Jacob Thulo, an alias for a South African national who at one point spent four years in Nigeria and got up close with the budding local tech scene, is convinced that Nigeria, despite its plethora of interminable self-inflicted struggles, is “far ahead” of his homeland and very likely the future of the continent.
That’s not a popular opinion to have as a South African given the contemporary multidimensional rivalry between both countries and the fact that Nigeria is grossly underperforming in many aspects.
Notwithstanding, Thulo’s view is probably shaped by his experiences as a perennial casualty of the intractable inequality issues in South Africa, which he strongly believes have hampered his entrepreneurial pursuits. He reckons Nigeria is in better shape because it’s free from the grip of ‘White monopoly capital.’
“Nigeria has no ‘White man problem,’ or at least not the one we have here. The ecosystem there seems to bridge the clique mindset, where value can be supported and funded regardless of where it comes from,” Thulo told WeeTracker, asking that his identity be withheld.
“South Africa’s private sector is still largely controlled by Whites, the funders are also mainly White. They aren’t really interested in helping Black businesses. I believe this is a deliberate and systematic attempt to keep Black people as mere consumers and not real players in the economy. The few Black funders that are there also face the issue of not believing in themselves, such that they won’t believe in Black founders until someone else does,” he added.
White monopoly capital is the term loosely used to refer to the extensive control that South Africa’s minority-White population has over the country’s economy; resulting in capital, opportunities, land, income, and networks being largely held by people with complexion of the lighter variety, to put it simply.
“Funders and venture capitalists typically fund people who look like them. The unfortunate part is that the funders are often White, male and from the West,” says Edwin Mbugua, Founder of E&A Digital Republic.
“There is even a running joke that goes: ‘If you want funding, make sure you have a White person on your founding team and ideally with an American accent,” he adds with a hint of mirth.
The colour of capital
Thulo runs a South African tech company, which he co-founded ten years ago. And he puts his startup’s fundraising struggles down to mostly the skin colour of the founding team, for want of a better explanation.
“We have been declined line of credit by the banks. We’ve been taken through enterprise development programmes by big companies but no money, just coaching and training vouchers. The only reason companies even do this in the first place is the government scorecard. Again, Funders in this ecosystem are White. It’s a very close-knit circle with zero interest in helping Black businesses,” says Thulo who also argues that Black founders are perpetually over-mentored and underfunded.
Source: Briter Bridges
Inequality in post-apartheid South Africa manifests in myriad forms across the nationhood – including the local tech landscape where it takes the form of blatant disparities in the funding and access environment. It’s such that entrepreneurs on the lighter end of the colour spectrum are found to be furnished with much more capital than their counterparts on the opposite side.
This stands as one of the many lingering after-effects of the widespread racially-based segregation system that was a hallmark of the by-gone apartheid era which, despite coming to an end nearly three decades ago, has left the country socio-economically stratified by race. It follows that the largesse in the hands of the few cater to only a few.
“Across the world, a very important first step for entrepreneurs is to get funding from angel investors and usually they leverage their networks to access early-stage capital. Given South Africa’s complicated history, the angel investing space has been dominated by White males who have tended to fund businesses with White male founders,” shares Dominique Collett, Head of AlphaCode, which identifies and backs innovative entrepreneurs in financial services and related industries in South Africa.
Today, South Africa’s White population, though accounting for just 9 percent of the population, own and control more than 90 percent of the nation’s wealth. The Black population, despite making up 80 percent of the country, represent the poorest and most disadvantaged group. Indeed, South Africa is the most unequal country in the world, according to the World Bank.
Tech is not spared
The extent of the imbalance can be felt across sectors – not least in tech. Per information from WT Data Labs, 84 percent of the 216 South African startups that raised funding in the three years between 2019 and 2021 are those led by founders or founding teams that are fully or partly White or Indian/Asian.
Fully Black-led startups accounted for just 16 percent, many of them raising relatively paltry sums in the form of grants and prize money. Thulo mentioned that most funding for Black businesses in South Africa is via DFIs which are government-controlled. “It’s a ‘who you know’ show in that space and it is not getting better,” he contends.
The reason for the observed funding disparity is both simple and complicated, according to Tefo Mohapi, Founder/CEO of iAfrikan Media; a technology and media company based in Johannesburg.
“At the end of the day, people trade with people. And most times people trade with people they share values with or who somehow are within their circle of values or principles, or simply people they like. Thus, unless you “move” in circles where the tech startup VCs are (unfortunately still mostly White), you are highly unlikely to get a whiff at being invested in,” Mohapi tells WeeTracker.
Venture capital (VC) funding, in particular, has historically been disproportionately allocated to White founders. White-led startups accounted for 59 percent of all the startups that reported having tapped angel funding, while 24 percent of White-led startups reported having raised ZAR 1 M (~USD 70 K) or more to fund their businesses, compared to just 8 percent of Black-led startups (and 2.5 percent of Black African founders), per a 2017 Ventureburn study.
Similarly, Briter Bridges data suggests only 12 percent of South African startup funding went to companies with at least one Black co-founder since 2012. All of these signal a tendency of funders to neglect South Africa’s Black entrepreneurs, which is – by the way – a microcosm of a phenomenon observed even in Silicon Valley and other racially diverse settings across the globe. Kenya even had a reckoning on this issue not that long ago and another uproar more recently.
“The issue of Black founders being underfunded is not unique to South Africa but it is amplified by our past. A 2016 Center for Policy Solutions report showed that less than 1 percent of American venture capital-backed founders are Black. The lack of generational wealth means most family members of Black founders cannot invest, no matter how good the idea is,” Collett reckons.
And there’s scarce respite
Those privations, which generally place Black entrepreneurs at a significant disadvantage even before the race has begun, are often the reason many South African Black-run businesses find it tough when it comes to securing ample financial backing, says Thabo Ncalo, a Private VC Investor and Senior Investment Professional.
“The old adage ‘It takes money to make money’ comes to mind in this case. Most Black South African founders come from (generally) previously disadvantaged backgrounds so using their own funds or obtaining the initial seed capital to bootstrap new ventures becomes quite challenging,” Ncalo tells WeeTracker.
“Most funders in our South African market prefer to see some traction before advancing funding (e.g. from Series A onwards) and most Black founders don’t have enough funds to get over this initial step from pre-seed, to seed to Series A funding. This lack of initial funding from ‘friends, family and fools’ prevents most Black founders from getting through the initial start-up phase to be able to show sufficient traction to raise more significant funding. This is a significant stumbling block,” he reiterates.
Ncalo used to be associated with one of South Africa’s most prominent local VC firms, Kalon Venture Partners (KVP), which is oddly yet to invest in a Black-led business since launching in 2016, epitomising the lopsided distribution of capital.
Clive Butkow, who leads KVP, echoes Ncalo’s thoughts by attributing the absence of Black-led startups in KVP’s portfolio to a shortage of Black-led startups with the desired specs.
“We are a growth capital tech fund investing in entrepreneurs solving the largest problems in South Africa and globally. We do not use race as a criterion before making an investment. While I say this, we do have a disproportionate number of White founders. While we are actively looking for Black entrepreneurs to invest in, we do not come across, for both inbound and outbound, a sufficient number of Black founders whose startups are ready for growth capital,” Butkow says.
“From a Kalon perspective, we would welcome the opportunity of being exposed to more tech startups from people of colour. We, unfortunately, have not yet resolved how we get visibility of more of these businesses that fit our investment mandate,” he adds.
In a way, it’s like the Black founders’ equivalent of the chicken and egg problem. To raise substantial funding, they need to first gain substantial traction, and to gain substantial traction, they need to get their hands on funding which they typically lack; it’s kind of an impossible situation.
However, some have pointed out double standards and suggested that the funders aren’t really trying. They argue that South Africa’s majority-White VC ecosystem simply use the “fit-our-investment-mandate” excuse as a convenient way of hiding the fact that they hold Black founders to a different standard given that White founders typically only need to do half as much to get twice the attention from funders.
“What is evident anecdotally speaking is the fact that White founders who have to some extent mediocre startups with limited ability to scale and zero market traction are able to raise USD 1 M,” argues Mbugua, who says Black founders can only dream of such backing. And for those Black founders who manage to scale the hurdles and raise modest sums in South Africa, it’s often to their own detriment, apparently.
“I have come across a lot of Black founders being frustrated in not raising capital from local VCs but those that manage to get a term sheet do so with terms that in our opinion are not founder-friendly at all,” reckons Vuyani Tati, Group Financial Manager at Startupbootcamp; a well-known startup accelerator in South Africa.
“The unfortunate part is that due to the drought in funding for early-stage businesses, as well as desperation from the founder’s side, they end up taking those terms. What gets to me more, however, is the lack of support given to the founders. The leverage is skewed towards investors that they will focus their time on those businesses they feel will succeed. In most cases those happen to be White-owned solving first-world problems,” Tati emphasised.
A fundamental mismatch
The fundamental disconnects between the experiences of majority White funders and the vision of Black founders, as well as conscious and unconscious biases rooted in faulty perceptions around competence, desire, and skill, are among the main factors perpetuating the lopsided trend, according to Ditshego Dube, a tech and branding enthusiast.
“It’s purely because of ignorance, a number of people do not understand – and aren’t bothered as to why it [funding Black entrepreneurs] is both important and necessary. Also, the stigma around Black entrepreneurs not being focused and more likely to fail is of course just a myth,” Dube opines.
“The existing funding apathy is down to Black people lacking the necessary education and training when it comes to funding amongst ourselves so when we seek funding from others, we are not prioritized or the potential investors are not in-sync with the problems that we may want to solve,” she adds.
Considering the fact that a large proportion of Black entrepreneurs remain chronically underfunded and therefore never get the opportunity to execute locally relevant solutions, it can be deduced that there are perhaps dormant, underserved, and untapped markets ripe for the sort of disruptive value creation that only sufficient capital and support can bring about in South Africa and the wider continent.
This is even more germane in a local context where diverse founders and teams are found to have a far greater statistical advantage of succeeding in solving locally relevant problems. Hence, investors are clearly passing up great opportunities by totally neglecting one group while wholly preferring another, for reasons that are not exactly tied to the merits of the business or the capacity of its founders and may or may not be down to racial bias.
“There are too many levels which require fixing, many of which rest in the socio-cultural structures of the country. On an investment level, we need to build better bridges in which investors and founders from previously disadvantaged communities can actually talk and find common ground in which we can all learn from each other,” says Tati.
It would take some fixing
Backing Black founders represents a genuine funnel for investing in broader communities and expanding the scope and opportunity for job creation. As Black founders are more likely to successfully identify and solve locally relevant problems, they are also more likely to hire diverse teams resulting in job creation within communities plagued by a lack of job opportunities; a much-needed fix at a time when South Africa’s unemployment rate is nearing 40 percent.
However, it would border on naive and unrealistic to expect the people who cut the cheques to suddenly step out of what they have since established as their zones of comfort and start throwing any more money at Black entrepreneurs in South Africa than they currently do. Or rather – not do.
While well-intentioned efforts like AlphaCode’s Additiv Seed exist to plug some of the gaps by being deliberate about funding Black-led businesses, experts are convinced nothing would move the needle quite like seeing more successful, wealthy Black people invest in Black-led startups, as well as nudging the government to mandate funders to make a set minimum quota of investments in Black-owned startups annually.
Talking solutions to tackle the funding gap, Tati, Mohapi, and the other stakeholders who commented recommend more seed-stage and angel funds for South Africa’s Black founders (most especially from Black investors who are best placed to understand the problems faced by their communities and can see the value of businesses tackling those problems), while also pointing out increased diversity among fund managers as an antidote.
“I think the solution is potentially twofold: Black businessmen who have ‘made it’ need to themselves become VCs and in the process can also bridge the gap between Black and White VCs and startups. But yes, them investing their own money in startups would go a long way to “normalizing” the situation. The other solution is more credible accelerators with clear criteria. These can somewhat level the playing field for getting a shot at pitching to potential investors and removing the real and/or perceived racial bias,” shares Mohapi.
In addition, Ncalo reckons there’s as good a chance of shrinking the funding gap as any if founders and funders can be more deliberate about strategic networking and open-mindedness respectively.
