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 grow, according to new research.
The report, released by SiMODISA, a private sector-led association that promotes entrepreneurship, in partnership with Allan & Gill Gray Philanthropy, warns that regulatory hurdles, limited access to funding and restrictions on international investment are slowing the country’s startup ecosystem at a time when regional competitors are moving ahead.
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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, signalling that other African markets are becoming more attractive to entrepreneurs and global investors.
The report estimates that South Africa attracted about R3.3 billion in fresh early-stage venture capital in 2024. However, it notes that the majority of startups continue to rely on personal savings, family support or informal funding because institutional capital remains difficult to access.
Researchers say this shortage 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 broader blended-finance models that combine public and private funding to support entrepreneurs at different stages of growth.
The findings come as South Africa seeks to strengthen its position in Africa’s digital economy. However, unlike several countries that have introduced dedicated startup legislation, South Africa has yet to enact 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 adopted in 2024. The continental framework is designed to help member states create startup-friendly regulations that encourage innovation, attract venture capital and support economic transformation.
The report forms 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, particularly those seeking foreign investment or looking to expand into global markets.
Among the biggest challenges identified are regulatory complexity, lengthy administrative processes, high compliance costs, limited access to early-stage finance, restrictions affecting international capital flows, shortages of skilled talent and fragmented government support programmes.
The report also found that South Africa trails leading startup ecosystems in areas such as founder visa programmes, capital mobility and targeted incentives for high-growth technology companies.
Despite these structural challenges, South Africa still maintains significant strengths. Cape Town was ranked the third-highest startup ecosystem in Africa in this year’s Global Startup Ecosystem Index and placed 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 display a lower appetite for early-stage risk compared with 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, combined with regulatory uncertainty, has made it harder for innovative companies to secure the capital needed to scale rapidly.
Shelley Lotz, SiMODISA policy lead said South Africa’s challenge is not a lack of entrepreneurial talent but the absence of policies that allow businesses to grow into global competitors.
“South Africa does not lack entrepreneurial ambition. What we lack is a robust policy environment that consistently enables that ambition to scale,” Lotz said.
She added that the findings show incremental policy changes will no longer be enough if South Africa wants startups to create jobs, attract investment and compete on the international stage.
“If we want startups to succeed, create jobs, attract investment and compete internationally, policy reform must become a national economic priority,” she affirmed.
To reverse the 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 programmes, strengthening private-sector venture capital mobilisation and aligning government policies more closely with the needs of high-growth businesses.
The report also stresses the importance of distinguishing between traditional small-business support programmes and policies designed specifically for innovation-driven startups.
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While both contribute to economic development, researchers argue that scalable technology companies require different policy tools because they depend heavily on access to global capital, international markets and specialised talent.
Without those reforms, the report warns, South Africa risks watching more investment, entrepreneurs and high-growth companies migrate to faster-moving ecosystems elsewhere on the continent.
As African countries compete to become the preferred destination for technology investment, the study suggests 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 holding them back.
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