Look to India for tips on start-up culture

Ask Ervin Tu what he thinks SA should do to create a more vibrant venture capital (VC) sector and his answer is essentially that it isn’t about capital. He talks about how the engineers who came out of universities such as Stanford and Berkeley in California had ideas and launched new things, and because of the promise of those new things in a stable market with good infrastructure and discretionary income, capital followed.

“You need all those elements. You can’t just say ‘make a VC industry’,” says Tu, who is interim CEO of Naspers and its international arm, Prosus, but was at VC giant SoftBank before he joined the group.

Tu was in Delhi this week announcing Naspers/Prosus halfyear results. The choice of Delhi was significant: India is now the secondlargest geography for Naspers/ Prosus after China, accounting for 20% of the valuation of its ecommerce portfolio excluding China’s Tencent. It’s one of the key geographies for its growth.

The group first went into India 18 years ago and got in early on the start-up economy. It has deployed $8bn and now has mature, wholly owned operations such as Delhibased global payments platform Pay U. But it also has smaller stakes in a range of new, high-growth firms.

In SA Naspers has businesses such as Takealot and Mr Delivery and investments in platforms such as home services provider Sweep South. In India, Prosus has more than 20 investments, from early start-up to more mature companies.

The scale is extraordinary. So is the success in some cases; three of the group’s tech-based investments have reached “unicorn” status, with valuations of $1bn or more.

Nine-year-old food and grocery delivery platform Swiggy has 350,000 delivery drivers and 20million people buying monthly. Meesho is an e-commerce platform on a vast scale, targeting the mass market outside the large cities with low-cost local products — $4 is the median price. In 2022 its app was downloaded 280-million times and it fulfils 3.5-million orders daily.

A third unicorn is Urban Company, which, like Sweep South, is a gig economy platform providing cleaning and other home services, including air conditioning repair. The companies are looking to list in the next couple of years. And where in earlier years successful start-ups headed to the US when they wanted to go public, now it’s India’s booming domestic stock exchanges, with their 80 listings in the first half of 2023.

The portfolio of the VC arm, Prosus Ventures, includes a range of earlier-stage start-ups in India that reflect the vibrant ecosystem that has developed, especially in its “Silicon Valley” city, Bangalore, where 1,000 new start-ups a year are generated.

Detect Technologies uses artificial intelligence (AI) to plug into data that companies already have from sensors and cameras to make workplaces safer and more efficient.

Vegrow is a business-to-business platform for fruit, enabling tens of thousands of mango and other farmers to supply local and multinational customers. The young founders of Detect Tech and Vegrow are mechanical engineering graduates from one of India’s elite tech training institutes, the Madras Institute — its alumni are now a startup support network in themselves.

There are about 15 such institutes in India and they go back to a 50year-old decision by India’s first prime minister, Jawaharlal Nehru, to make engineering and technology education a priority.

The 1-million engineers India graduates each year have been the basis for the software services export economy it has built, and for the more recent explosion of its start-up ecosystem. India is estimated to be the world’s third-largest ecosystem in terms of capital raising for startups. Where the graduates of Madras five years ago aspired to go into the public sector or big corporates, now the founders say they all want to set up start-ups.

A series of underlying conditions have fallen into place to generate that lift-off in innovation and growth. India is now the world’s fifth-largest economy and its fastest-growing, with GDP projected to double in the next seven years. The demographic is a huge plus — 1.4-billion people, many of them young — as a market.

But digitalisation has been key, particularly the rollout of public digital infrastructure off which all the innovation can leverage.

South Africans might find some of it disturbing in terms of civil liberties and data privacy. But the backbone of the system is a government digital biometric system — Aadhaar — with digital IDs for 90% of the population.

That has gone with governmentmandated free bank accounts for all, and extensive mobile and internet penetration and the world’s cheapest data. All of that has provided the basis for a highly efficient mobile payment system, UPI, which enables all sorts of economic activities.

The demonetisation programme

Indian Prime Minister Narendra Modi autocratically imposed in 2016 helped drive take-up of mobile payments; so did Covid-19. He also implemented a series of aggressive tax and other reforms to make it easier to do business in India and to attract foreign investment. That now includes tax incentives and other measures to encourage start-ups and venture capitalists.

Those are some of the conditions in which about 4,000 VC funds and 10,000 start-ups are being created in India each year. Year-to-date VC funding in India has reached $22bn.

SA has generated some great tech or tech-enabled start-ups, some of which have scaled up and expanded globally. And it has a growing VC industry, though it is still small.

At last count the VC industry had about R8bn under management, led by the SA SME Fund, started some years ago as a joint business-state initiative and now the largest institutional investor in VC with about R2bn under management. Tiny, though, in the context of SA’s large but risk-averse institutional investor base.

It’s a chicken-and-egg situation. Without a robust enough start-up industry, local investors will be slow to develop the expertise and appetite to invest in early- or later-stage startups. That’s tragic for SA, which needs a lot more entrepreneurial small businesses in general given their importance for job creation, and a lot more tech start-ups to drive innovation and growth.

But if Tu is right that’s not because the money is lacking but because many of the conditions are not there.

SA not only needs to fix its energy and logistics infrastructure. It needs to make digital infrastructure and plentiful, cheap data a priority in a way the government has simply failed to do. It would also need to find the political will to shake up the regulatory environment to make it easy to start businesses and do business. And it would need farreaching reforms to education.

The list is long and India’s spectacular example may not be a fair comparison. But SA has much to learn from it.