Building a New South Africa

An investment thesis looking at the opportunities for technology investment in South Africa

Nov 21, 2023

To Investors,

South Africa has an opportunity to alter its image and improve its competitive standing in the global technology space. As assessed by the Global Finance ranking of the most technologically advanced countries in the world, and the IMD Digital Competitiveness rankings, South Africa in 2022 ranked as the 53rd most technologically advanced country in the world, out of 65 countries assessed.

Technological advancement by Global Finance is assessed as follows:

Assessing the technological breadth and adoption for a country using:
- internet users as a percentage of a country’s population, and
- LTE (4G) users as a percentage of the population
The Digital Competitiveness Score, created and compiled by the IMD World Competitiveness Centre
The portion of GDP spent on research and development (R&D), which represents both the government’s investment into future technological development as well as the desire to compete for future advancement.

We’re focusing on the first 2 factors.

Currently, South Africa (SA) is at rock bottom on the technology front, but the seeds of innovation have been planted.

According to Statista, 77% of the South African population are below the age of 44 years old. This younger majority will be more exposed to innovation, therefore the future for South Africa is knowledge based, where it is impossible to neglect technology.

Key positive charts:

Internet adoption is rising nationally, with work to be done…

National internet spectrum coverage looks healthy, with work to be done…

The State of the ICT Sector Report of South Africa 2022

Learning from the Global Finance and IMD assessments, we’ll look at the Technology and Future Readiness sub-factors - which present long term investment opportunities for outsized returns.

Technology (SA scored 58/63)

Described as the overall context that enables the development of digital technologies, measured through:

1. Regulatory Framework:

The weakness for SA here is the ease of starting a business, and the development and application of technology.

Status:

Participants in the startup and Venture Capital ecosystem have been lobbying for SA to introduce a Startup Act - a policy framework that makes it easier for startups to establish, grow and scale. The aim is that the policy framework will achieve the following objectives:

Tax breaks and incentives to encourage investment in qualifying Startups.
The removal of barriers that inhibit access to skilled talent.
Addressing exchange control limitations - to remove barriers that hamper globalisation and investment into qualifying start-ups.
Granting automatic Level 1 BBB-EE status for procurement and supply chain grading for qualifying startups.

2. Capital:

Weaknesses here are venture capital, and funding for technological development.

Status:

From early 2020 to late 2021 we saw peak venture capital activity, with record funding going into venture capital deals globally. Compared to the most active venture capital regions, minimal funding went into VC in South Africa.

Data Compiled from the CB Insights State of Venture Report 2022

3. Technological Framework:

Weaknesses for SA are mobile broadband users and internet users (at approximately just 70% of the population).

Status:

Future readiness (SA scored 59/63)

Described as the level of a country’s preparedness to exploit digital transformation, measured through:

1. Adaptive Attitudes:

Weaknesses are internet retailing and tablet possession.

Status:

The State of the ICT Sector Report of South Africa 2022. Machine to Machine (M2M) subscriptions describe an industrial mobile data subscription directed at communication between machines, for example smart home meters, vehicle telemetry services, asset tracking, wearable technologies, and automated supply chain management.

As smartphone penetration grows, functions involving digital connection (social media, e-learning, and e-commerce) will become ubiquitous - allowing more individuals and small businesses to benefit from the infrastructure set up by the likes of Takealot.

2. IT Integration:

The most significant weakness for SA is cyber security.

In perfect correlation, the rise in technology usage will be accompanied by a rise in cyber security vulnerabilities, presenting opportunities for building defence mechanisms.

Status:

The most significant bit of work done recently was the introduction of the POPI Act in 2020. Within the Act, there is a mandate where companies are required to disclose cyber security breaches as it relates to user data exposure.

This gives everyone insights into the types of attacks, the motivations, and helps anyone interested develop robust defence infrastructure.

That noted, the 2020 report on the Cyberthreat Landscape in South Africa by Accenture noted the following:

South Africa has the third most cybercrime victims worldwide, losing R2.2 billion a year.
South Africa is an attractive target for cyber threats due to the following factors:
- A Lack of investment in cyber security
- South Africa has been slow to adopt cybercrime legislation, and there is a lack of training for authorities to act on and prosecute cybercrime.
- South African Internet users are inexperienced and less technically alert than users in other nations.
- Organisations hugely underestimate their exposure to applications.

In addition, according to the 2023 African Cyberthreat Assessment Report by the International Police (INTERPOL):

Despite African countries representing just 0.75% of global Business Email Compromise (BEC) attempts between 2021 and May 2022, South Africa accounted for more than half of the BEC cases reported.
South Africa is the nation most targeted by ransomware attacks in Africa, accounting for 42 per cent of all detected attacks - suggesting that the number of undetected ransomware activities taking place in the country is even higher.

Venture Capital’s Key Role

The challenges mentioned above give rise to a vast array of opportunities for entrepreneurship and investment. The reality is that improvements necessary in this context will require long term, efficient, and patient capital. Therefore, the private sector has a key role to play (of course requiring the necessary support from a policy perspective).

The best vehicle to drive this development and innovation is Venture Capital.

Venture Capital has a 10 to 20-year investment cycle.

When Venture Capital vehicles are operated at peak performance, they can enable generational technological advancements such as the personal computer and the smartphone, both pioneered by Apple; gene editing technology spearheaded by companies such as CRISPR Therapeutics and Prime Editing; new forms of platforms that enable social interactions and interconnectedness such as Facebook and Twitter; the evolution of automobile manufacturing pioneered by Tesla; knowledge unlock through companies like SpaceX, OpenAI, and Oklo; and cutting edge infrastructure technology provided by NVIDIA - a fundamental company in the current technology wave (A.I) that is sweeping through the entire world.

In its purest form, venture capital is a style of investing that takes a long-term approach to investing in businesses throughout various stages of a business's life cycle - investing with the goal of developing an ecosystem that unlocks monumental potential.

There’s a lot of work to be done, but problems are really opportunities.

Respectfully,

- Mansa

Sources:

https://venturesafrica.com/why-are-startup-acts-becoming-more-popular-in-africa/

https://techcabal.com/2023/03/01/sas-tech-startup-ecosystem-is-slowing-down-can-a-startup-act-resurrect-it/

https://www.iol.co.za/business-report/companies/sona-touted-work-visa-on-the-cards-but-is-an-empty-promise-so-far-63396eaa-1416-4e67-a1ce-b79128822847

https://stats.oecd.org/Index.aspx?DataSetCode=VC_INVEST#

https://www.startupact.co.za/

https://www.news24.com/news24/tech-and-trends/news/south-africans-find-creative-way-to-access-starlink-as-other-african-countries-connect-officially-20230719

https://pitchbook.com/newsletter/recalling-apples-vc-funded-past

https://crisprtx.com/about-us/press-releases-and-presentations/crispr-therapeutics-raises-additional-64-million-to-translate-breakthrough-crispr-cas9-technology-into-next-generation-therapies-for-patients-1