Lessons South Africa can learn from the Indian start-up ecosystem
Entrepreneurs, investors, incubators, accelerators, governments and academic institutions are all essential functions of every start-up ecosystem. The current operating environment requires all these functions to find innovative ways to generate and develop business ideas in order to create targeted solutions aimed at resolving consumer challenges.
In 2017, India’s improved ranking in the World Bank’s “ease of doing business” category led to the country’s emergence as the world’s third largest start-up ecosystem. The lessons of how India managed to achieve this rating were recently shared with some of South Africa’s investment professionals at the first India – South Africa Business Summit, held in Johannesburg in May 2018. There are key learnings from the Indian market that can be applied to the South African start-up environment. Some of these are unpacked below.
Education is a crucial aspect of every country’s economy. South Africa is faced with the challenge that although the value of education is thoroughly understood, access to high quality education remains elusive for most of its citizens.
In India, investor interest in the extensive convergence and integration of technology across diverse disciplines has introduced new approaches to education. The surge in EduTech-based start-ups has provided the country with innovative and effective instruments to drive transformation and youth employment.
The education sector in India is gradually parting ways with traditional systems and gravitating towards exploring online teaching and learning. This will enhance the country’s capacity to provide access to quality education for all citizens who have connectivity and smartphones. EduTech start-ups are expected to play a major role in education not only in India but also globally, which provides significant opportunities for South African investors to consider.
India’s food processing industry, which essentially connects the manufacturing and agriculture sectors, has seen substantial growth in tech-driven start-ups across various value-chains, and continues to be the engine behind the Indian economy. The integration of new technological advances into the agriculture and manufacturing process has created a great demand for agri-tech start-ups that will transform and streamline operations within the sector, and deliver cost-effective supply chain and retail distribution solutions as well as food security.
Much like South Africa, the consumption of processed food remains a national concern. The increased demand for convenience-driven food gives rise to issues relating to affordability, health and safety. In India, however, agri-tech start-ups have begun to develop a healthy snacking food category, producing food made from certified organic ingredients and indigenous ingredient-based products. Food processing start-ups in India have also begun to use digital technologies to create Do-It-Yourself (DIY) food testing kits for consumers that enable them to test product quality through fast, system driven and precise procedures.
In South Africa, food safety has become a widely publicised topic, with an increased demand for safe food products. Driving investment within the food processing industry will enable start-ups to find innovative and effective ways to design products and systems that can mitigate against the mishandling of processed foods; going a long way in restoring consumer trust in the sector. Further opportunities also exist for investors to invest in South African agri-tech start-ups that can optimise the food processing value chains, enhancing efficiencies. These start-ups have the additional benefits of contributing to employment and national food security.
Foreign direct and domestic investment are essential to achieving sustainable economic growth and incentivising investors can prove effective in accomplishing related national key objectives. In India, investors are incentivised with in-country investments by means of tax exemptions and/or reductions on capital gains tax. Start-ups are given temporary relief from compliance by being excluded from regulatory inspection for three years. Other incentives include dedicated funding for start-ups, providing start-ups with government services at one centralised point and a reduction in the costs associated with the registration of patents.
These and other incentives have helped elevate the Asia-Pacific region to become the world’s leading region for FDI for 2017. The determinants of the destination of Foreign Direct Investment (FDI), according to fDi intelligence, is the proximity of markets to customers, the domestic market growth potential, the availability of a skilled workforce and the regulatory environment combined with business climate. A systematic improvement of the factors under our control would assist Africa in general and South Africa in particular to increase our market share of FDI to above the current 3%.
In South Africa, only a handful of investors have the risk appetite to financially invest in companies that have yet to prove their ability to generate sufficient revenue. Promising entrepreneurs often deplete their savings or family funds long before their business model has been able to attract financial support from investors. Some current incentives in South Africa include tax incentives such as 12J and government services such as CEDA. What’s more, President Cyril Ramaphosa has also prioritised the reduction of red tape for small businesses; reiterating the South African Government’s commitment to providing essential incentives that will provide a good basis for a thriving startup environment.
The Indian Government is determined to build an ecosystem that inspires and supports entrepreneurship and has established a number of initiatives to ensure that there is sufficient provision for start-ups. The Start-Up India initiative is intended to encourage innovation, generate large scale employment opportunities for citizens of the country and provide investment opportunities for keen investors; driving sustainable economic growth.
Digital India is another such example, which focuses on the ability of data to facilitate start-up venture processes. In addition, the Indian Government’s Digital India programme aims to provide disadvantaged regions with digital infrastructure to reduce the digital divide and ensure that government services are made easily accessible for all people. It is a great opportunity for start-ups, particularly those in the e-commerce sector, to take advantage of.
In South Africa, start-ups generally lack market-access and have difficulty receiving financial support from investors. The main contributor to the lack of access is the need for additional support in the form of preparing businesses to be investment ready by providing commonly required skills to operating and managing businesses efficiently. Proposed solutions to the lack of access include the introduction of a Public Procurement Bill that will support and empower black-owned and small enterprises and a new SME Incubation Fund (intended to help township enterprises) which will improve the proficiency of start ups’ business operations.
India’s domestic market provides many opportunities for start-up economic growth. The South African start-up environment can benefit substantially from applying the lessons learnt from the Indian experience and making them relevant for South Africa.
Tanya van Lill joined the Southern African Venture Capital and Private Equity Association (SAVCA) in March 2017 as CEO, after a rewarding 10-year career at the Gordon Institute of Business Science (GIBS).