The future of venture capital is in Cape Town

Cape Town is making a name for itself as the start-up capital of South Africa. Recent developments continue to bolster its potential, not only as Africa’s leading location for venture capital, but also as the potential global hub for early-stage funding of emerging market entrepreneurs and start-ups.

Business Insider reported in May that American venture capitalists Activant Capital opened an office in Cape Town, spreading beyond the USA and Europe for the first time. Although Activant isn’t looking to invest in South Africa’s fintech start-up scene, the move is another positive one for a city establishing itself as a top destination for international companies.

In a 2021 report from fDi Intelligence (a data division of the Financial Times group), Cape Town was named one of the world’s fastest-growing regions for foreign direct investment (FDI). Cape Town placed second after Cairo, Egypt for FDI strategy, showcasing its drive to create necessary infrastructure for an innovative start-up and tech ecosystem.

Cape Town is Africa’s tech hub
Elon Musk was born and bred in the Mother City, which is home to several successful tech companies. The city invests heavily in marketing itself as the African tech start-up hub, leveraging its status as home to some of South Africa’s largest financial institutions and Africa’s top rated university, UCT. The presence of global investors such as Google, Amazon, Microsoft, Oracle, and SAP have contributed to Cape Town’s reputation as the number one Sub-Saharan tech hub choice.

In the past decade, the Western Cape has received R103 billion in Foreign Direct Investment (FDI) in its technology sector. The Cape Town to Stellenbosch corridor contains more than 450 tech firms employing more than 40,000 people, bigger than Nairobi and Lagos combined. This is according to Wesgro, the Western Cape’s official tourism, trade, and investment promotion agency.

Africa’s oldest tech incubator is the Cape Innovation and Technology Initiative (CiTi), which has spun out more than 2000 businesses and supported more than 3000 entrepreneurs since starting in Cape Town in 1999. According to CiTi’s CEO Ian Merrington, “Cape Town’s success can be attributed to a number of factors, starting with an established ecosystem development strategy over the past 20 years that helped stimulate entrepreneurial activity”.

Why technology is important to the venture capital industry?
Technology is the driving force behind the boom of venture investments over the past decade, according to analysis of global venture capital investments. From 2010 through 2020, tech start-ups made most of the venture funding across all deals by independent VC firms and corporate venture capitalists.

According to a report by Bain & Company, using their Startup Investment Cruncher database, the total value of venture capital investments in tech declined 13% from 2018 through 2020 amid an overall venture funding pullback, but tech venture investments roared back during the Covid-19 pandemic.

There’s a clear and current global trend toward technology companies capturing a growing share of venture funding. The total value of venture investments in technology in the first quarter of 2021 nearly doubled from the same period in 2020, more than twice the growth rate of other sectors.

A stock exchange catering for venture capitalists  
The Cape Town Stock Exchange (CTSE), the fast-growing African fintech stock exchange that is geared towards small and medium-sized businesses, recently closed an R85 million funding round adding new shareholders to the company. Thee shareholders are passionate about unlocking funding and investments for early stage businesses and start-ups.

The oversubscribed round was led by Imvelo Ventures, the venture capital investment fund founded by Capitec Bank and Empowerment Capital Investment Partners, with participation from Lebashe Investment Group, Pallidus Ventures, Tommy Lo, and Gary Stroebel, all existing investors in the CTSE.

In addition, the CTSE added three new venture capitalists to its board, Mark Fitzjohn and Bruce Ndidi, both of Empowerment Capital, and Stephan Van Der Walt of Pallidus Venture Capital.

Ordinarily, a traditional stock exchange's fee structures and governance requirements have prevented many SMEs, start-ups and mid-cap businesses from considering a market listing as an avenue for raising capital.

CTSE's technology and financing innovation is changing the market's capital and funding raise experience, making the listing process cheaper, faster, and more transparent. This development is good news for Cape Town’s growing status as Africa’s VC hub.  

Factors for Cape Town making a good name as Africa’s VC hub of choice:

• Number of VC firms

The Western Cape has the highest number of venture capital firms, making it easier for start-ups to access funding in the region compared to other cities and regions on the continent.

• VC funding and investments

According to a report commissioned by CiTi, entitled, “Evaluation and Network Analysis of the Cape Town Stellenbosch Tech Sector”, there is a high prevalence of VC funding in Cape Town. Roughly one third of the companies interviewed in this study received some form of angel investment or venture funding. This number is higher on average than the rates in comparable cities like Lagos, Nairobi, and Johannesburg. In 2020, a total of $88 million (R1.2 billion) of disclosed investments were injected into tech start-ups in Cape Town across 46 deals, the highest investments made in South Africa.

• Co-working spaces 

The Western Cape has over 30 co-working spaces, the highest in Africa and 715 free WiFi spots in Cape Town alone.

• Developer talent

Cape Town hosts 38% of the total developers in South Africa, the highest concentration of developers in the country.

• Edtech hub of Africa

Cape Town has a high density of digital skills training academies and is the location of choice for EdTech businesses building content for entities and educational institutions across the globe.

• Ease of doing business

According to the latest World Bank research report on Doing Business in South Africa, Cape Town ranked the top metropolitan municipality in the country when it comes to the ease of doing business.