I've been hearing a lot about the structural problems in South Africa with regards to the seed funding woes that startups experience.

I would like to start a debate about how much angel/seed funding is needed to get a technology startup over the hurdle that would allow them to raise early stage venture capital and how much is needed to kick start the local market.

What's the right number for 12 months startup capital for a small (4-5 person team)?  R500k? R1m?

If there was a proper incubator (ala 500 startups/Y-combinator) in Cape Town - how many startups do you think would represent critical mass?  25? 50? 500?

Let's assume these startups were part of an incubator - where costs were kept low and shared.  

I often hear founders asking for anything from R2m - R20m for startup capital - I think that seed capital should be much less than that - but would love to hear your thoughts.

Views: 2626

Reply to This

Replies to This Discussion

Read the original response I wrote.  The investment window would be 24 months, probably with a 6 month class/rotation.  Remember, the A round companies would not be in the incubator (and probably not seed round either).

I honestly believe there is not enough in SA. Maybe 20 good/average startups a year imo. Think wider than SA - Africa?

Well, it seems I'm persona-non-grata in this thread, but I'll add my $0.02 anyway. 

Persona-non-grata:

1. First time poster here (the fact that I lurk doesn't count)

2. Close to 40, first-time founder (the amount of startups previously involved in doesn't count)

3. I'm in smoggy Jhb, not the lovely Cape

Ok, so first up the seed-funding discussion.

Personally, I find the dilution numbers being thrown around, erm, excessive especially when being compared (at least as a first-round in) to SV. Vinny got quite close when he mentioned the 2.6m opportunity cost (I read it last night, so I'm probably a bit out with this figure) for the fresh-faced founders, effectively this is what they have put in in time and effort. Their investment. If others put in 4m total, that doesn't mean they should walk-away with the lions-share after an exit. Human capital is also capital.

For the small amounts needed locally, I would rather convince somebody to pack their bags and go to SV if they had something worth of an exit in the future, rather than selling their souls. The SV incubators have this spot-on. The ones in Europe? Not so much.

I do fully agree that any founder should not expect a 100k salary, Danny with his <20k is more realistic. You first pay everybody else and then take the cent or two that is left in the kitty. Marathon, not a sprint. Heck, I would love 20k currently after walking away from R1.2m+ annually.

Finally, let's tackle the age-ism that is apparent all-over:

Don't underestimate the old guys. Just because they used to earn 100k+ doesn't mean that they don't have the drive to make it work. Next time a startup needs to retrench people to get through some tough times, remember that some of us have been there, done that. Employing the right people based on fit and skills and not immediate need? Check. Growing from 3 to 100 people and be profitable? Check. Making the tough calls when things don't go according to plan? Check. Going into a board meeting with a radical plan after missing revenue targets by $2m? Check. Going through selling the company and dealing with the aftermath? Check.

Being a non-founder early on also teaches you the hard lessons. I could go on, but I'll just say this: As a gambling man, taking 2 founders, one 30-40 who has been around the block, the other 21 with the same idea and initial resources, I'll put my money on the over-the-hill toppies each and every time.

Good read, very interesting discussion and great initiative, Silicon Cape. I have never really paid attention to it until I saw Kevin’s link on his FB page yesterday. I completely agree with the general feeling in this thread that it requires some hurt money rather than easy money to have the privilege of becoming a (successful) entrepreneur.  Today I met with two business students from NL who are researching how ICT start-ups in South Africa are funded. I personally think it is too early in SA to focus on angel/seed investments, for that you need critical mass. Rather stimulate entrepreneurship at school/university, get rid of the idea that working for a corporate is the coolest. It is much more fun to be an entrepreneur! Also lobby with local politicians to put (tax) incentives in place for tech entrepreneurs and investors, like they do in some US states and eg Chile.

This post on Quora, succinctly explains why we need to create a large portfolio of angel investment opportunities...

http://www.quora.com/Brandon-Smietana/Graphs-for-Angel-Investors/Gr...

You probably want to head to the Kaufmann Foundation study rather than just look at the graphs.

http://www.kauffman.org/uploadedFiles/angel_groups_111207.pdf

I've read it :-)

The link is for the people who want to understand more about the graphs ;-P

Hey Vinny, Al and other contributors to this stream... Great debate and would love to add my 2c worth in a proper response on VC (more like Growth Equity) in SA and Angel Investing. But time = enemy. I do agree with Gareth that the big Red Flag and missing piece in the SA early-stage acceleration puzzle is: What happens when these startups actually start succeeding? You can incubate and mentor and 'Business Plan Competition' all you want, but if a high-growth venture needs to go global in a narrowing window of opportunity niche, some real equity investment funding is most probably needed in the mix to achieve that...

+1

Spot on.

And if we don't do it, government will try, and mess up the space completely.

Good discussion going on here. After a lot of reading, here's the crux in my opinion:

1. Salary: R100K+? Ridiculous. If you are going to start your own business, and you have high costs, you need to prepare. If you don't, better for you. @Gareth - who the heck earns R100K a month? Whoever does needs to accept and plan for earning way less while doing their start-up, funding or no funding.

2. Equity/Share: There things will be discussed and vary per start-up. Some businesses don't actually need funding. But I feel the incubator needs a proper share for going the long road.

3. Age and experience: It doesn't really matter who is running the start-up, it matters what they've done. Who would you prefer: A senior manager from Sanlam or a 24-year old who has already sold his first start-up? Age is irrelevant. Experience is. In your sector, idea, etc, and in being an entrepreneur. The incubator would provide mentorship anyway, we hope.

But the overwhelming question actually is what Vinny (or someone/people he is asking on behalf of) wants to know: Volume. Because he rightly says that without a number of start-ups, the numbers won't work.

So, do we have enough start-ups in SA worth taking on? I don't believe we only have 20 idea with 10 of them being apps. So what if they are an app. I think we can definitely find 50 start-ups. But 100 - that may be too much.

My $1.

RSS

Help spear the word!

Add this image to your site:

© 2014   Created by Roger Norton.

Badges  |  Report an Issue  |  Terms of Service