AUGUST 2018
EVALUATION & NETWORK ANALYSIS OF THE CAPE TOWN- STELLENBOSCH TECH SECTOR ABOUT ENDEAVOR INSIGHT: Endeavor Insight is the research division of Endeavor, a non-profit organization that supports high- impact entrepreneurs across the world.
Our work seeks to answer three questions: 1 How do entrepreneurs reach scale individually at their companies? 2 How do entrepreneurs reach scale collectively in local networks and ecosystems? 3 What can policymakers, philanthropic leaders, investors, support organizations, and other stakeholders do to empower more entrepreneurs to scale?
Over the last five years, Insight’s work across five continents has been supported by a broad range of foundations and other organizations. The methodology utilized in this study builds on previous Endeavor Insight research supported by the Omidyar Network, the Kauffman Foundation, the World Bank, the Inter-American Development Bank, as well as partners within the Global Entrepreneurship Research Network.
SPECIAL THANKS This project was commissioned and developed with the assistance of the Cape Innovation and Technology Initiative (CiTi) (which runs the Bandwidth Barn hubs), Allan Gray Orbis Foundation, and Wesgro - with kind support from the Western Cape Government. As well as assistance from Silicon Cape and members of the Endeavor South Africa team, especially Andrea Neiman and Catherine Townshend. This project was conducted as part of the Global Entrepreneurship Research Network’s initiative to map entrepreneur communities. In addition, the following research assistants and analysts were critical to the project’s success: Kathryn O’Neill, Scott Unwin, Penmai Chongtoua, and Yuniya Khan.
AUTHORS: Maha AbdelAzim, Associate at Endeavor Insight ([email protected]) Rhett Morris, Director of Endeavor Insight ([email protected]) INTRODUCTION
The findings summarized in this report South Africa, Cape Innovation and Though the size of the local tech sector are drawn from interviews with more Technology Initiative (CiTi), and Silicon does not allow for the deepest forms than 150 technology entrepreneurs Cape. The methodologies used in of network or econometric analyses, in the Cape Town metropolitan area, this research have been developed comparative metrics were utilized to as well as secondary data on over by Endeavor Insight along with other compare Greater Cape Town’s tech 450 local tech founders and their organizations that participate in the entrepreneurship community to several companies*. For the purposes of this Global Entrepreneurship Research peer cities on the African continent. research, software and technology firms Network and are implemented in The following sections of this report were defined as those whose primary dozens of cities across the world. will share findings on the size and business activity fell into the categories The goal of this project was to productivity of the entrepreneurship of either software development, fintech, answer two research questions: community, motivations of local or e-commerce. In addition, the Cape entrepreneurs, network analysis Town-Stellenbosch area was defined 1. What is the current state of of the sector, key challenges that to include both the Cape Town and the software entrepreneur impact opportunities for growth, and Stellenbosch metropolitan areas, and is community in the Cape Town and recommendations for future expansion. also referred to as “Greater Cape Town” Stellenbosch metropolitan areas? or simply “Cape Town” in the text. 2. Where do opportunities exist to These interviews were conducted further the growth of this community in late 2017 and early 2018 with the so that it continues to generate jobs assistance and support of Endeavor and economic value for the region?
* Unless otherwise noted, all figures reflect year-end totals for 2017.
3 GREATER CAPE TOWN HAS A COMMUNITY OF MORE THAN 450 ENTREPRENEURIAL SOFTWARE COMPANIES WITH A RELATIVELY HIGH FOCUS ON E-COMMERCE AND SOFTWARE AS A SERVICE
Analysis by Endeavor Insight indicates that the Cape Town area GLOBAL INNOVATIVE FIRMS tech sector includes between 450 and 550 entrepreneurial Cape Town has produced multiple firms that have stood companies working in software development, e-commerce, out for their innovative breakthroughs and who have a or fintech. These firms are typically led by small teams of strong global presence as a result. Clickatell, for example, founders, averaging to about 1.7 cofounders per company. developed the first mobile messaging API and was hired by the US State Department to send text message excerpts FOCUS ON E-COMMERCE AND SAAS. to global citizens during Obama’s 2009 speeches in Cairo Of the entrepreneurs interviewed for this project, roughly and Accra1. The data mining firm BrandsEye is also known 20 percent were each working in the e-commerce and for its prediction of both the British exit from the European SaaS sectors. The next largest industry was fintech, Union, and the outcome United States presidential election with about 15 percent of respondents. Many of these in 20162. Finally, what is perhaps the most obvious example companies have a direct-to-consumer focus.
4 of Cape Town’s impact in the tech sector is the internet THERE IS A VERY HIGH PREVALENCE OF VC giant Naspers, Africa’s highest-valued tech company3 FUNDING IN CAPE TOWN. Roughly one third of and a massive tech investor on a global scale. the companies in this study have received some form of angel investment or venture funding. This number Getsmarter, an Edtech firm that provides online certification is higher on average than the rates in comparable courses in partnership with some of the world’s top cities like Lagos, Nairobi, and Johannesburg. universities, is another more recent example of these firms. Last year, the company was acquired by the Edtech giant 2U for $103 million4, the equivalent of over 1 billion rand.
5 TECH ENTREPRENEURS CHOOSE TO START THEIR COMPANIES IN CAPE TOWN BECAUSE OF THE LIFESTYLE AND ITS VALUE AS A TECH HUB.
What makes the Cape Town area an living in the area wanted to continue a great environment to feed off of from attractive location for launching a living there and start their business there other entrepreneurs and startups.” technology company? Endeavor Insight for the quality of life and ecosystem. The importance of the local tech asked local tech entrepreneurs why These factors often overlapped in the business community can also be seen they chose to start their businesses in responses. As one founder noted “I was in the frequency of specific words that this community during the interviews living in Stellenbosch at the time and it is entrepreneurs used when discussing conducted for the study. Results show an incredibly inspirational place to start why they selected the city as the that there are some characteristics a business.” Another founder responded location for their firms. Terms such as of the city in particular that are highly that “it is the start up capital of South “business,” “tech,” and “companies” valued by these entrepreneurs. Africa and I had just finished studying were mentioned more than almost at UCT so it was a perfect match.” The most commonly cited reason for any other words by the respondents. launching a firm in the Cape Town area The second most commonly cited Additionally, the word “business” was was a practical one: the area was where reason was the perception of Cape often directly associated with the word entrepreneurs were living when they Town as a tech hub. One founder “tech,” suggesting that many businesses first decided to start their companies. responded that Cape Town has an are interconnected with this sector. This rationale is actually common and incredible tech and startup scene with has been seen in other cities studied creative and innovative minds because by Endeavor Insight. What stands out “people are willing to take a leap of is the recurring logic - many founders faith and put themselves out there; it’s
EXAMPLE RESPONSES ON LOCATION DECISIONS AMONG LOCAL SOFTWARE FOUNDERS
“THERE IS A BETTER TECH SCENE IN CAPE TOWN, A BETTER MEETUP ECOSYSTEM AROUND TECH. FOR EXAMPLE, I HELPED SET UP A DEEP LEARNING MEETUP HERE THAT WOULD NOT HAPPEN IN PLACES LIKE JOHANNESBURG. MOST OF THE TECH CONFERENCES HAPPEN IN CAPE TOWN BECAUSE IT IS MORE OF A TECH HUB.”
“IT WAS CONVENIENT BECAUSE I ALREADY LIVED HERE. IT IS A GOOD ECOSYSTEM TO BE IN BECAUSE CAPE TOWN IS A CREATIVE HUB. I HAD BUILT A STRONG NETWORK ALREADY WHICH MADE IT EASIER.”
“WE WERE HERE. EVERYTHING WAS HERE. FINANCES WERE HERE. THERE’S SOMETHING ABOUT STELLENBOSCH AND ENTREPRENEURSHIP, OPPORTUNITIES AND FUNDS. CAPE TOWN HAS A DIFFERENT FEEL TO IT.”
“PRIMARILY BECAUSE I HAVE A GOOD NETWORK HERE AND ALSO BECAUSE IT’S A VERY CONDUCIVE ENVIRONMENT – GOOD INFRASTRUCTURE, GREAT LIFESTYLE AND LOTS OF WEALTHY INDIVIDUALS AND INVESTORS.”
6 “WHY DID YOU CHOOSE TO START YOUR BUSINESS IN CAPE TOWN OR STELLENBOSCH?”
MOST COMMONLY MENTIONED WORDS AMONG TECH FOUNDERS LISTED FROM MOST FREQUENT TO LEAST FREQUENT
Living Place Hub Business University Moved Tech Ecosystem Support People Africa Access Lifestyle/Quality of Life Talent Based Market Companies Work
Lifestyle was the next most frequently Different characteristics of the lifestyle a lot from coffee shops along the coast.” mentioned factor for why founders chose in Cape Town attracted founders in It is also important to note that local to start their companies in Cape Town. various ways. Some respondents found universities and major companies One founder responded that “the lifestyle that the lifestyle was less corporate were also cited frequently as of Cape Town promotes creativity, than other places in South Africa. One bringing significant numbers of innovation, and inspiration because of founder noted that “Cape Town is educated or soon-to-be-educated the mountains, ocean and nature. People more of a tech hub than Johannesburg residents to the city. This may play are coming here to be creative and with a less corporate feel and a bigger an important role in contributing to innovative. They’re drawn to it. There’s concentration of tech companies and the number of new tech founders. a tech culture that has boomed here support organizations.” Another founder with technically innovative products.” reported that “no one goes to the office on the same day and instead we all work
7 PRODUCTIVITY AMONG ENTREPRENEURS IN CAPE TOWN COMES FROM A SMALL NUMBER OF COMPANIES THAT REACH SCALE
Entrepreneur communities do not benefit 1. THE MAJORITY OF Most of the local their cities simply by creating large ENTREPRENEURIAL TECH COMPANIES entrepreneurship numbers of companies. The value that WORLDWIDE ARE EARLY STAGE WITH support organizations they provide comes from entrepreneurs VERY LOW RATES OF PRODUCTIVITY. generating economic productivity. THIS IS ALSO THE CASE IN CAPE TOWN. working in the Cape Town area Entrepreneurial productivity can be measured Generally speaking, the majority of tech target early-stage in a number of ways. Analysis from previous companies are small early-stage companies research suggests that many of these metrics companies. with little tangible impact on local job creation, tend to correlate with each other, especially economic growth, or other measures of among companies operating in the same productivity6. In Cape Town, the majority of community and in the same industry5. local companies interviewed for this study The most productive entrepreneurs raise are micro-businesses with five or fewer more capital, hire more employees, and employees that have raised no venture capital. generate more sales than less productive Though data was not collected on sales, founders working in the same regions. these firms are likely to be generating very low revenues at this point in time. The small For the purposes of its research, Endeavor contribution each of these companies makes Insight measures entrepreneurial productivity to productivity is likely to shrink even further, primarily by comparing the number of as firms at this stage have a high rate of failure. employees at each company. This metric was selected from the set of correlated As the next section shows, the significance measures of entrepreneurship productivity of these companies is therefore less in because it was both widely applicable – e.g., their combined productivity and more not all tech firms require outside capital on their potential impact if they are – and was the metric that founders were able to successfully reach scale. most willing to share during interviews. Analysis of the data collected for this study on hundreds of local founders suggests two important conclusions on the generation of productivity among tech entrepreneurs in Cape Town.
8 EMPLOYMENT CONTRIBUTION AMONG CAPE TOWN TECH COMPANIES
100% Companies with 100+ employees 90%
80%
70%
60% Companies with 100+ employees
50% Companies with 1 to 99 employees
40%
30%
20%
10% Companies with 1 to 99 employees
0% FIRMS EMPLOYMENT
2. THE MOST IMPORTANT SOURCE significantly more employment than all However, even when controlling for the OF PRODUCTIVITY AMONG the other companies in the local tech size of Naspers, companies with 100 or TECH ENTREPRENEURS IN CAPE community. more employees still generate almost TOWN IS A SMALL NUMBER half of the employment in the sector. This Within these companies, Naspers OF COMPANIES THAT REACH highlights the importance of Cape Town’s alone accounts for about 80 percent of SIGNIFICANT SCALE. scaled companies in driving productivity, employment in the sector - easily the and potentially the need for more Local companies that reach highest contribution of an individual companies like this to drive Cape Town’s significant scale are responsible for tech company to a tech sector out of the growth without relying too heavily on one a disproportionate amount of the cities previously studied by Endeavor company. productivity in Cape Town’s entrepreneur Insight. By comparison, Bangalore’s tech community. As the chart above sector has produced roughly 500,000 illustrates, around 15 entrepreneurial jobs and the combination of its three companies in city’s tech sector have largest companies - Wipro, Infosys and grown to have 100 or more employees. Flipkart, is only about 40 percent of total However, these firms have produced employment7.
9 OVERALL, CAPE TOWN’S TECH SECTOR IS DISTINCTIVELY PRODUCTIVE COMPARED TO OTHER AFRICAN TECH SECTORS
In 2017 and 2018, Endeavor Insight gathered higher if employment is used as a measure. Cape Town data on software founders in Nairobi as As the graphic on the following page outperforms these well as Lagos as part of a study for the Bill illustrates, Nairobi has nearly twice as many cities in relative & Melinda Gates Foundation, which will software companies but has less than a be released later in 2018. Initial analyses fifth of the employment. Lagos also has productivity because of the data from that study shows that the over twice as many software firms as the it has fostered Cape Town area compares favorably to Cape Town area but has only generated the development these two other African tech centers. less than a quarter of the employment9. Even if the impact of Naspers is excluded, of more firms at Both Nairobi and Lagos have more software the average company size in Cape Town significant scale companies than the Cape Town area with is still larger than both these cities. 2017 estimates ranging from 700-800 in Nairobi and 800-900 in Lagos8. Cape Greater Cape Town outperforms these Town has generated an objectively higher cities in relative productivity because it level of productivity than Lagos and Nairobi has fostered the development of more of combined if employment is used as a measure. the firms at significant scale discussed Cape Town’s tech sector has generated in the previous section. Approximately 1 over 40,000 employees compared to over percent of software companies in Nairobi 9000 in Lagos and 7000 in Nairobi. have reached 100 or more employees and only 2 percent of software firms reach that COMPARATIVE ENTREPRENEURIAL level of scale in Lagos. In the Cape Town PRODUCTIVITY. area, between 3 and 4 percent of local Greater Cape Town has a smaller number tech firms reach this level of scale10. of tech firms than Nairobi and Lagos, but its relative productivity is significantly
10 COMPARISON: NUMBER AND PRODUCTIVITY OF SOFTWARE ENTREPRENEURS IN CAPE TOWN, LAGOS,& NAIROBI
NUMBER OF SOFTWARE COMPANIES
800 - 900 FIRMS
700 - 800 FIRMS
350 - 450 FIRMS
EMPLOYMENT AT SOFTWARE COMPANIES
12,000 - 14,000 JOBS
7000 - 9000 JOBS
10,500 - 12,500 JOBS
11 GREATER CAPE TOWN’S TECH SECTOR IS NOTABLY DYNAMIC, WITH A HIGH PERCENTAGE OF COMPANIES REACHING SCALE IN THE PAST DECADE AND ACTIVELY SUPPORTING OTHER LOCAL TECH COMPANIES
OUTGOING CONNECTIONS OF CAPE TOWN TECH COMPANIES
† % OF CONNECTIONS Entrepreneurial tech communities with not necessarily affect a company’s mentorship, and investment . a high percentage of companies that performance, but connections from By studying the relationships in have reached scale can often be skewed founders at scale, especially mentorship entrepreneurship networks, it is LEGEND: towards older companies. In Cape or former work experience, can possible to follow the movement of = COMPANIES WITH 100+ EMPLOYEES Town, however, this higher proportion significantly increase a company’s people, knowledge, and capital, and = COMPANIES WITH 1–99 EMPLOYEES of scaled companies also remains likelihood of reaching scale. Mentorship use this to draw lessons on the state true for all companies founded in the from the founder of a scaled company, of the entrepreneurship community. Source: Endeavor Insight. past decade. While only 1 percent of for example, can increase a company’s Cape Town’s tech companies seem to be companies founded in the past decade likelihood of reaching scale by nearly seeking support in the right places. As the have reached 100 employees or more double or more12. This applies to tech chart above shows, a large percentage of in Lagos, and less than 1 percent in sectors at various sizes including support for tech entrepreneurs is coming Nairobi and Johannesburg11, 3 percent New York, Bangalore, and Nairobi. from Cape Town’s largest companies. of the companies founded in the past A HIGH PROPORTION OF CAPE Most notably, roughly 30 percent of decade have reached this level of scale TOWN’S FOUNDER TO FOUNDER founder to founder mentorship comes in Cape Town. This is a critical indication SUPPORT COMES FROM SCALED from companies with 100 or more of the dynamism of the sector. COMPANIES Endeavor Insight also employees, compared to only 12 percent SUPPORT FROM THE FOUNDER analyzed the connections that exist in Lagos, 4 percent in Nairobi, and much OF A SCALED COMPANY among software firms in the area using lower rates in Johannesburg, where SIGNIFICANTLY INCREASES A a methodology developed by members scaled companies are typically older and COMPANY’S LIKELIHOOD OF of the Global Entrepreneurship Research much less involved with supporting other REACHING SCALE Network*. This methodology looks tech companies13. Some of the most Previous research by Endeavor Insight at four specific relationships among active mentors in this category include has found that connections with founders and their companies: serial the founders of Wigroup and Clickatell. other entrepreneurs in general do entrepreneurship, former employment,
*This methodology was based on initial research conducted by Endeavor Insight and that primary member organizations involved in developing this methodology were Endeavor Insight, the Kauffman Foundation, MaRS, Nesta, and the World Bank. † Investment variables were included in the analysis of potential predictors even though investment itself can be considered a measure of productivity or market validation and is highly 12 correlated with reaching scale. Cape Town’s scaled companies are also ordering and delivery platforms15. These investment, former employee and serial strongly involved as investors - roughly investments have also spanned other entrepreneurship connections, only 20% of investment from tech companies regions with a large number taking about a third are companies with 100 or or founders comes from them. Within place in Brazil and the United States. more employees. This means that there these, the majority of investment is still room for them to become more THERE IS STILL ROOM FOR MORE unsurprisingly comes from Naspers, a actively involved in the ecosystem. ENGAGEMENT - CAPE TOWN’S massive tech investor on a global scale. SCALED COMPANIES ARE The following graphic illustrates the Naspers has also made dozens of ACTIVELY INVOLVED, BUT THEY different types of connectivity in the investments in tech companies ARE NOT THE MOST INFLUENTIAL sector over time and the outgoing across the world, including Emirati COMPANIES influence of each company. e-commerce giant Souq.com, which Out of the top ten percent of most has been acquired by Amazon14, and influential companies, i.e. companies Swiggy, one of India’s largest food with the most outgoing mentorship,
VISUALIZATION OF THE ENTREPRENEUR NETWORK AMONG SOFTWARE COMPANIES IN GREATER CAPE TOWN
TECHNIRVANA ISPANI SNAPNSAVE CRAFT ACE SONGROLLER IKASI NOTES JUGGL EVENTERPRISE EXPRESSION PROPERTY SOURCE GROUP CATALYST MOJOREPORTER DIGITAL KARRI SPONTY
LIFEQ BRITECAP BACKABUDDY UPRISE WUMWUM SOULV THE BET.CO.ZA BETTECH SOFTWARE HAPPINESS AFROZAAR GAMING NETWORK RECAST/LABS.FM RETHINK FUMANA UMUNTU EDUCATION SOUNDSREAL UBUNTUDEAL MEDIA PERK FRONTCREW OPEN LEASE 2GO CLICK2SURE HEALTHQ TEAMDOX TECHNOLOGIES PET HEAVEN UTHINI HUBBLE UNBRANDED KABOOSE THUNDAFUND STUDIOS DESIGNS SMSWEB PLAYLOGIX CREATE WHITE HIRING REDPANDA IT DOMESTLY INSTANT WALL BOUNTY MAXXOR SOFTWARE ALL AFRICA WEB
HI5 DALI TEAMGAGE MIMIBOARD 5OUNCES TECHNOLOGIES WALA
CHESSCUBE PADDOCKS APPY WYZETALK GETSMARTER EVER LULALEND PYPE.COM AFTER COMPREHEND VIRTUAL CURIOUS IT MOBILE QUESTIONS OPEN GETWINE LINUM ENTERSEKT TECHNOLOGIES CC BOX LABS CLANDESTINE REKINDLE WUMDROP SOFTWARE INSIGHTS LEARNING WIGROUP VISUAL BIZCALL M4JAM TOURS MAGNETICHQ Before 2003- 2008- 2013- Year 2002 SNAPPLIFY FUNDAMO 2007 2012 2017 Founded
OFFERZEN GOMETRO CARZAR URBIAN GROWING INTERNET AGILE PRO CABLEKIOSK SHOPPINGFEEDER LIBRYO PRICECHECK THE NASPERS MEMEBURN DATING LAB AIRBORNE
SA THE FLORIST MYGATE GREATSOFT STUDENT COMMUNICATIONS HUB/ERAONLINE MYKINDAPRICES.CO.ZA BRANDSEYE PIMP MY NUMBERBOOST SWIST JUMO.WORLD BOOK FUNDAMENTAL TECHNOLOGY THAWTE SOFTWARE SOLUTIONS CLICKATELL CONSULTING TRAVELSTART LADYCOMPSHOP TUYU SYNTHASITE/YOLA SASA.FINANCE FIREPAY/SNAPSCAN MXIT PIILO
AUTEEMATIC LESSFUSS HQ AFRICA WOOTHEMES ELECTRIC OVER EGG NIOCAD JUMPIN EKAYA URAHISI YEIGO RIDES PROPERTY TUBE FONTERA TALLORDER AFRIGATOR ORDERTALK RAINFIN SOLUTIONS LEAP.LY NICHESTREEM EMERGE EASY2MAP MOBILE HEPSTAR DATAPROPHET QUICKET SAMPLEBOARD FLEXY TWANGOO CITIDOC CLOUDONE.MOBI ZLTO THE TRAINING PAYMENT24 MONEYSMART 5 ROOM SWEEPSOUTH GUST ROOMS PAGEMAN ONLINE PAY TAKEALOT RUNWAY DIARIZE.ME SALE THE DONT DROPOFF HEALTHCENT PARTY BUZZFINDER T/A SIGNAPPS IKHOKHA BSAVI ZAPACAB BETTR FINANCE SPATIALEDGE SUDONUM PICUP BOZZA TECHNOLOGIES WASHR FITKEY THISISME YETHU SKILLUP WHEREISMYTRANSPORT YOCO 8BIT TUTORS BLOCKCHAIN YUEDILIGENCEACADEMY BITSURE SPRINGLEAP FLICKPAY RECEIPTFUL/CONVERSIO WAHI
ENTITIES: TYPES OF CONNECTIONS: ENTREPRENEURIAL COMPANIES Serial entrepreneurship Size of the circle reflects the number of outgoing Former employment connections from the founders of each entity. Mentorship Founders are represented by their most prominent company. Angel investment
13 ACCESS TO HUMAN CAPITAL IS THE MOST CRITICAL OBSTACLE REPORTED BY TECH FOUNDERS IN THE CAPE TOWN AREA.
Endeavor Insight evaluates the challenges ACCESS TO TALENT. faced by local founders by assessing them Access to talent was the most Only about half as across three key areas: access to customers, frequently cited challenge, with about many respondents access to talent, and access to equity financing. 67 percent of respondents ranking it as Founders are asked whether or not they a serious or very serious obstacle. considered access consider these elements to be serious or very The majority of these respondents indicated to equity as a serious challenges to operating their business. challenge compared that access to technical talent specifically to access to talent. Typically, challenges are assessed by was a serious or very serious challenge. One examining those cited by all founders and founder claimed that “our core strength is in those cited by founders at large companies our technology. Finding talented developers to separately. Due to the relatively small size of help us build that technology is a major hurdle.” the entrepreneurial tech sector in Cape Town, Many founders attributed these difficulties to the analysis in this report could only examine offering competitive salaries compared to the the challenges as reported among all founders. most established firms. One founder noted However, this yielded several interesting that “larger tech companies are offering huge findings. Most notably, compared to founders salaries to developers and pricing the small in Lagos and Nairobi, software entrepreneurs start-ups out of the market for development in the Cape Town area were much less likely to talent.” Paralleling this sentiment, another report that access to equity funding is a serious founder stated that there is “difficulty in hiring or very serious obstacle and were much more good talent and paying competitive salaries.” likely to identify access to talent accordingly. The findings below are based on the responses of the 150 entrepreneurs who participated in this survey.
14 “IS THE FOLLOWING A SERIOUS OR VERY SERIOUS OBSTACLE TO OPERATING YOUR BUSINESS IN CAPE TOWN/STELLENBOSCH?”
PERCENTAGE RESPONSES AMONG INTERVIEWED TECH FOUNDERS
ACCESS TO ACCESS TO ACCESS TO EQUITY CUSTOMERS TALENT FINANCING
LEGEND: = CHALLENGE = NOT A CHALLENGE EACH SQUARE REPRESENTS 1% OF RESPONDENTS
Source: Endeavor Insight.
ACCESS TO EQUITY FINANCING. Yet, those who did find raising funding to ACCESS TO CUSTOMERS. Raising capital to start or grow a business be difficult often ranked it as their most The presence of the tech hub that is rarely easy anywhere in the world. critical obstacle. One founder noted created many local businesses and However, on average, only about half as that “the investment landscape in Cape clients was listed as a key strength many respondents considered access Town still has a long way to go” perhaps by many of the entrepreneurs when to equity as a challenge compared because of the slow and timely process explaining why they are located in to access to talent. Roughly 32% that it takes to receive outside capital. Cape Town. Overall, only 20 percent of the entrepreneurs interviewed of the founders interviewed listed reported that access to equity was a access to customers as a serious serious or very serious obstacle. or very serious challenge.
15 IN ORDER TO MAINTAIN THE DYNAMISM OF THE LOCAL TECH SECTOR, LEADERS IN THE CAPE TOWN SECTOR SHOULD TAKE ACTION IN FOUR AREAS.
Cape Town is arguably the most productive skills needed to find, train and retain talent. and impactful tech hub in sub-Saharan There is also room for more of these Africa. It has generated the continent’s Cape Town is arguably organizations to focus on developing talent. most highly valued tech company as well the most productive Cape Town already has a strong potential as other software businesses that have and impactful tech hub talent pool given the strength of its local reached scale, exited for significant sums, universities and its attractive lifestyle and in sub-Saharan Africa. or grown to become leading businesses reputation as a tech hub. Existing coding on the continent. However, the sector’s schools, which help develop this talent but do productivity is still highly skewed towards not necessarily focus on helping entrepreneurs Naspers and contains the potential to develop find talent, could be more strongly more successful, high-scaled companies. integrated into the entrepreneurship support In order to ensure that the Cape Town ecosystem as a resource for entrepreneurs. area continues to produce productive Some initiatives such as CiTi’s CapaCiTi tech entrepreneurs who generate large programme, CodeX and Code for Cape Town, numbers of jobs and economic value for the already work with a focus on connecting community, Endeavor Insight suggests that their students to potential employers16. leaders should focus on the following four RECOMMENDATION 2. AVOID THE recommendations. These are drawn from “MYTHS OF QUANTITY” – BELIEFS research in entrepreneurship communities THAT MORE STARTUPS, SUPPORT across dozens of global cities as well as ORGANIZATIONS, OR CONNECTIONS Endeavor’s first-hand experience supporting WILL GENERATE INCREASED more than 1,000 fast-growing global ENTREPRENEURIAL PRODUCTIVITY. entrepreneurs and operating Endeavor Catalyst, one of the most active venture capital It can be appealing to assume that the key to funds investing outside of Silicon Valley. fostering a more productive entrepreneurship community would be to increase the number RECOMMENDATION 1. of inputs to the local entrepreneurship system. FOCUS ON TALENT. Data from other cities shows that this is not the While funding is a major challenge in most tech case. If a larger number of companies led to a sectors including Cape Town, there is a much more productive community, then Nairobi and stronger focus on funding than talent within Lagos, which have more than twice the number Cape Town’s accelerators* and entrepreneur of tech firms and many more young, tech support organizations - despite the fact that companies, should be significantly outpacing talent was cited more frequently by founders the Cape Town area in terms of productivity. as a challenge. Many of these organizations Entrepreneurship plays a critical role focus on helping their companies build in countries like South Africa where connections with potential investors and unemployment is high. In many cases, South mentors, but very few of them emphasize Africans are forced into entrepreneurship as connections with talent pools or building the the only opportunity to create employment
*GALI defines accelerators as cohort-based, time-bound entrepreneurship support programs with specific start and end dates, typically between one to twelve months, which is consistent with the definition used in this research.
16 for themselves and may require support flipside, when experience and support the challenges that they identify as in doing so. However, evidence from this comes from people who do not have obstacles to the growth of their firms study shows that the type of support personal expertise in leading companies are likely to be true constraints of that will have the strongest impact on to reach scale, they are associated the local entrepreneurship system, job creation is in helping successful with little improvement in outcomes rather than the result of their lack of businesses grow rather than establishing or even lower rates of performance. experience or other internal challenges. larger numbers of micro-businesses. By the same logic, these studies also This can be especially helpful in This approach will also better allocate show that entrepreneurship support addressing talent shortages. Since these local talent - a resource that is already organizations like accelerators are much founders are hiring more employees in short supply - towards helping more effective when they help their than anyone else, they will have the local companies succeed, rather than companies connect to these successful best sense of the types of technical spreading it out over a large number founders. The most effective support talent and management talent that of less productive companies. organizations are founded or run by are short in supply, i.e., knowledge of people who have experience as founders specific programming languages or RECOMMENDATION 3. or C-Level executives of companies the ability to lead specific software INCREASE THE PREVALENCE OF that have reached scale18. Thus processes. These entrepreneurs are MECHANISMS THAT FOUNDERS focusing on the quality of connections also the most likely members of the AT SCALE USE TO INFLUENCE these organizations are building will community to have developed solutions YOUNGER ENTREPRENEURS, have a much stronger impact than to their human capital challenges that SUCH AS MENTORSHIP & simply increasing their number. can be scaled to benefit other firms. ANGEL INVESTING. The primary ways that the most Leaders should continue to seek the In place of a focus on the quantity of successful entrepreneurs in the feedback and input of local founders inputs in the community, leaders in the Cape Town area can support new on a regular basis, in order to identify Cape Town area should seek to maximize companies are by empowering their new constraints arising in the software the quality of interactions among local former employees leave to become community and to locate solutions to software entrepreneurs. A large supply of founders, by acting as local angel local problems that can be scaled. knowledge, social capital, and potential and venture capital investors, and investment funding already exists by mentoring entrepreneurs at among the founders of the community’s younger software companies. most successful tech companies. These founders are very active but RECOMMENDATION 4. LISTEN TO still underutilized in the community. FASTEST-GROWING FOUNDERS TO IDENTIFY THE MOST CRITICAL As previous and forthcoming research CONSTRAINTS OF THE LOCAL from Endeavor Insight has shown, ENTREPRENEUR COMMUNITY. when leaders of the fastest-growing local firms connect with entrepreneurs The founders of fast-growing companies at newer companies, it improves the are small in number, but critically rates of high-performance of these important. Because they are the best newer firms by double or more17. On the performers working in the community,
17 METHODOLOGY
GLOSSARY: businesses whose primary activity is not graphic design firms, BPOs, etc., as well Angel investment: an investment fintech and could be described as either as businesses in which internet and made by an individual, not as part of an software development (for enterprises mobile-based platforms are secondary organization in a company. or consumers) or internet/mobile-based platforms, such as print newspapers retail or services. and brick-and-mortar retail stores. Entrepreneurial firms: for-profit businesses started by an individual SAMPLING FRAME: 3. The company is entrepreneurial. (excludes government entities and local Companies were considered as “targets” Entrepreneurial companies are divisions of corporations based in other and included in the sampling frame those started by individuals. cities). if they met the following criteria: It excludes businesses Fintech companies: for-profit 1. The company was founded or that began as either: businesses whose primary activity is headquartered in the Cape Town/ using new technologies to support or a) Government entities, such as Stellenbosch metropolitan area. enable financial services. TTCL, which was privatized by the Companies were included if they were: government in Dar Es Salaam; or Mentorship: a connection through which a mentee will meet the mentor a) founded in the Cape Town/ b) Local divisions of corporations at least three times for a minimum of Stellenbosch metropolitan area, or based in other cities, such as Nairobi’s 30 minutes to discuss critical business Safaricom, which began as a division b) currently headquartered in the Cape issues. of Telkom Kenya, a subsidiary of U.K.- Town/Stellenbosch metropolitan area based and U.K.-founded Vodafone. Metropolitan area: at the start of after they were founded elsewhere. the mapping process, Endeavor Insight DATA COLLECTION: Target companies also included works establishes the boundaries of a The data collected for this project businesses that have closed after city’s metropolitan area using local input. comes primarily from surveys and being founded or headquartered in the The resulting area, therefore, may not interviews with local entrepreneurs and metropolitan area, or those that have always be perfectly within the statistical stakeholders. been acquired after being founded metro area. or headquartered in the area. We began by building a primary Serial entrepreneurship: the company list from multiple sources. 2.The company fits the definition founding of a company by someone who These include databases like Pitchbook, of a technology company. previously founded another company. D&B Hoovers, and Crunchbase, as well as Technology companies are defined as the portfolio companies of investors and SMEs (Small and medium-sized for-profit businesses whose primary entrepreneurship support organizations enterprises): used to refer to any activity could be described as either: operating in the city. We then reviewed company founded more than three years companies in the list to identify which ago. a) Software development for enterprises ones were targets based on the sampling (e.g., CRM and logistics systems, Spin-off: a company started by a frame in the previous section. Companies security software, outsourced software former employee of another company. must be founded or headquartered and app development), or consumers in the mapped city, entrepreneurially Startups: companies that were (e.g., mobile apps, digital gaming), or founded and in the selected industry to founded a maximum of three years ago. b) Internet-based or mobile-based retail be included. Target companies: entrepreneurial or services (e.g., e-commerce, fintech, Once the list was complete, we launched firms, founded or currently delivery platforms, content platforms). a mass outreach campaign asking the headquartered in the city’s metropolitan This definition excludes firms for whom entrepreneurs on the list to either fill out area and in the industry being mapped. software development is a secondary a survey online or set up an interview Technology companies: for-profit activity, such as consulting firms, in-person or over the phone. The
18 interviews contain the same questions regardless of whether or not they had create an edge list of connections in the survey, but are adapted to be more been interviewed. The verification among organizations, along with a conversational. email contains a summary of all their corresponding set of four outbound connections, including those mentioned connections. We used that edge list The survey is designed to take no more by other founders (e.g. if another to create the network maps in D3. than approximately 15 minutes for interviewee they did not mention listed entrepreneurs to fill out. It has remained For each network map, we assigned them as a mentor). This allowed us to relatively unchanged over the past few every founder to one company or verify each connection on both sides. We years, with only some updates made organization. Where an entrepreneur collected and verified data on roughly to reflect city-specific factors or the has founded multiple companies, his 90 additional founders through this reticence of entrepreneurs in providing or her most prominent company based process. certain kinds of data. Endeavor main- on an index of founding date, number of tains confidentiality, and collected data NETWORK MAPPING: employees, total investment, and exit is accessible only to Endeavor and its Previous research by Endeavor Insight sizes represents his or her influence on research partners. has found that there are four main the map. Where an entrepreneur has connection types between. These are: founded an investment firm or support In order to ensure that the company list organization, their tech company takes is comprehensive, we built a secondary precedence if they founded one, followed list of companies mentioned in the 1. Angel investment; by their investment firm, followed by interviews and surveys that were not in their accelerator or support organization. the primary list. If an investor or support 2. Mentorship; organization that was not in the primary We calculated the size of an 3. Serial entrepreneurship, and list was mentioned in the survey, we organization’s circle based on also looked up its portfolio companies 4. Former employee spinoffs. directed closeness centrality for and added them to the secondary list. unconnected graphs. In other words, To learn about these connections The secondary list also included new the size of an organization is a function between tech founders, the surveys companies we found on LinkedIn while of the number of first-, second-, and interviews discussed above collecting data on entrepreneurs and third-, etc. degree connections the focused on four core questions: companies. After identifying targets organization and its entrepreneurs in this second list, we then launched 1. Who invested in your company? have to others in the network. another round of outreach. This process (This includes both angel and There is no limit to the degrees of was repeated multiple times depending institutional investors) separation that factored into the on the size of the city. 2. Who was your mentor during centrality score. For example, if one Over the course of this process, we the growth and development mentor led to a chain of mentorship reviewed over 1000 companies of your company? between entrepreneurs, the original to determine if they met the mentor’s centrality score increased even 3. Have you founded other tech aforementioned criteria and identified if the mentor only directly mentored one companies in your city? 450 tech companies. Out of these, entrepreneur. All connections on the we were able to gather basic data and 4. Which of your former employees map were weighted equally. Financials identify the founders of about 360 have gone on to found tech and employee counts did not factor companies. In total, we interviewed 153 companies in your city? into the organization’s bubble size. tech founders representing 170 tech The survey also asked about work Each ring on the map represents a time companies. and education history and we used period and companies are located Once all outreach was completed, LinkedIn to fill in the gaps for founders on a ring according to the year they we sent a verification email to all who did not respond. We used the were founded. The oldest companies founders of target companies, responses to these questions to are placed on the inner ring and the
19 most recently founded companies are .5 years. We then set the mentorship operating were included in the map and positioned on outer rings. The number year equal to the year the target analysis if it was possible to find enough of rings on a map depends on the size company was founded, and add .5 years data to target them. For companies that and development of the sector. to it, rounding to the nearest year. were acquired, we used the number of employees at the time of acquisition. Connections accrue to an organization Typically, companies are spread out based on the time period in which the over the map to facilitate processing We do not currently compare maps connections occurred. Where we do not the connections, and the proximity to randomly generated networks. know the year a connection occurred, of companies on the map does However, maps, sub-networks and the we take one of two different approaches. not necessarily reflect the degree strength of connections are compared Where we do not have year information of connectivity between the two. to other benchmarks, including maps for a former employee, investment, or However, the maps will occasionally of the same industry in other cities and founder connection, we assume that feature clustering sub-networks maps of sectors of a similar size. These the year of the connection between in order to emphasize the role of benchmark comparisons prove helpful the source and the target companies is specific companies in the sector. in understanding a sector’s timeline equal to the year the target company and characteristics of development. was founded. To estimate when a NETWORK ANALYSIS mentorship relationship started where Companies were only included in our LIMITATIONS we are lacking a start year, we reviewed analysis if it was possible to identify their We recognize that omitted variables mentorship relationships where we founding year. For companies whose might play a role in sampling and do have start year information. employee count could not be found, we therefore tried to offset resulting used the median number of employees adverse effects through our double For the mentorship relationships where for companies founded in the same interview, verification, and analysis this information is available, we find year, where companies founded over process. If gaps in or misinterpretations that the mean elapsed time between ten years ago were combined into one of the data are revealed, the map and company founding and mentorship is cohort. Companies that are no longer resulting analysis are corrected.
20 END NOTES 1. “Clickatell Acknowledged by Mobile Marketing Association – Awarded Finalist in Two Categories” Clickatell. 2009, ac- cessed July 20 2018
21 © Endeavor Insight August 2018