South Africa’s digital industry is among the fastest-growing segments of its economy. However, the low level of racial inclusion in funding and general financial muscle to compete is a growing concern, which will likely widen inequality in the future if left unaddressed. This is according to a provisional report by the country’s competition regulator, the Competition Commission (CompCom), on dominance abuse and anti-competitive 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 asset accumulation blocked historically disadvantaged persons (HDPs), most of whom are Black, from being active players in the country’s digital economy.
The report further said startups founded by HDPs face greater pre- and post-revenue funding barriers when compared to those by white entrepreneurs. They also experience greater challenges when joining major B2C sites.
“The Inquiry has found a distinct lack of participation by HDPs in online platform markets and even low representation amongst the business users on the intermediation platforms,” CompCom said in its findings.
“Whilst in some cases this reflects the lack of transformation of the industries served by the platforms, such as tourism and estate agencies, it is striking how even more untransformed the online economy is relative to the traditional economy even in these categories. Given the pace of movement to the online economy, these barriers to participation threaten a new and deeper level of exclusion for South Africa,” it said in the report.
In the e-commerce sector, for example, HDP businesses were found to face great hurdles “when securing domestic distribution agreements for products where there are existing long-standing distributors,” while white-owned tier one businesses got more support and had their onboarding fast-tracked.
CompCom said that exclusion of HDPs from South Africa’s digital economy was a compounding result of the apartheid system, which upheld segregationist policies and institutionalized racial oppression from the 1940s to the early 1990s. South Africa, a country whose population is majorly Black -- 80% -- is the world's most unequal society, with 10% of its population owning more than 85% of the household wealth, according to the Thomas Piketty-backed World Inequality Lab, which also found half of the country’s population to have 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-revenue funding from a family or associate ‘angel investor’, unlike their white counterparts," said the regulator.
It also added that many VCs were not keen to support startups from townships unless they were mandated to, adding that such directives were scarce anyway, that even one of the largest VCs in SA, Naspers Foundry, “could cite only a single small investment in an HDP entrepreneur.”
The regulator drew these conclusions following a public inquiry about the market dominance and anti-competitive behavior of tech platforms in the country, which also saw the participation of entrepreneurs and VCs, including the South Africa Venture Capital Association.
“At the stage where the VC industry gets involved, HDP start-ups continue to face far greater barriers to funding support than white entrepreneurs. The VC industry concedes that it lacks transformation itself, that it perceives the risks in township economies to be higher than they actually are, and that it does not actively seek out HDP opportunities unless there is a mandate to do so from funders,” it said.
“This set of circumstances clearly places HDP entrepreneurs in a significantly disadvantaged position relative to their privileged white peers. The primary VC fund with an HDP mandate for 75% of funding is the SA SME Fund, a joint initiative by the government and the CEO initiative of large corporations.”
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 disburse), to HDP entrepreneurs in the digital space.
The issue of inequity in startup funding is not unique to South Africa, as Kenya’s ecosystem, one of the big four markets in the continent in terms of funding received, is facing a similar challenge — where white founders are found to have an easier time raising capital.