Global Courant
Startup business concept pointing finger
The need for South Africa to create a more conducive environment for entrepreneurship and start-ups to build a competitive and fast-growing economy. Access to finance, especially venture capital (VC), is critical to growing the startup ecosystem and fostering innovation. The article suggests that South Africa’s pension sector, with its significant assets, could be a potential solution to address the funding gap.
Known as an innovation hub, the Western Cape has been actively working to attract more venture capital funding to boost the local economy. However, recent developments, such as the shutdown of Naspers’ South Africa-focused venture capital fund and concerns about financing start-ups amid rising interest rates and fears of a global recession, have raised questions about the availability of sufficient funding .
To ensure that local start-ups and small and medium-sized enterprises (SMEs) have the opportunity to thrive, the article proposes several measures. First, efforts should be made to close the funding gap, possibly by providing first-loss guarantees and incentives to encourage more pension funds to invest in venture capital. It is also proposed to reduce the regulatory burden on venture capital investments, to provide tax incentives or guarantees to support risk-taking and to create favorable conditions for start-up financing.
Pension funds have been reluctant to invest in start-ups because of the perceived risks. However, there is a growing interest among South African pension funds in venture capital, with some already committing money or showing interest. The article highlights the success of pension fund investments in the venture capital sector in the US, Europe and Nigeria, which have contributed significantly to the growth of successful ventures and startup ecosystems.
South Africa’s current position in seed financing lags behind countries such as Nigeria, Egypt and Kenya. The article emphasizes the need for targeted policy interventions and explicit guidance to boost pension fund investment in venture capital and make South Africa a top start-up hub. Clear policies, incentives and support are essential to unlock the potential of start-ups in driving economic growth, job creation and socio-economic impact.
Overall, the article highlights the importance of addressing the funding gap for start-ups and proposes leveraging South Africa’s pension sector as a potential source of investment through targeted policy interventions. By providing a supportive environment and access to finance, South Africa can boost its startup ecosystem, drive innovation, attract foreign investment and accelerate economic growth.
The way forward
In the Western Cape, the provincial government is trying to attract more venture capital to the region to boost the local economy and job creation.
Late last year, the Premier of the Western Cape, Alan Winde, led a delegation to Europe and one of the main goals was to promote the province’s tech ecosystem and explore closer cooperation with venture capital funds in London. VC is one of the few financial services sectors dominated by the Western Cape, in part due to the strong technology development ecosystem surrounding the province’s leading institutions such as Stellenbosch University.
Overall, most of the risk flows to the technology sector, including fintech and education technology, according to a recent industry report from the Southern African Venture and Private Equity Association (Savca), the industry association and public policy advocate for private equity and venture capital in the region . It rightly emphasizes that increasing investment in high-growth, early-stage companies is essential for fostering economic growth and innovation, and is imperative to tackling the challenges of poverty, inequality and unemployment.
This is also in line with the National Development Plan, a government blueprint to eradicate poverty and reduce inequality. The plan has ambitious targets for small businesses, including a target to create 90% of employment in this sector by 2030. To get anywhere near this goal, we will need to create a thriving ecosystem for entrepreneurship and start-ups. For this we need VC and pension funds more than ever. It’s an urgent conversation we should be having as part of our efforts to respond to some of the burning questions and challenges we face today.
HOW TO MAKE SOUTH AFRICA A NATION OF START-UPS
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