South Africa risks losing Africa's startup race as policy failures scare away capital

South Africa is at risk of losing its position as one of Africa's leading startup destinations unless the government urgently reforms policies that are driving away investors and making it harder for young technology companies to thrive, according to new research.

The report, released by SiMODISA, a private sector-led organization promoting entrepreneurship, in partnership with Allen & Gil Gray Philanthropy, warns that regulatory barriers, limited access to funding and restrictions on international investment are slowing the country's startup ecosystem at a time when regional competitors are making headway.

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While South Africa remains home to some of Africa's most established innovation hubs, including Cape Town and Johannesburg, the study found that its startup ecosystem is expanding more slowly than those of Egypt and Kenya, raising concerns about the country's long-term competitiveness.

According to the research, South Africa's startup ecosystem recorded growth of 19.5 percent, behind Egypt's 22 percent and Kenya's 33.5 percent, showing that other African markets are becoming more attractive to entrepreneurs and global investors.

The report estimates that South Africa attracted approximately R3.3 billion of new early-stage venture capital in 2024. However, it has been noted that most startups continue to rely on personal savings, family support or informal funding as access to institutional capital remains difficult.

Researchers say this lack of early-stage financing is preventing promising businesses from developing products, hiring skilled workers, and expanding beyond the domestic market.

Although venture capital plays an important role in supporting innovation, the report argues that it currently reaches only a small number of startups. It recommends comprehensive mixed-finance models that combine public and private funding to support entrepreneurs at different stages of development.

The findings come as South Africa looks to strengthen its position in Africa's digital economy. However, unlike many countries that have introduced dedicated startup legislation, South Africa has not yet enacted a Startup Act that specifically supports innovation-driven businesses.

Experts involved in the research argue that such legislation would align the country with the African Union's Startup Policy Framework and Model Law, to be adopted in 2024. The continental framework is designed to help member states create startup-friendly rules that encourage innovation, attract venture capital and support economic transformation.

This report is part of the ongoing work of the SA Startup Act movement, led by SiMODISA, which is campaigning for policy reforms that make it easier for startups to raise capital, enter new markets and compete internationally.

The movement argues that South Africa's current regulatory environment creates unnecessary barriers for founders, especially those seeking foreign investment or expanding into global markets.

The biggest challenges identified include regulatory complexity, lengthy administrative processes, high compliance costs, limited access to early-stage finance, restrictions affecting international capital flows, shortage of skilled talent and fragmented government support programmes.

The report also found that South Africa lags behind the leading startup ecosystem in areas such as the founder visa programme, capital mobility and targeted incentives for high-growth technology companies.

Despite these structural challenges, South Africa still retains significant strengths. In this year's Global Startup Ecosystem Index, Cape Town was ranked as the third largest startup ecosystem in Africa and ranked 114th globally, ahead of Johannesburg, which ranked 122nd.

However, researchers warn that strong cities alone will not guarantee future competitiveness if the broader policy environment continues to discourage entrepreneurship and investment.

They argue that while private sector innovation has continued to drive startup activity, policy reforms have not kept pace with the changing needs of technology businesses operating in increasingly competitive global markets.

South Africa's investment culture has also become a concern for founders. The report notes that investors generally show a lower appetite for early-stage risk than in countries such as the United States, where venture capital firms are more willing to back unproven ideas with high growth potential.

This cautious investment approach, coupled with regulatory uncertainty, has made it difficult for innovative companies to secure the capital needed to scale rapidly.

SiMODISA policy head Shelley Lotz said South Africa's challenge is not a lack of entrepreneurial talent, but the absence of policies that allow businesses to grow as global competitors.

Lotz said, “South Africa does not lack entrepreneurial ambition. What we lack is a strong policy environment that consistently enables that ambition to scale.”

He said the findings show that incremental policy changes will no longer be enough if South Africa wants startups to create jobs, attract investment and compete on the international stage.

He affirmed, “If we want startups to succeed, create jobs, attract investment and compete internationally, policy reform must become a national economic priority.”

To reverse this trend, the SA Startup Act movement is calling for coordinated reforms rather than isolated interventions.

Its recommendations include simplifying market access for startups, reforming exchange control regulations, expanding co-investment and fund-of-funds programs, strengthening private sector venture capital raising, and aligning government policies more closely with the needs of high-growth businesses.

The report also emphasizes the importance of distinguishing between traditional small-business support programs and policies specifically designed for innovation-driven startups.

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While both contribute to economic growth, researchers argue that scalable technology companies require different policy tools because they depend more heavily on access to global capital, international markets, and specialized talent.

The report warns that without those reforms, South Africa risks seeing more investment, entrepreneurs and high-growth companies flee to faster-growing ecosystems elsewhere on the continent.

As African countries compete to become the preferred destination for technology investment, the study shows that South Africa's future position will depend not only on the strength of its entrepreneurs, but also on how quickly policymakers can remove the barriers preventing them.