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.