South Africa’s digital industry is one of the fastest growing segments of its economy. However, the low level of racial inclusion in funding and the overall financial strength to compete is a growing concern, likely to increase inequality in the future if left unchecked. This is according to a preliminary report from the country’s competition regulator, the Competition Commission (CompCom), on abuse of dominant position and anticompetitive behavior of online intermediation (B2C) platforms within its borders.
CompCom said a lack of funding due to exclusion from business networks, scarcity of wealth and wealth accumulation prevented historically disadvantaged individuals (HDPs), most of whom are black, from being active players in the country’s digital economy.
The report went on to say that startups founded by HDPs face greater pre- and post-revenue funding barriers compared to white entrepreneurs. They also experience greater challenges when joining large B2C sites.
“The survey found a clear lack of HDP participation in online platform markets and even low representation among business users on the brokerage platforms,” CompCom said in its findings.
“While in some cases this reflects the lack of transformation of the sectors served by the platforms, such as tourism and real estate agencies, it is striking how unchanged the online economy is compared to the traditional economy, even in these categories. . Given the pace of the transition to the online economy, these barriers to participation threaten a new and deeper level of exclusion for South Africa,” it said in a statement. the report.
In the e-commerce sector, for example, HDP companies faced major hurdles “in entering into domestic distribution agreements for products where there are long-standing distributors,” while white tier 1 companies gained more support and had their onboarding quickly followed.
CompCom said the exclusion of HDPs from South Africa’s digital economy was an even bigger result of the apartheid system, which enforced segregationist policies and institutionalized racial oppression from the 1940s through the early 1990s. South Africa, a country whose population is predominantly black – 80% – is the most unequal society in the worldwith 10% of the population owning more than 85% of the household, according to the Thomas Piketty-backed World Inequality Lab, which also found that half of the country’s population has more liabilities than assets.
“The lack of wealth accumulation by HDPs due to exclusion from the economy under apartheid has created a substantial barrier to accessing pre-income financing from a family or associate ‘angel investor’, unlike their white counterparts,” the regulator said.
It also added that many VCs were not eager to support township startups unless they were required to, adding that such guidelines were scarce anyway, that even one of the largest VC in SA, Naspers Foundry,” just a single small investment in an HDP entrepreneur.”
The regulator drew these conclusions after a public inquiry into the market dominance and anti-competitive behavior of technology platforms in the country, which also involved entrepreneurs and venture capitalists, including the South Africa Venture Capital Association.
“At the stage where the VC industry is getting involved, HDP startups still face much greater barriers to funding support than white entrepreneurs. The VC industry admits it lacks transformation itself, sees the risks in township economies as greater than they really are, and doesn’t actively seek HDP opportunities unless there is a mandate to do so from financiers,” it said.
“This set of circumstances clearly places HDP entrepreneurs at a significant disadvantage compared to their privileged white peers. The primary venture capital fund with an HDP mandate for 75% of the funding is the SA SME Fund, a joint government initiative and the CEO initiative of large companies.”
CompCom said that while the government had set aside a fund for SMEs, it was necessary to have more targeted funding, through DFIs or the fund mandate model (for VCs to pay out), to HDP entrepreneurs in the digital space.
The problem of inequality in start-up financing is not unique to South Africa, as Kenya’s ecosystem, one of the continent’s four major markets in terms of funding received, faces a similar challenge – where white founders easier time to raise capital.