How Africa can meaningfully support and promote entrepreneurship

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How Africa can meaningfully support and promote entrepreneurship

Promote Entrepreneurship! The cry of every African Entrepreneur.

A lesson from Silicon Valley (Book review: The Code – Silicon Valley and the remaking of America)

We spend at least 1 hour a day as Africans using a product or service created in Silicon Valley. WhatsApp, Google, Twitter, iPhone, Facebook, Instagram, Netflix, an Intel Chip, a Cisco router the list goes on. So why is Silicon Valley so successful and what can Africa learn from it? How can we use these lessons in our journey to create viable local industries which create real jobs? We need to promote entrepreneurship.

In this article, I will try to touch on a few fundamental issues that helped create Silicon Valley. I believe these can be implemented anywhere in Africa and produce real results. I also want to spark conversations amongst Universities, Entrepreneurs, Money Managers, Policy Makers, Labour and Business which will encourage more collaboration instead of contention.

 

Government spending on Research and Development (R&D)

In most African countries, Government spending as a percentage of the Gross Domestic Product (GDP) is at least 30%. South Africa’s government spending as a ratio of GDP was 35.29% in 2019. In real terms the South Africa’s government consolidated spending for 2019 was R1.83 Trillion. Of this expenditure, R209 Billion was spent on Economic Development. Only R16 Billion of the economic development spend, was spent on R&D (referred to as Innovation, science and technology).  This means Africa’s most industrialised economy spent less than 1% of its expenditure on R&D (less than 0.3% of its GDP).

However, China spent over 2% of GDP on R&D. When you look at history, the Japanese, through their Ministry of Industry Trade and Industry, invested large R&D dollars. These propelled computer chip development in the 1970’s which brought us innovations like the Walkman.

Silicon Valley is responsible for three billion smartphones, two billion social media users and two trillion-dollar companies. Silicon Valley was also born out of the US Military R&D spend which was fueled by World War 2. The US Defense R&D spend was channeled to Stanford University and other Engineering schools like MIT. The intention was to help build wartime communication technology (radars, signal jammers). This later fuelled its race to space against Russia which had launched the world’s first space satellite (Sputnik 1). It is estimated R&D made up more than 10% percent of the entire US Federal budget for the first half of the 1960’s. Much of it tilted towards the emergence of high-tech.

So why is this important in promoting entrepreneurship in Africa?

Well, for Africa to build new Industries, it is going to need to channel a significant portion of its budget towards R&D. This R&D has to be geared to solve unique African problems. Universities and government will need to partner in investing R&D in areas like agriculture and food production, mining, healthcare and most important high tech. These are key solving unique African problems like poverty, inequality and outdated manufacturing techniques. In other words, a key driver that governments in Africa can influence is to increase their R&D spend and channel it to partnering with universities in driving innovation.

 

Government procurement spend

Governments in Africa are also the largest buyers in their respective markets. Where possible African countries should prioritise using their procurement power to promote locally manufactured products and services. In South Africa the media wants you to think that if you go after government tenders you are not a real entrepreneur. They have even coined a term “tenderpreneur” as derogatory term. I admit that the process of issuing out tenders is sometimes fraught with corruption. However, Bidvest, Deloitte and some big banks get significant amounts of their revenue from government business and re-invest it in the economy.

In Silicon Valley, big government defence and space spending benefited the early Silicon Valley pioneers like Fairchild Semiconductor. The recent launch by Space X to send the first humans to space from American soil was made possible by a NASA contract worth over US$12 Billion. Consequently, one of Silicon Valley’s champion of free markets Peter Theil’s company called Palantir gets a significant portion of its revenue from the American government.

Lessons from an Entrepreneur

As an Entrepreneur myself who has taken part in most of the government sponsored incubations and other related programs, I can tell you that Startups biggest challenge is not necessarily investment money but access to markets. Who best to provide the markets than your own government? I am always puzzled when a government opts to procure a foreign-based software for its HR or other enterprise software. Especially when there are better locally produced solutions which are better priced and subsequently contribute to GDP. Do you think the US Department of Defence would use a cloud solution which is not American? No, they recently contracted to MS Azure for that.

So African countries need to start using their purchasing power to promote entrepreneurship in local industries. Especially where the expertise in the local country are at the same levels as foreign companies. This process of using government spend to promote local industries must be deliberate and part of government policy. The process must be free of corruption and focus on local businesses. Priority must be given to organisations which have sound business models and high potential to scale. Governments should avoid giving these tenders to middle-men who do not add any value. This, most often, results in price inflation, corruption and business being channeled back to external service providers.

 

Using Universities for ground-breaking research and a source of entrepreneurs

In 1981 the Governor of California Jerry Brown, together with leaders of Silicon Valley, Bob Noyce, Steve Jobs, Jerry Sanders, Sandra Kurtzig and Regis McKenna agreed to collectively fund a US$10 million microelectronics center at University of California in response to the Japanese growth in world market share in the electronics arena. This is a good example of how corporate, government and universities came together to support the Silicon Valley industry.

Stanford University, was a huge catalyst in establishing breakthrough technology in the Valley. It produced legendary entrepreneurs like Bill Hewlett and David Packard founders of HP. This all happened because of the government grants for scientific research which Stanford received during World War 2 and post the war.

It is important for Universities in Africa to collaborate with business and government for research purposes. The current situation that is faced in South Africa is that Universities are producing graduates which the business sector does not need. This is creating skills shortages and high levels of unemployment amongst graduates. Universities are also not promoting entrepreneurship and there are no clear strategies of universities commercialising their research. Universities, especially in the faculties of engineering, computer science and biomedicine, need to play a bigger role. They need to move from a mindset of producing graduates, to creating groundbreaking research. This research can be licensed to commercial businesses and incubate potential entrepreneurs.

 

Skills

All the above points discussed will not mean anything if Africa does not have the skills. Fortunately, we do… but unfortunately most of our skills are being exported overseas. One of the key reasons why Silicon Valley came to be was the great trek of many engineers from all over the United States to the Valley from the early 1940s to the 1970s. Up-to now we all know how the Indian and Asian population has grown in Silicon Valley as it continues to attract skills. In fact, the CEO’s of Google and Microsoft are all of Indian Descent.

Africa needs to incentivise skilled people to stay in Africa or even come up with initiatives to lure them back. Since we now live a knowledge economy. it is critical that if we are going to rebuild Africa, we are going to need every skilled African currently living abroad. We also need to focus our universities to areas that we need skills. I don’t think there is any value of churning out graduates which are not going to be employed because their skills are not needed.

 

Venture Capital – Money Managers

Where do I even start when it comes to Money Managers in Africa. One of the biggest drawbacks in African innovation and start up growth is the lack of venture capital (VC). The current crop of VCs all requires businesses to be post revenue before they even consider them for investment. In fact, the money is not really scarce but there is low to no risk appetite. Money Managers want high returns with bank level risk models.

One of the key pieces of Silicon Valley’s ecosystem is the VC community which is known to give out US$200k on ideas alone. In South Africa PIC is probably the biggest money manager in Africa and could be used as a huge catalyst to drive business growth through targeting high growth startups. The recently established SME Fund is a step in the right direction, but I am not sure if it is reaching its intended recipients.

In order for Africa to grow, new viable businesses it will have to provide risk capital. This risk capital should be given to VC’s who have been in the trenches (in other words, give it to VC’s who have started and ran successful businesses themselves). There is no use giving money to Managers who use theoretical models and not experience as a basis of investing in startups.

 

Conclusion

 To summarise what I learnt from the book The Code – Silicon Valley and the remaking of America.

  1. As much as I am pro- free markets, government and the state are central in promoting entrepreneurship through their procurement spend and policies on R&D.
  2. The world has changed, wealth creation is now in people’s brains and not so much in the earth as in previous generations. PS: I am not saying we don’t need land. We need all of our knowledge workers to be incentivised to come back and rebuild new industries.
  3. We need a working ecosystem which at the very least should include;
    1. Universities for breakthrough research and skills development.
    2. Money Managers which are a given more latitude to make risky bets.
    3. Skilled Managers and technical experts (especially in the engineering, tech and sciences fields).
    4. Government which is intentional about R&D, and channels spending to grow the African economy.
    5. Entrepreneurs who can build scalable businesses.

 

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