South Africa is a great place for international investors to get involved in the African startup ecosystem. The country is home to many factors that are needed for a tech eco-system, including renowned research institutions and a strong financial and regulating set up. Venture capital is still scarce, and corporate venture capital investors (CVCs) could be the key to pushing the market forward.

Africa is attracting more international investors. South Africa is one of three largest markets, along with Kenya and Egypt, according to Bpifrance. Although the continent’s tech scene is still in its infancy, it has the fastest-growing population.

Sony’s first investment in the continent was made by Carry1st, a South African mobile games publisher. Founders Factory Africa is a pan-African seed-stage venture company based in South Africa.

Sam Sturm, chief portfolio officer at the company, says: “I believe Africa presents a tremendous CVC market opportunity. South Africa is probably one for a CVC’s easiest markets to operate in.”

It can be difficult to engage if you don’t understand the players, the market, or the customer base. If you look at the markets, it is one of the easiest on the continent to do a business and to plug in if you are not on the ground.

South Africa is the home of 14 of Africa’s top 20 companies in terms of revenue. These big companies may not have a CVC, but they can still be customers for local startups even if they don’t provide equity funding.

“In general, the corporate enterprise ecosystem is much more developed in Kenya and Nigeria.” Sturm says that the startup ecosystem has evolved largely around this, for better or worse.

“You have a lot of really smart and talented people working for banks, insurance companies, and consultancies. There are many other markets where entrepreneurship may be more important as a way to create jobs than in South Africa. The flip side of that is there is a robust ecosystem for corporates to support and partner with startup companies.”

Vuyo Makapo, who runs the venture investment and studio arm of South African financial services company Old Mutual, Next176, says that the country has many other advantages. It has a young and tech-savvy population. It also has a mature and stable financial system, and a reliable regulatory climate.

He says that we have a strong regulatory system in place globally to ensure the rule of law. “When you do anything, you know the contract is enforceable. And we have a judiciary which has been kept free from any political influence.”

Old Mutual has invested in a variety of areas, including health, education, and employment. However, in South Africa, it has concentrated on fintech. This table lists some of the biggest rounds in the last three years. Old Mutual’s fintech successes in South Africa include TymeBank which closed a Tencent backed round last year, valuing the company at just under $1bn. Another is digital payment company Onafriq which raised $100m in 2022 from investors such as CommerzBank and Axa.

Top VC rounds in South Africa, 2021-2024

Company Name	Deal Date	Sector	Deal Size ($)
All Weather Roads Engineering	12/01/2024	Industrial/Construction	200
Onafriq	14/06/2022	Financial services	200
Red Rocket Energy	27/09/2023	Energy	160
Jumo	08/11/2023	Financial services	120
Planet42	22/02/2023	Transport	100
Yoco	27/07/2021	Financial services	83
TymeBank	22/05/2023	Financial services	78
Yoco	01/12/2022	Financial services	70
Cassava Technology	18/07/2022	Telecoms	50
VALR	01/03/2022	Financial services	50
Wetility	07/09/2023	Energy	49
Ozow	20/11/2021	Financial services	48
Bio2Watt	30/01/2023	Energy	39
Lula SA	01/02/2023	Service	35
Peach Payments	01/05/2023	Financial services	31

South Africa, like many other developing nations has limited startup capital. South Africa has more VC firms than neighbouring countries but fewer local VC firms.

“It is a very small market, from the perspective of an investor. Mpako says that there are a few players who have been in the market for at least a decade, if not longer. They are well-established.

The markets are not mature and some of the fences that the Silicon Valley world is accustomed to are still relatively new in some of our market, so these are challenges. But it’s evolving.”

South Africa has a relatively new venture capital industry. Sturm says that VCs were once viewed as “private equity guys wearing hoodies”. This has meant investors like Barati Mahloele who is a GCV Rising Star and oversees packaged food group Tiger Brands CVC activities have had to work very hard to educate the markets and broaden their range of investments.

She says that there are many opportunities and that there is no shortage of innovative companies. “I think that the venture capital funds who have been on the market for a while did well to develop the market, but there is still a long way to be done in terms of the other pools of money.

“For example, there has been much work done to educate asset managers about the potential of this asset category. It is risky, but it has a lot of potential upside. It’s all about how we manage our risk/return profile in order to make it more appealing for additional capital pools.

“Corporates are a major player…we think it could be an important lever for growth in the future.”

Tiger Brands believes that corporates can play a major role in growth.

A local partner could be a solution to getting more foreign funding. Sony works with the International Finance Corporation in order to find African startups, while Next176 counts Singapore based Standard Chartered SC Ventures as one of its partners. The international corporate gets a better view of the market, while the local CVC can access deep pockets and global investors for its startups.

Mahloele says that the risk-return profile and ticket sizes can be a little too high for some local investors. “But for an international investor, it’s very clear – if you have an appetite for Southern Africa, East Africa or West Africa, then you can align yourself with VC funds and corporate venture capital funds in those markets and you’ll be able to see the opportunities available.”

Currency instability is a problem if you are able to secure foreign funding. The South African rand’s value has dropped by half against the US dollar in the last decade. If you raise money with US dollars and get revenue in rands it can be difficult to generate returns for investors.

The Rainbow Nation must reach out to the rest Africa

South Africa must also address the issue of diversity. South Africa has not completely overcome its old problems, despite being called the Rainbow Nation for over 30 years. According to the 2022 World Inequality Report by Harvard University Press, South Africa is the most unequal country in the world.

The level of diversification among its funds varies. But many market observers noted that Naspers Foundry ($100m local investment arm) of internet and investment company Naspers had only one startup in its portfolio of nine with a black founder before the unit closed.

South Africa’s inequality – which is a sharp divide between large corporations and most of the population – can also limit the client base for startups.

Sturm says, “You have very successful startups that serve corporate clients because you have a huge corporate client base that you don’t find in other markets.” “But you also have to consider the needs of consumers with lower incomes at the bottom of a pyramid.”

Agtech startups can find wealthy clients in South Africa’s large commercial farms but struggle to adapt these solutions to other parts Africa.

He says that the average farm size is 20 times larger in South Africa than it is on the rest the continent where smallholder farmers are the majority.

“There is a big difference between the shape of the problem and the user’s needs in South Africa. This means that if you invest money in a solution for farmers in Nigeria, then you can imagine its applicability to farmers in Ghana and Benin. In South Africa, there are fewer of these solutions because the smallholder user base has become less viable due to consolidation.

Sturm, an American, spent a year as the head of new ventures at Founders Factory Africa in South Africa. He now manages the entire continent from an office in London. He says he feels like an outsider because of the country’s Apartheid history and how isolated it seems from other African markets. Next176, for example, may be looking beyond its borders but the rest must follow suit.

“To get to the next stage, stronger ties with other parts of the continent would really be valuable.” It must move away from ventures that were built for South Africa and towards ventures for Africa.

“To get to the next stage, stronger ties with other parts of the continent will be very valuable.” Sturm says that the country needs to move away from South African-based ventures and instead focus on ventures for Africa.

Sturm believes that this ability to see beyond the county borders is growing.

“The next wave we see is more focused on pan-African, or even global expansion. “We have a South African company that is considering the Philippines for its next country because they find it an interesting model,” says he.

He adds that corporates can have a big impact on the success of startups in South Africa, because they are influential. Africa is a region where startups are solving interesting and practical problems. South Africa also has several research universities that work on innovative technologies. CVCs are able to make a difference.

Mahloele says, “We have some incredible venture capital funds. They have a role to fill, but there are so many listed corporations with money who could help develop the venture ecosystem.” “It is about developing this ecosystem. There are plenty of opportunities.”