aerial view of Cape Town, South Africa
PHOTO: John O'Nolan

Africa is the next big opportunity. 

The next billion is in Africa. 

#africaTechRising

As a proud South African and entrepreneur, I have heard the above buzzwords many times. But are they true? Is the African startup environment enabling enough to validate the buzz-worthy expectations?

Having started and exited a company in South Africa, and recently relocated to the Netherlands, I have a unique perspective on the subject. Clearly there are multiple geopolitical and historical reasons for the disparities that exist today, and while they are critical to the discussion, I have purposefully selected just a few key disparities to explore. For the purposes of this article, I will be examining the specifics of start-up life in South Africa and the Netherlands, rather than the broader continental dynamics.

Ambition Is Equally Distributed, Opportunity Is Not

After recently reading the CB Insights FinTech trends to watch in 2019, I was disappointed to learn that Africa was the only major continent not to birth a Fintech Unicorn ($1bn+ valuation) in 2018. With all this buzz, surely we could have expected at least one out of 39 last year? Having worked in both a South African and now a European startup ecosystem, I can unequivocally state South Africans share the same grit, determination and drive as the Dutch — if not more, at times. The challenge does not lie in any cultural differences in the entrepreneur’s ambition, but rather the opportunities that the respective ecosystems present to those entrepreneurs. So, what are the opportunities the Dutch get that South Africans do not?

Related Article: How to Run a Thriving Organization as a Startup

A 17:1 Exchange Rate Makes Competing on a Global Scale Difficult

In my first few months in Amsterdam, I assisted a fellow South African entrepreneur (who also now lives in the Netherlands) raise capital for a Dutch-registered data startup. 

The goal: 900,000 Euros (approximately 15 million ZAR) for a seed-round. This was enough for an 18-month runway, while remaining frugal on the development and user acquisition costs. The cash flow and team growth model would have looked very similar, building the same company in South Africa. The strategy was simple: leverage both of our networks in South Africa and simultaneously reach out to the European VC community. 

The result: Multiple engagements with European investors and mostly push-back by South African investors: the ask was simply too big for them. 

While a typical seed-round in South Africa ranges from 1 to 5 million ZAR, the typical seed-round in the Netherlands ranges from 8 to 16 million ZAR. However, a typical developer's salary in South Africa is also less than half of a Dutch developer's salary. As a result, you cannot in effect buy more services in South Africa than you could in the Netherlands, despite the capital rounds being significantly higher — it is relative. 

The challenge comes in when South African startups want to operate globally. Like any tech dream, world domination is always the end goal. However, procuring services and paying Euro or Dollar-based bills with less than half the capital of your competitors makes this dream very challenging. So why don’t South African tech entrepreneurs just raise capital abroad?

Regressive IP and Exchange Control Law Plus Foreign Investors Is a Bad Fit

Most investors are all chasing the 10x return. They make investments and hope they can exit those positions, at a multiple, usually through an acquisition or IPO. When selling your tech company, in simple terms, both the number of users/clients and the intellectual property (IP) will play a critical role in the valuation, which is the same valuation investors are using to calculate their expected ROI. This means the IP of your company needs to be reasonably free to be sold to any international buyer. In South Africa, this unfortunately is not the case. 

There have been multiple cases of South African domiciled companies that have run into major exchange control challenges when trying to take their IP abroad. A recent example was the South African cryptocurrency startup, VALR, who almost lost the foreign portion of its $1.55 million capital raise after needing to spend huge sums of money on major US and South African law firms, with over 158 emails and scores of meetings to comply with exchange control.   

In the Netherlands, IP is completely free and the government provides incentives, including reimbursing up to 40% of development costs for creating "new innovations."

Related Article: 6 Questions to Make a Good Startup Idea Great

The Netherlands Attracts Foreign Talent (in Spite of the Rain)

The number of highly skilled migrants I encounter in the Netherlands every week is remarkable. Hailing from all over the world, Dutch startup workplaces are a melting pot of incredibly diverse accents and unique perspectives. The Dutch Highly Skilled Migrant Visa took me just over 1 month to obtain, from start to booking my one-way flight. The influx of talent has made hiring some of the brightest minds in the world a reality for Dutch startups — and we all know the importance of the team you have as a success factor. 

On the other hand, South Africa is still trying to figure how to draw in highly educated migrants. With xenophobic challenges reemerging and working visas still difficult to obtain, hearing foreign accents in the workplace is unfortunately still the exception rather than the norm. 

I Still Love South Africa

Despite the somewhat sobering perspective I have gained over the past few months, I still really love South Africa. From her natural beauty to the warmth and love of her people, it is the country I call home, and I remain optimistic about her future. While influencing the exchange rate or enabling an ecosystem that yields more opportunity may take time, I do believe policy reform on issues such as IP and exchange control regulation, and relaxing working visa requirements can act as a catalyst in ameliorating these issues. I remain an advocate of my country and hope that, given time and the correct leadership, we can turn the buzzwords into a reality.