Neopenda | Uganda | East Africa, US |
| 23 | mDaaS | Nigeria | Nigeria |
| 24 | Payitup | Zimbabwe | UK |
| 25 | Lori Systems | Kenya | Undisclosed |
| 26 | Instadeep | Tunisia | Tunisia, US |
| 27 | Gokada | Nigeria | San Francisco, US |
| 28 | MyDawa | Kenya | Mauritius |
| 29 | Intergreatme | South Africa | South Africa |
| 30 | GovChat | South Africa | South Africa |
| 31 | Safeboda | Uganda | Germany |
| 32 | Swvl | Egypt | Sweden, Dubai, China, Egypt, Kuwait |
| 33 | TymeBank | South Africa | South Africa |
| 34 | Arnergy | Nigeria | EU, Norway |
| 35 | Max | Nigeria | Nigeria, Kenya, Japan |
| 36 | Lulaland | South Africa | World Bank, Washington US |
| 37 | Twiga Foods | Kenya | France |
| 38 | Sweep South | South Africa | South Africa |
| 39 | Inclusivity Solutions | South Africa | The Netherlands |
| 40 | Rent to Own | Zambia | The Netherlands |
| 41 | Opay | Nigeria | China |
| 42 | 54gene | Nigeria | US |
| 43 | Enko Education | South Africa | South Africa |
| 44 | Lynk | Kenya | New York, USA |
| 45 | Yumamia | Egypt | Saudi Arabia |
Additionally, South Africa Receives More Share of All Private Equity Investments in Sub-Saharan Africa
In addition to the numerous local investors, South Africa is also receiving a wave of investment from international investors and private equity firms. According to Asoko Insight , South Africa is the main target of investment on the continent with 39% of the total offices set up by these investment firms. Kenya comes second with 14% and Nigeria is third with 13%.
The Increasing Role Of Crowdfunding
2019 has quite been significant for South African startups, with Intergreatme and Beerhouse raising substantial sums from Uprise.Africa, a crowdfunding platform in record-breaking deals. Crowdfunding refers to raising money from the public (who collectively form the “crowd”) primarily through online forums and social media. At a time when most African countries are yet to open their doors up to crwofunding, South Africa is increasing the chances of startups raising capital through this means. Enabled by the friendly legal framework on crowdfunding in South Africa, Africa’s first equity crowdfunding, Uprise.Africa, and South African alternative exchange ZAR X recently entered into an agreement that will see the mini stock exchange list any up-and-coming entities, which have already successfully raised capital via crowdfunding, and freely trade their shares on the open market. Not only could the arrangement be the funding gap filler that fledgling South African entrepreneurs desperately seek, but it could bring the local capital market to the people. The partnership also solves the fundamental flaw of all other pre-IPO models, namely that once a company has issued the shares they remain fairly illiquid, with investors having their funds tied up until that company looks at going public. Tabassum Qadir, co-founder, and CEO of Uprise.Africa says they plan to conclude at least three deals a month.
“We are simplifying venture capital through this mutually beneficial partnership for both entrepreneurs and investors,” Qadir says.
Reducing The Risk Exposure of South African Startup Investors Through Legislation
One significant role government has played in enabling more inves in South African startups is the introducing in 2009 Section 12J tax incentive, which gives tax relief to investors for investing in qualified Venture Capital Companies (VCCs). The objective of section 12J is to create and maintain employment and to grow the economy and ultimately the tax base. The incentive allows investors who make investments in approved VCCs — that then invest in qualifying small companies — a tax deduction. Section 12J was introduced with a “sunset clause” that takes effect on 30 June 2021. It is not clear whether the incentive would be extended.
By operation, Section 12J, enables venture capital firms to upon investment in an approved venture capital company (VCC), claim an income tax deduction in respect of the expenditure actually incurred to subscribe for VCC shares. For example, if an investor subscribes for shares in an approved VCC for R100,000, that taxpayer will be entitled to an income tax deduction of R100,000 against taxable income.
A lot of venture capital firms have been opened in response to Section 12J, notable among them including Kalon Venture Partners, KNF Ventures, Kingson Capital and Grovest.
In February, it was revealed that Vinny Lingham is involved in one 12J fund, the Lion Pride Agility VCC Fund, through his investment company Newton Partners.
Other notable South African startup ecosystem boosters include a large presence of incubators and other private equity firms.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world