In the past, the near lonely voices of a handful of high-tech entrepreneurs and venture investors in South Africa haven’t received much attention at high levels. Their issues have rarely received much airtime, because after all, surely high-tech startups and venture capital are a tiny, specialist niche, particularly in SA, and something for a privileged few?

But maybe that’s a narrower point of view than you might think. One of the key things we hoped to do with the launch of the Silicon Cape Initiative, was demonstrate that this community was much bigger than many thought, and that there was already lots going on, and that their voices and issues needed airtime. The launch has helped to begin creating a platform for just that, and we’re even being heard at national government level now. But I’m sure many would ask themselves, is it really worth paying attention to this little sector..?

I recently did some reading about the impact of venture capital and startups on the American economy. The survey, commissioned by the NVCA, had some incredible results. I think the most startling revelation can be found in the opening paragraph:

“In 2008, venture capital-backed companies employed more than 12 million people and generated nearly $3 trillion in revenue. Respectively, these figures accounted for 11 percent of private sector employment and represented the equivalent of 21 percent of U.S. GDP during that same year. These findings extend trends regarding venture capital’s outsized impact – or “ripple effect” – on the U.S. economy that stretch back to the first edition of this report, published in 2001.”

Woah! So 21% of US GDP can be directly attributed to venture capital backed companies? If you read further, you find that those same companies also contributed to a 1.6% growth in jobs, as opposed to the national private sector average of just 0.2%.

Clearly, high-tech startups in combination with venture capital backing aggressively create jobs and huge value for the US economy, also attracting the world’s top brains and talent into the country. Its value is obvious.

We must of course bear in mind that the US has had a vibrant ecosystem of this activity taking place for around 30 years, in order to get to where it is now. From 1970 to 2008, nearly half a trillion dollars in VC money went into almost 30,000 companies. And the end result today is clear, with no signs of slowing. Many of these companies, backed by VC money years ago, are well known corporate giants today.

South Africa needs to be targeting this opportunity as aggressively as it can, because as we can see it takes time to get there, and many other countries are already moving to position themselves. What could start out as a small niche clearly has the potential to become a cornerstone of an entire economy, so we better be taking it, its problems and its participants’ opinions seriously, now. Here’s another quotation from the report:

“Today, countries around the world have begun to emulate the U.S. model by adjusting their tax and regulatory policies and by strengthening intellectual property protection. This will inevitably lead to more innovation worldwide – but also to increased competition for venture capital dollars and the benefits they produce. The primacy of the U.S. industry is no longer the given that it once was.”

The report also makes reference to regional VC hubs within the US. I believe that the importance of these can’t be underestimated. To my mind, you can’t try and turn an entire country into a high-tech innovation centre, although tax and regulatory policies would of course need to be at national level. But practically, regional hubs bring VCs, entrepreneurs, engineers and professional service providers together in close working conditions and communities which foster interaction, development and knowledge sharing.

It seems Israel actually did work on a regional basis when they created their investment incentives scheme for venture capital, choosing to assign different cities qualifying points within the scheme for tax deductions and grants, although this was more aimed at boosting certain lesser developed areas.

Another interesting train of commentary within the report is discussing how US venture capital firms are typically a small team, which is made up of a combination of experienced entrepreneurs, veteran businessmen or domain experts such as doctors or engineers, and professionals with tertiary qualifications.

The underlying message is that in order to be an effective startup investor, you need to be able to really get under the skin of the business you are looking at and understand it and its potential at the founders level, and you also need discipline and financial know-how. A VC team that is unbalanced will struggle to succeed, and taking a private-equity approach (mostly staffed with corporate finance type professionals) or a cowboy approach (mostly staffed with entrepreneur types) will probably in either case be a recipe for problems.

I think SA has a way to go in finding its feet in adopting and adapting the VC model and executing it well, but those of us who are giving it a bash are doing our best. Everyone has their part to play and we are seeing increasing interest and activity in the local VC scene, which I get the feeling is starting to hot up. I’ve already been made aware of some new funds that are soon to launch, so watch this space!

Many people look to VCs as oracles because they’re the people with the big purse strings, but out here in SA there is new ground being broken all the time, as we have to come up with our own unique ways, models and methods of doing things, particularly given our restrictive regulatory framework, while still fitting into the global context. 4Di Capital is also a startup, albeit a startup which happens to do venture investing. Nonetheless, it still has to prove itself and the concepts that underpin it, or else its funding too will ultimately dry up, just like any other startup.