The Western Cape might still be the most popular region in South Africa in which to run a tech startup, but the province is losing ground to the country’s richest province – Gauteng, reveals a new survey. In addition, the number of black tech startups is on the rise.
In the 2017 Ventureburn Tech Startup Survey powered by Telkom Futuremakers – which was released yesterday – 44% of the 260 founders surveyed said they operated in Gauteng (see below graph), behind the Western Cape’s 47%.
Among its other key findings the survey uncovered that:
- The percentage of black startups has risen from 26% in 2015, to 50% this year.
- Just three percent of black tech startups turn a profit, versus 16% of their white counterparts.
- Over a quarter of startups plan to raise angel or VC funding, but only eight percent receive such funding.
- Almost a third say they pay market-related salaries, but pay is the top reason for employees leaving.
- Successful startup founders are most likely to be white males from the Western Cape.
The percentage is up from 29% in a 2015 Ventureburn survey of 197 founders (see below graph) and is just behind the 47% who reported in the latest survey that they operate in the Western Cape (59% in 2015).
The rise in Gauteng tech startups appears to be driven by the increasing number of tech entrepreneurs who are black (black African, coloured, Indian or Chinese South African) — and who now make up half (50%) of the country’s tech startup founders, up from 26% in the 2015 survey.
In addition, the majority of black startups (53%) list Gauteng as their base, with 42% saying Western Cape is their home.
Of the 260 founders quizzed in the latest survey, 46% list themselves as white, down from 66% in 2015 (see above and below graphs). Four percent chose not to reveal their race (eight percent in 2015).
The survey also reveals that while South Africa may have seen an explosion in venture capital (VC) deals of recent — with the value of such deals having increased by 134% in 2016 over 2015 (see this story) — just 10% of tech startups are turning a profit. This is down from 17% in in 2015.
Black startups struggling
Black tech startups in particular are struggling. While 16% of startups founded by white entrepreneurs are turning a profit, a mere four percent of black-owned tech startups are doing the same.
Most worrying is that 61% of black startups have yet to generate an income — because they are still working on their concept or are still in the seed stage — compared to 30% of white startups.
Furthermore, just nine percent of black-owned startups (and four percent of black African startups) generate a revenue of above R1-million — compared to 29% of their white counterparts. Three quarters (75%) of black startups generate under R100 000 (and 78% of black African startups).
In all, white startups accounted for 59% of all those startups that reported having tapped angel funding, while 24% of white startups reported having raised R1-million or more to fund their businesses, compared to just eight percent of black startups (and 2.5% of black African founders).
It suggests better resourced white startup founders who often have access to more capital, skills and experience and better networks are able to out perform black startups.
The survey also reveals that white startup founders are significantly older than black founders. Over a quarter (26%) of white founders are 40 years or older, compared to just 13% of black founders. Almost three quarters of black founders are aged 35 and younger, compared to 62% of white founders located in this age band.
This raises various questions as to what is driving more middle-aged white founders to start up their own business and whether employment equity is behind this or not.
In addition, it might also explain why so few black startups are making a profit compared to white startups. Older founders are usually more experienced, better networked and have more capital than younger entrepreneurs.
Out of touch in getting angel, VC funding
But back to angel and VC funding, where it seems startup founders are out of touch with reality.
Over a quarter (27%) of all SA tech startup founders believe they will grow their business by securing VC or funding from angel investors — yet only about eight percent report ever having been able to secure such funding, a new survey reveals (see the below graphs).
In a further hint that startup founders need a reality check, just nine percent of those looking for angel investing and just 20% seeking VC funding have firms that are growing or turning a profit.
The majority of SA tech startups use their own cash to fund the business (40%), followed by loans and grants from friends and family (23%).
When they are able to get funding, most startups tap very little. In all, 42% of startups reported getting less than R50 000. Only 16% received R1-million or more (the value at which angel investors and VC funding usually starts at). The remainder (42%) received between R50 000 and R1-million.
Findings from the survey also put into question whether South African tech startup founders really pay employees as well as they claim to. Close to one third (31%) that took part in the survey claim they pay their employees market-related salaries.
Yet the same founders list remuneration as the top reason for employees leaving their employ – 21% of founders list remuneration as the top reason employees leave.
This raises the question of whether startups are really in touch with market-related salaries or whether a good number of fibbing — particularly as 63% of founders surveyed said their startup generated less than R100 000 a year.
White founders in the Western Cape most successful
While just 10% of startups report making a profit, in all, 27% of startups can be termed “successful”, in that they are generating a profit or are growing.
So, who then runs the most successful startups (defined as those that make a profit and are growing)? Well, most are run by men. While 27% of startups run by men say they are successful, just 18% of startups run by women can say the same.
More white founders report being successful, with about two thirds of startups who say they are successful being white-owned firms. Taken by race group, 36% of white founders report being successful, compared to just 13% of black startups (and just 10% of black-African founders).
About 32% of startup founders in the Western Cape say they are successful — compared to 22% who are in Gauteng who list themselves as successful.
Most are over the age of 40 or between 30 and 35 years old (36% of startup founders in these ages groups say they are successful) and run a fintech or insurtech or a startup in the advertising and media business.
Those with a business partner and who have a startup that is already over two years old employing more than 10 people are also more likely to report being successful. B2B startups – those that serves other businesses (rather than consumers) and that tap the North American or European market.
Finally, are you more likely to be successful if you’ve run other startups before? In short, not necessarily.
Data from the survey reveals that 33% of founders who have run one or more startups previously report being successful with their current business — not overly different from the 30% who have never run a business before and say they are successful.
However there appears to be some correlation with the number of startups a founder has run as a predictor of success.
Though startup founders were not quizzed on whether their past firms had been a success, 50% of those who have run five or more startups report that they are successful with their current firm — compared to 29% of those that have run one to four startups before.
It may suggest that as the country’s tech startup ecosystem matures, the level of those reporting success is likely to increase. More critical however, will be to close the gap between less successful black tech startups and their white counterparts — this will not be easy.
*Note on the methodology the survey used: In all there were 298 respondents to the survey which was conducted using an online questionnaire, by data analytics firm Qurio. Of this number, 38 respondents were found to be employees of startups (rather than founders) and were excluded. The survey therefore sampled 260 startup founders.
Crouching Yeti strikes
Kaspersky Lab has uncovered infrastructure used by the Russian-speaking APT group Crouching Yeti, also known as Energetic Bear, which includes compromised servers across the world.
According to the research, numerous servers in different countries were hit since 2016, sometimes in order to gain access to other resources. Others, including those hosting Russian websites, were used as watering holes.
Crouching Yeti is a Russian-speaking advanced persistent threat (APT) group that Kaspersky Lab has been tracking since 2010. It is best known for targeting industrial sectors around the world, with a primary focus on energy facilities, for the main purpose of stealing valuable data from victim systems. One of the techniques the group has been widely using is through watering hole attacks: the attackers injected websites with a link redirecting visitors to a malicious server.
Recently Kaspersky Lab has discovered a number of servers, compromised by the group, belonging to different organisations based in Russia, the U.S., Turkey and European countries, and not limited to industrial companies. According to researchers, they were hit in 2016 and 2017 with different purposes. Thus, besides watering hole, in some cases they were used as intermediaries to conduct attacks on other resources.
In the process of analysing infected servers, researchers identified numerous websites and servers used by organisations in Russia, U.S., Europe, Asia and Latin America that the attackers had scanned with various tools, possibly to find a server that could be used to establish a foothold for hosting the attackers’ tools and to subsequently develop an attack. Some of the sites scanned may have been of interest to the attackers as candidates for waterhole. The range of websites and servers that captured the attention of the intruders is extensive. Kaspersky Lab researchers found that the attackers had scanned numerous websites of different types, including online stores and services, public organisations, NGOs, manufacturing, etc.
Also, experts found that the group used publicly available malicious tools, designed for analyzing servers, and for seeking out and collecting information. In addition, a modified sshd file with a preinstalled backdoor was discovered. This was used to replace the original file and could be authorised with a ‘master password’.
“Crouching Yeti is a notorious Russian-speaking group that has been active for many years and is still successfully targeting industrial organisations through watering hole attacks, among other techniques. Our findings show that the group compromised servers not only for establishing watering holes, but also for further scanning, and they actively used open-sourced tools that made it much harder to identify them afterwards,” said Vladimir Dashchenko, Head of Vulnerability Research Group at Kaspersky Lab ICS CERT.
“The group’s activities, such as initial data collection, the theft of authentication data, and the scanning of resources, are used to launch further attacks. The diversity of infected servers and scanned resources suggests the group may operate in the interests of the third parties,” he added.
Kaspersky Lab recommends that organisations implement a comprehensive framework against advanced threats comprising of dedicated security solutions for targeted attack detection and incident response, along with expert services and threat intelligence. As a part of Kaspersky Threat Management and Defense, our anti-targeted attack platform detects an attack at early stages by analysing suspicious network activity, while Kaspersky EDR brings improved endpoint visibility, investigation capabilities and response automation. These are enhanced with global threat intelligence and Kaspersky Lab’s expert services with specialisation in threat hunting and incident response.
More details on this recent Crouching Yeti activity can be found on the Kaspersky Lab ICS CERT website.
R5m in software fines
South African companies paid almost R5.2 million in damages for using unlicensed software in 2017 up from R3.6 million in 2016.
This is according to data from BSA | The Software Alliance, a non-profit, global trade association created to advance the goals of the software industry and its hardware partners.
The significant increase in unlicensed software payments – which includes settlements as well as the cost of acquiring new software to become compliant – is the result of more accurate leads from informers, says Darren Olivier, Partner at Adams & Adams, legal counsel for BSA. In 2017 BSA received 281 reports in South Africa alleging the use of unlicensed software products of BSA member companies – this up considerably up from 230 leads in 2016.
“BSA’s recent social media campaign also helped to create awareness among local companies about the need to comply with existing legislation in order to avoid legal action,” Olivier says.
The result has been a 13% increase in settlements paid in 2017, with the settlements total reaching almost R2.5 million.
While the average settlement paid by companies in 2017 was around R36 094, in some cases the amount owed was far greater, as is evidenced by Shereno Printers, a print and design company based in Gauteng, which ended up paying a hefty settlement amount of R260 000 last year in an out of court settlement.
The company’s case was in line with a broader trend, which saw the print and design industry as a whole rank among the top sectors plagued by unlicensed software.
Aside from settlements, companies also paid more than R2.6 million in licenses purchased to legalise their unlicensed software.
And the ramifications of software piracy extend beyond financial implications. “It also results in potential job losses and loss in tax revenue. This is not to mention the financial and reputational damage brought about by security breaches and lost data,” comments Olivier.
As unlicensed software has not been updated with the latest security features, it leaves businesses vulnerable to cyberattack, he explains.
This is a particular problem for companies operating in South Africa where economic crime has recently reached record levels, according to the Global Economic Crime Survey. Indeed, 77% of South African organisations have experienced some form of economic crime. What’s more, instances of cybercrime totalled 29% of economic crimes reported.
This in turn, raises questions around government policy and the adequacy of existing copyright legislation, which only enables the registration of copyright in films, but not in computer programs.
Olivier notes that it is likely the percentage of unlicensed software on South African computers has increased over the past year. “We received many more leads this year, which is an indicator that the amount of pirated software is greater than in previous years,” he comments.
Often unlicensed software is not so much a case of deliberate piracy as it is a result of poor software asset management (SAM).
“For this reason, the BSA encourages all businesses to ensure they have effective SAM practices in place. Companies should be able to confirm what software they are using and are licensed to use – this will help them to identify unlicensed software and can also bring about cost savings. Even the most basic SAM practices such as regular inventories and software use policies can help,” says Chair of the BSA SA Committee, Billa Coetsee.
With this in mind the BSA offers a range of SAM solutions, not only to help organisations reduce legal and security risks, but also to create business value.