South Africa has plenty of good business ideas but there is a real need to develop the startup ecosystem to support these ideas, according to angel investor Tendai Shamu.
An angel investor provides initial seed money for startup businesses, usually in exchange for ownership equity in the company.
Shamu said: “We need more accelerators, more incubators, and, crucially, more interdisciplinary collaboration.”
He said that now is the perfect time for investors to take notice of South African businesses.
“Look at the progress in infrastructure and other sectors, and you’ll see that the country is on the right track,” Shamu said.
Shamu has previously worked at Barclays Investment Bank and Statoil in London which gave him invaluable experience in the corporate world.
“During that time, I was also actively involved in several angel investment networks, with the most notable success being Alter, which was eventually acquired by Google for $100 million,” the angel investor said.
Shamu said that the Alter deal was a pivotal in making him go full-time as an angel Investor.
He is currently with the First Serve Ventures with a focus on being the first investor at the earliest possible stage.
“I typically invest up to R500,000 in pre-revenue start-ups,” Shamu said.
“The goal of this funding is to help founders refine their ideas through research, testing, and iteration until they reach hat’s known as product-market fit. This is essentially when a product or service proves its value by gaining real traction in the market.”
The angel investor breaks thing down with the following example:
If a person has a business idea for a new kind of reusable water bottle, they would first need to research what makes current water bottles inconvenient such as the bottles being bulky or hard to clean.
Next, the person would need to create a prototype and test it with users. Based on the feedback, they would need to tweak the design until it solves those problems effectively.
“Only once people start buying it enthusiastically because it fits their needs would we say the product has achieved product-market fit,” Shamu said.
The rise of startups in South Africa
The South African startup ecosystem is some of the most promising on the continent, according to the Global Startup Ecosystem Index 2024 by StartupBlink.
The report said that Cape Town, particularly, stands out as a technology hub, drawing direct foreign investment and skilled talent from across the country plus it is also the hot spot on the African continent for digital nomads.
However, the SA startup ecosystem faces challenges, such as brain drain, highlighted by the departure of the country's only unicorn, G01, and subpar infrastructure due to load shedding.
Despite these challenges, the challenges in securing employment has spurred many young people to establish their own businesses which has resulted in a startup ecosystem predominantly led by youthful entrepreneurs.
The fintech industry is a major driver of innovation while the edtech industry is experiencing growth and has potential for expansion due to the high dropout rates in schools.
The National Youth Development Agency and the Small Enterprise Development Agency both support startup ecosystems by providing grants, loans, and relief options, as well as non-financial assistance, according to the report.
“In addition to public sector efforts, a network of startup ecosystem stakeholders are working together to create the South Africa Startup Act, which will be an interesting potential milestone once it is launched,” the report said.
Other entities that provide support and funding to South African entrepreneurs include the South Africa SME Fund, the Technology Innovation Agency, and the Design Innovation Seed Fund.
Key challenges such as corruption and insufficient infrastructure are delaying the progress of local startup ecosystems, and further contributing to brain drain.
The Silicon Cape Initiative, Endeavor South Africa, Plug & Play Tech Center, Injini, Grindstone, Founders Factory, and Digital Collective Africa have been some of the main enablers and promoters driving this growth.
This collaboration among stakeholders has created a vibrant national startup scene, making South Africa an attractive hub for entrepreneurs to build and grow their companies.
The report has also highlighted a few notable startups that are based in SA including: Cell C, Flow, Luno, TymeBank and Ozow.
Interest from investors in South African businesses
Shamu said that there has been interest in investors in South African businesses.
“I have only been on the continent for six months, but during that time, I have seen strong interest from foreign investors, particularly from Europe, where I was previously based,” Shamu explained.
“I often find myself on calls with foreign high-net-worth individuals, venture capital firms, and other angel investors who are eager to invest in South African businesses. They understand Africa’s trajectory and see South Africa as the best starting point.”
A report by David Saunders of Briter backs this up. Putting aside the 2021-2022 funding bubble, start-up funding has grown by 25% since 2019. This means that the momentum is there.
However, when comparing similar economies, SA is not allocating nearly enough capital to venture investment, especially ventures that are at the early stages which is something that needs to be addressed.
Possible challenges
Shamu said that South Africa has done an excellent job of improving its global reputation and reducing its perceived risk.
“When I am in London and amongst the circles of individuals who would be qualified to Invest in South Africa they are well aware of respected institutions like Investec, global success stories like Nando’s,” the angel investor said.
However, investors do need trusted local partners to guide them through uncharted waters.
Shamu said: “A great example is Launch Africa Ventures, which raised over $36 million for its first fund in 2020, 238 investors participated, but only 35 were South African. The firm invested in many South African businesses, including DigsConnect, HomeComingX, and Bosso.”
That said, a stronger appetite for investment needs to cultivate as South Africans should ultimately benefit most from their start-ups, not just foreign investors.
Negotiating with investors
This is an important question, but it highlights a common misconception.
Founders and investors should not see themselves as adversaries haggling over deal term. Instead they are partners that are working towards the same goal.
Shamu said: “Personally, I dislike the traditional pitch format. I prefer a conversation. Tell me about your idea something you know better than anyone else.”
Startups should share their unique insights about the market they want to serve and the edge they have over competitors.
“Let me see your vision clearly, without needing to persuade me. If you want to persuade anyone, persuade your customers, that will get every Investors attention,” Shamu said.
Advice for startups
Shamu share tips to help startups:
– Make sure the problem you are addressing is a real one. If it’s not a problem you or someone you know is personally dealing with, go find the people who are. That’s how you validate the problem.
– Then, test your solution with potential users. Try different approaches until you’re confident that your solution is the best fit.
– Finally, ensure that the market opportunity is substantial investors are looking for returns.
“If you articulate these three elements well, the rest can be figured out. Even if you’re not the ideal founder to execute the idea, we can find the right people to support you,” Shamu concluded.
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