Silicone Cape: A Catalyst for Tech in the Western Cape

Interview with Daniel Guasco, Chairman of Silicone Cape

One of your family objectives was to brand and promote the region locally and internationally as the imagined Silicone Valley of Africa. How far away are you from achieving that goal?

It depends on how you define it and I don’t think our vision is to replicate the original Silicone Valley. You could never do that. The key drive is to build the ecosystem. There are of course a lot of similarities, physically and environmentally, that exist between Silicone Valley and the Western Cape. The biggest aspect being the beauty, the weather and the great environment that we live in.  The other aspect would be from the educational perspective such as two large universities being close together. One out in Stellenbosch and one more locally here in Cape Town and the big pool of talent that emerges from that. From a branding perspective we certainly are recognised. There is a lot more association with Silicone Cape initiative locally and internationally which is encouraging. Though we still have a very long way to go to be where we would like to be.

Like the original Silicone Valleys legacy of homebrewed technology, hippie guys and techno utopians, do you think your Silicone Cape has that kind of counter cultural aspect?

I haven’t thought of it like that but I think that could definitely be an aspect. It’s definitely a choice you make in terms of lifestyle. If you think about South Africa, Johannesburg is debatably the commercial centre but with technology I would say more happens here in the Western Cape. So I’d say the flexibility that technology brings in terms of not having to be based in the office, being able to work remotely from wherever you want to, has allowed it to evolve more locally here. If you think of some of the bigger companies that exist in the ecosystem such as Takealot, Groupon and Amazon web services, large ecommerce companies that have chosen to base their office here which has allowed the ecosystem to evolve. More investments have come in terms of skills development, in terms of programmers and so on which has allowed the local ecosystem to develop.

I don’t think our vision is to replicate the original Silicone Valley. You could never do that. The key drive is to build the ecosystem.

How far away are you in the Western Cape from having the right economic regulations?

We still have quite a way to go. There are some great initiatives being driven by the likes of Westgrown Aluminium and others who are lobbying heavily to remove a lot of the red tape. We have a meeting scheduled with the deputy minister of the Reserve Bank coming up to change certain legislation that is inhibiting a company’s ability to scale more locally. Rather the incentive isn’t there to build your business more locally. What you find are a lot of interesting companies doing more work globally and they would choose to actually base themselves here but register IP and such offshore. Basing yourself here and registering off shore is an interesting concept but actually there are ways around that and unfortunately that’s the reality that has evolved based on certain restrictions around IP, exchange control and various other legalities. It’s a massive opportunity for local and national government because they are losing opportunities based on tax collections and so forth.  There’s more of an IP and technology related thrust and thinking, in terms of Westgrown Aluminium and various other local government initiatives but it is still dependent on national government approval and it takes time. It’s a slow process. 

Who would you benchmark yourselves against most closely in terms of other semi successful Silicone hubs around the globe? For example; Bangalore in India or Israel better known as the Starsat nation, both of which are excellent.

We aspire to be. I think the UK has an incredible start up ecosystem that has been driven by the enablement of policy which has allowed for investment which in turn has allowed the ecosystem to develop as it has. Israel is another great example. Those two are always first to be mentioned. Berlin is another interesting one. Start-up Chillie is also one that we have looked at. There need to be certain foundations in place. If the environment is enabling it will attract more skill sets and business start-ups within that space. The more that it grows, the more talent develops and the more businesses evolve which leads to more investments.

We’ve heard a few of the champion companies such as Yodot, Mxit and Twangu as well as the current cloud computing leader amazon web services were conceived in this region. Can you highlight some of the other world class high tech start-ups that were incubated here that might be underexposed or even operating in isolation?

Vandemer is another great example, which was sold to visa. It was started by Hannes van Rensburg and evolved from the Western Cape and was sold to Visa for quite a substantial amount. Travelstart is in the travel sector and although it’s locally based here it also has a number of offices in emerging markets around Africa, the Middle East and Turkey and headed up by Stefan Eggburg who started lastminute.com back in Sweden. He chose many years back to rebuild locally. He saw the opportunities in online travel and created travel start as well as other interesting things including recently raising a substantial amount of money to grow that further. He raised about forty million dollars.  In the ecommerce space Takealot has raised substantial amounts of money as well as international investments. These are some of the locally born companies that may be lesser known on a global scale because they are quite locally focused. Vandemer has obviously become more global now having been bought by Visa and then adopted globally. Some of the other lesser known companies would be those like Zoona, Remittance Business Interafrika doing quite substantial amounts of revenue locally.

Does the SA tech-sector have a particular competitive advantage in developing fin-tech because African countries are now so reliant on mobile?

I’d say financial services because of the local restrictions. It’s a restrictive environment. If you look at the global financial crisis of 2008 South Africa was relatively unaffected because many of our exchange controls and reserve bank regulations are quite prohibitive. That typically stifles innovation but actually what it has done here has made local entrepreneurs think outside of the box in a restrictive environment. That’s one dimension. Another dimension would be mobile. We leapfrogged the more traditional route of desktop to mobile and went straight to mobile so I believe we are recognized by global players and global banks as more mobile. There are some interesting things happening in that space. A good example of that is Barclays Tech Stars. It’s launching in the next week. Essentially Barclays, who are part of ABSA, are funding Tech Stars who chose Cape Town as the location for their first Tech Stars incubator. It’s funded by Barclays and it’s fin-tech focused. I think they have over five hundred applications globally. It’s fascinating to see what has come out of that process. So there are a lot of African start-ups but also quite a few global players.

In terms of bridging the private and public sector, how would you describe the level of encouragement and support and meaningful engagement that investors and entrepreneurs have from the various stakeholders in the USA and the Cape public sector including schools, universities, local and national government as a new technology innovation agency?

There are some great initiatives being driven forward. There’s a real thrust around creating more, doing more. The challenges are always around basic education and how can we enable that to hold up better. And technology is potentially a huge enabler of that. But it requires a certain level of forward thinking and understanding for that to be adopted on a national as well as a local level. There’s a lot of forward thinking locally and it sometimes can’t move forward as quick as it would like to because there is also a national agenda that needs to be met. It’s a challenge but there are some great initiatives being driven locally and I think we’ll see more and more of that happening. The likes of Westgrown and the local economic departments are very much behind driving that forward and supportive of that.

The local government seem quite leading edge, in terms of e-goverment, the rolling out of super Wi-Fi networks so they do seem to be ahead of the curve, much more so than any other province in South Africa?

Definitely. Those Wi-Fi enablement initiatives are a huge driver of that. The first objective is connectivity and then thereafter you can start evolving the ecosystem so there have been some great investments and initiatives behind that and I think a lot of that foundation has been built over the last couple of years and the effect is being seen only now.

Some of the criticisms levelled at the Silicone Cape initiative are perceived lack of skills in South Africa, lack of large anchor corporates that might provide management training, a lack of professional service firms available to the start-up market and a lack of capital structure as well as angel funding network. How would you respond to all of those drawbacks?

Those are realities. I think it’s an evolution of the ecosystem and my argument is that success breeds success. So you need some entrepreneurs who have made it and who have seen the opportunities and developed a success of some sort in either the profit or non-profit sector and then off the back of that success being able to mentor guide and in some instances even investing in other entrepreneurs and so that ecosystem starts to evolve. A lot of this funding and capital that has come into the ecosystem has been via local, Western Cape based venture capitalists and angel investors and that industry is growing in itself and I think that is bred off both the success of successful companies and entrepreneurs but it will still require a level of support through that process. Unfortunately till now a lot of that has been driven by private sector. Funding by Barclays capital or MTN or companies that are investing into various accelerators and initiatives that actually drive those agendas forward.

So it’s not actually a lack of capital that is preventing growth?

It’s an understanding of the sector and the risk associated with that sector and the potential success that it could have. When you look at globally scalable companies such as Facebook or Google those are typically focused on solving global problems with massive markets. The hesitation that an investor might have locally is that due to South Africa’s focus it’s a smaller market so what kind of return would you receive on your investment? Then you have the challenge around more internationally focused companies that might not be locally based because of the ip laws and legislations. So that is the challenge in a nutshell. There is no lack of capital. It requires understanding from those investors and asset backers of the sectors. Success stories are made from that. I’d say if you look at the ecosystem I don’t think there is a lack of any stage investments. I think there’s seed capital. I think it becomes a challenge between series A and series B. it’s the bridge in-between. The one million dollars to ten million dollars bracket is where the challenge really comes, in terms of follow on finance and so you typically see in a lot of South Africa companies early stage investors and fewer in the later stage and middle tiers where it’s a challenge but most investors who understand the sector are more offshore based and they typically fill up the gap

In your manifest you list things that were apparently stifling the creation and growth of the Silicone Cape ecosystem. Obviously exchange controls but also the FAIS Act and domestic laws which you say may even threaten Silicone Cape’s emergence entirely. Are you not perhaps being a little self-pitying and if what you envisage is actually to take root and to flourish here might it not  happen by a more organic process and hopefully the architecture around it will keep up with it?

It’s a good point and I think it’s essentially evolved in parallel. From an organisational perspective, we are lobbying for changes to some of these challenges and acts that are in place from both local and national government. The meeting we have scheduled with the Reserve Bank is a great example of that. I’d say it’s one of the first signs that we’ve actually managed to get results. We are actually getting entrepreneurs and fairly high level individuals in the reserve bank together around one table. That’s one of the signs that we have actively lobbied to move thinking forward but organically that’s happening anyway. Entrepreneurs will find ways around those local obstacles, whatever they may be. That could be anything from offshore registering, IP and the leveraging of local skills base because one of the challenges that you have as a South African is the ability to travel globally so there are many skilled individuals who can’t just walk into a more developed economy because of passports and visa restrictions and so forth. There’s an opportunity there because we still have a hold on the skills base but it will evolve eventually. The ecosystem will eventually find ways around that regardless of what happens in terms of legislation. They are already finding ways around it.

You have a vast market at your doorstep and I’m sure the lessons learnt from other emerging parts of the world are invaluable?

Absolutely. As an environment and as a country there is much we can learn and take from here into other emerging markets, some of which have already been used. I think fin-tech and mobile are probably the two biggest examples of that. Education as well is important but if you take some of the success stories like Codex run by Elizabeth Gould which teaches coding skills and she runs various programs and people with no education or experience of programming can learn and the outcome is that they are able to develop and to code.

Is that similar to Bandwidth Barn?

Not exactly. Bandwidth Barn is more of a mini ecosystem where there are a lot of interesting start-ups and initiatives being driven. Codex is based in Workshop 17 in the Waterfront who gave them an incredible space and that is for profit or initiative driven by the Waterfront but heavily funded as well. Codex chose to be based there as are Silicone Cape’s offices.

Do you foresee the DA being willing to create a tax incentivise high tech zone in the Western Cape similar to those that exist in Israel and elsewhere?

I do think it’s feasible and I do hope so and as an organization we are not politically aligned so I cannot speak for them but they’re certainly making movements to do that and we definitely support that. If you look at silicone roundabout in the UK that was a fundamental starting point for how that ecosystem evolved. As an investor I can see returns in a known environment such as stocks and commodities but in the technology sector where it looks very exciting but actually its high risk it requires another level of incentive for investors to actually be willing to invest and risk their money.

Do you think there are regions in South Africa that have been isolated from the Silicone Cape initiative which focuses primarily on the Western Cape?

It’s certainly not intentionally. We engage on a national level. In fact we have strong ties with Cesimondisa which operate out of Johannesburg and do similar work to what we do. We are constantly engaged by many people in the country and even the rest of Africa. The challenge as an organization is that we’re not funded. We are self-funded which means we are reliant on the support of entrepreneurs who see the benefit of donating money to a cause that will grow the ecosystem or reliant on private sector. Up until a year ago we had funding upfront only and then essentially no funding for two years and then last year we got a very kind sponsorship from first national bank which allowed us to create some more permanent resources within the organization so now we have a permanent GM, a small admin department and so on but we need to evolve that a whole lot more. It would be funding that would allow us to do that but obviously funding is difficult to find.

Intel turned sand into silicone and then into computer chips which are more valuable than gold. In the shift from raw materials to manufacturing goods to services and intellectual capital, do you think South Africa can retain or attract the necessary talent in order to realize your vision?

Absolutely. One of the biggest things that we also lobbied for is a change in immigration laws and visa requirements for foreigners to work within the local environment. At the moment it is fairly restrictive to be able to get a work visa locally. I think a part of the success Tech Stars had in their local fin-tech program was due to the attractiveness of Cape Town as a destination. We have that draw card. We have a huge base of international foreigners that wish to come and work here or develop companies. There are already some here but there are challenges and we need to change legislation to enable that. However in the local environment there is a big enough talent pool already to expand that. I look at myself, I am fortunate to be able to work locally or in Europe and I choose to be here and I think that many people see the benefit of that, both from a lifestyle perspective and also in the technology era the ability to build a global company now doesn’t depend on where you are based. It’s really about changing potential legislation to incentivise that, to allow for the flow of capital and skills to come in more easily and that is one of the key points and drive of what we are trying to achieve with Silicone Cape.

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