Venture Capital in South Africa
I read this blog post today on South African Venture Capital.
According to the blog, Mark Shuttleworth's firm, HBD, believes that:
'Venture capital is better spend on existing and growing firms' This is the opinion of South African venture capital company HBD, which is still strongly associated with information-technology entrepreneur Mark Shuttleworth.
I'm not so sure I agree with them on this point... I'd love to hear some views on the blog post mentioned above. There are a number of companies now competing for first round funding in South Africa, including HP Ventures & InVenfin. HBD views seem to contradict the hard work going into creating an early stage venture capital industry in South Africa and instead focusing on purely a private equity play.
If it were not for Yola's first round of venture capital funding into a company of only 6 people (at the point that we did not even have revenue), we would not have survived. I fully endorse venture capital in South Africa for early stage companies, although I concede that we need to concrete an ecosystem to improve the chances of success - but isn't that what Silicon Cape is all about?
According to the blog, Mark Shuttleworth's firm, HBD, believes that:
'Venture capital is better spend on existing and growing firms' This is the opinion of South African venture capital company HBD, which is still strongly associated with information-technology entrepreneur Mark Shuttleworth.
I'm not so sure I agree with them on this point... I'd love to hear some views on the blog post mentioned above. There are a number of companies now competing for first round funding in South Africa, including HP Ventures & InVenfin. HBD views seem to contradict the hard work going into creating an early stage venture capital industry in South Africa and instead focusing on purely a private equity play.
If it were not for Yola's first round of venture capital funding into a company of only 6 people (at the point that we did not even have revenue), we would not have survived. I fully endorse venture capital in South Africa for early stage companies, although I concede that we need to concrete an ecosystem to improve the chances of success - but isn't that what Silicon Cape is all about?
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Replies to This Discussion
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Permalink Reply by Gil Sperling on -
Hey Vinny,
Agreed, but how do you suggest going about improving chances of success?
I think the issues may sometimes be that a venture can have a brilliant idea but not a good marketing or strategy plan of rolling out for example. The may also misuse the capital and spend it on wrong resources etc. Would a venture capital firm maybe be able to offer a formula of how to use the capital?
Gil
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Permalink Reply by Brett Commaille on -
Everybody has their preferences when it comes to risk appetite. The later stage the business, the lower the risk. At Invenfin we believe in the potential in the early stage businesses which is why we invested in 4 projects pre-revenue. But that is where our appetite is. Many who started in the VC space later moved to early stage private equity and have found their niche there - each to his own.
I agree with you Vinny, someone has to fill the gap between Angel and Private Equity, or we won't have many existing business to invest into.
To respond to Gil:
There is no formula. Our approach is to work very closely with our investee companies to develop a business plan to reach their objectives. This is then turned into real costs which you request funding for and gets funded with certain milestones or monitoring mechanisms. There is no point is getting just money, you need the guidance to know how to best use the funds to achieve your objectives and that will vary greatly from entity to entity depending on your route to market or stage of business. The right funder will hold your hand through the process.
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Permalink Reply by Gil Sperling on
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Hey Brett,
Thanks for the reply, makes sense. How do you then judge the potential of a company pre-revenue?
Also, investing in pre-revenue companies, is there a method/terms you (Invenfin) use to minimise your risk?
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Permalink Reply by Arthur Charles Van Wyk on -
To an extent I can understand this.
What we have in this country at the moment is playing fields getting levelled at an unprecedented pace - in many industries. We find that one does not have to study under Professor Brian Haan to become a "known" in infotech anymore. Youngsters are coming through with brilliant concepts and most of them are self-taught as far as programming languages and development goes.
If I were an executive at a venture capital company and my colleagues and I have not a smidget of an idea how to tap into a demographic that is humungous and with the right plans, strategies, concepts and execution can be turned into a serious moneyspinner (think Kaizer Chiefs online community and complementary online retail) ..then I would also start putting plans in place to curb the amount of youngsters that's going to come to me hat in hand. This regardless of how much merit their plans carry or how brilliant they are as entrepreneurs.
We were dumb enough to invest in stupid things like requesting the name of the song from a radio station via sms at a time when Limewire, Kazaa et al ensured that some people have music lightyears before local labels who sample radio stations.
And now because WE were idiots in the past, we are hellbent on punishing people with business concepts that not only has the potential to make serious money.. but can also adds value to people's lives.
See through the fluff.
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Permalink Reply by Mark Pretorius on -
It appears the need is greatest for smaller, early stage investments, but South Africa lacks follow-on investors, thus forcing the few investors to participate in the full life cycle of the investment process without the staged risk / reward benefits. The issue is further exacerbated by the lack of acquirers who provide high liquidity multiples for innovation. Investors and entrepreneurs should embrace the world stage early for validation, customers, capital and liquidity.
The shift to later stage venture capital in the US is often driven by the need to deploy larger amounts of capital and mitigate risk accordingly.
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Permalink Reply by Arrie Rossouw on -
I agree, also with Brett. There are horses for courses. Maybe HBD will focus on existing and growing firms, but that leaves room for smaller VC players to fill the gap at the bottom of the start-up market. I think there is a lot of funding out there waiting to be utilised, but young start-ups are not aware of them. Silicon Cape is the platform for those VC funds wanting to focus on smaller funding options to become more active and visible.
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Permalink Reply by Vinny Lingham on -
My investment decisions is usually broken up into 3 parts:
1. The Entrepreneur (not the team)
2. The Concept
3. My ability to add value to the company
When I make angel investments - I don't invest in businesses that I do not think I can add value to (i.e. non-Internet).
In most organizations, the team can change and you can add and remove players - but the real heart of the company is the entrepreneur that you are backing - there is generally only 1 or 2 in any startup. As with the team, the concept will evolve over time and execution against marketing & strategy plans is intricately linked - if the team can evolve their plans and execute them, they will be successful. But, in many cases, the venture capitalist cannot add any value to the business and are purely financial investors - this is also a big problem. You need to back entrepreneurs who know how to spend their money and not rely on the investor to police how the money is spent. The trick, clearly, is finding the right entrepreneurs to back...
Gil Sperling said:Hey Vinny,
Agreed, but how do you suggest going about improving chances of success?
I think the issues may sometimes be that a venture can have a brilliant idea but not a good marketing or strategy plan of rolling out for example. The may also misuse the capital and spend it on wrong resources etc. Would a venture capital firm maybe be able to offer a formula of how to use the capital?
Gil
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Permalink Reply by Wynand Meyering on -
I would take a different approach to venture capital in South Africa if I was part of a venture capitalist firm like HBD. Look there are millions of web sites going live every day. One of those millions will be a new YouTube, Twitter, Google or MXIT or whatever. Selecting a winner is virtually impossible. It takes time and energy and resources to monitor these small entities, their progress, their management, their growth in users and revenue. I say: take 2% of a select number of quality .com start-ups in South Africa, invest small quantities and small amounts: broad-based investment with small quantities. Spread the risk, but invest in .com businesses that have a global reach - a possibility of a buy-out from a US venture capitalist / existing Nasdaq listed company / Forture 500 company. I say take a risk - be adventurous - don't hold back. You might just get 2% of the next Thawte - and wouldn't you have been glad you did... and encourage entrepreneurs to send their web site addresses and offer them ONLINE applications for evaluations and funding and advice. Let them secure a loan or an investment right there and then: online. No beaurocracy. No entrepreneur likes to drive around meeting tons of negative people. Venture capitalists should give .com entrepreneurs immediate online feedback and tips and an evaluation of their .com prospects and web site. Build relationships with the entrepreneurs and as time progresses - invest 2% more , 3% more , 5% , 10% ... but grow the relationship over time - and let entrepreneurs run their own businesses as they want to. Hands-off any .com business. It is that freedom and responsibility that gives most entrpreneurs the courage and confiction to come up with and build great businesses. The more control a venture capitalist firm tries to establish over a small firm - the slower the response of the entity. Momentum and creativity is lost. We need to build fast moving self-reliant business entities in South Africa. Entrepreneurs. You can get a million bright ideas from commited entrepreneurs. Guys like Steve Jobs can invent a million Ipods and Notebooks and Personal Computers given the time and space.
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Permalink Reply by Arrie Rossouw on
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Well said, Wynand. I agree with your suggestion. We are currently engaged in an elaborate, time consuming process to engage VC funds, and worry about the shareholding, structure, and accommodation of the VC fund in future, etc. In stead we just want to focus on developing our idea and getting it to market. Yes, for a very easy process and less time and schlepp knocking on doors.
Wynand Meyering said:I would take a different approach to venture capital in South Africa if I was part of a venture capitalist firm like HBD. Look there are millions of web sites going live every day. One of those millions will be a new YouTube, Twitter, Google or MXIT or whatever. Selecting a winner is virtually impossible. It takes time and energy and resources to monitor these small entities, their progress, their management, their growth in users and revenue. I say: take 2% of a select number of quality .com start-ups in South Africa, invest small quantities and small amounts: broad-based investment with small quantities. Spread the risk, but invest in .com businesses that have a global reach - a possibility of a buy-out from a US venture capitalist / existing Nasdaq listed company / Forture 500 company. I say take a risk - be adventurous - don't hold back. You might just get 2% of the next Thawte - and wouldn't you have been glad you did... and encourage entrepreneurs to send their web site addresses and offer them ONLINE applications for evaluations and funding and advice. Let them secure a loan or an investment right there and then: online. No beaurocracy. No entrepreneur likes to drive around meeting tons of negative people. Venture capitalists should give .com entrepreneurs immediate online feedback and tips and an evaluation of their .com prospects and web site. Build relationships with the entrepreneurs and as time progresses - invest 2% more , 3% more , 5% , 10% ... but grow the relationship over time - and let entrepreneurs run their own businesses as they want to. Hands-off any .com business. It is that freedom and responsibility that gives most entrpreneurs the courage and confiction to come up with and build great businesses. The more control a venture capitalist firm tries to establish over a small firm - the slower the response of the entity. Momentum and creativity is lost. We need to build fast moving self-reliant business entities in South Africa. Entrepreneurs. You can get a million bright ideas from commited entrepreneurs. Guys like Steve Jobs can invent a million Ipods and Notebooks and Personal Computers given the time and space.
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Permalink Reply by Vinny Lingham on
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Even more reason to start using Angel investors!
Arrie Rossouw said:Well said, Wynand. I agree with your suggestion. We are currently engaged in an elaborate, time consuming process to engage VC funds, and worry about the shareholding, structure, and accommodation of the VC fund in future, etc. In stead we just want to focus on developing our idea and getting it to market. Yes, for a very easy process and less time and schlepp knocking on doors.
Wynand Meyering said:I would take a different approach to venture capital in South Africa if I was part of a venture capitalist firm like HBD. Look there are millions of web sites going live every day. One of those millions will be a new YouTube, Twitter, Google or MXIT or whatever. Selecting a winner is virtually impossible. It takes time and energy and resources to monitor these small entities, their progress, their management, their growth in users and revenue. I say: take 2% of a select number of quality .com start-ups in South Africa, invest small quantities and small amounts: broad-based investment with small quantities. Spread the risk, but invest in .com businesses that have a global reach - a possibility of a buy-out from a US venture capitalist / existing Nasdaq listed company / Forture 500 company. I say take a risk - be adventurous - don't hold back. You might just get 2% of the next Thawte - and wouldn't you have been glad you did... and encourage entrepreneurs to send their web site addresses and offer them ONLINE applications for evaluations and funding and advice. Let them secure a loan or an investment right there and then: online. No beaurocracy. No entrepreneur likes to drive around meeting tons of negative people. Venture capitalists should give .com entrepreneurs immediate online feedback and tips and an evaluation of their .com prospects and web site. Build relationships with the entrepreneurs and as time progresses - invest 2% more , 3% more , 5% , 10% ... but grow the relationship over time - and let entrepreneurs run their own businesses as they want to. Hands-off any .com business. It is that freedom and responsibility that gives most entrpreneurs the courage and confiction to come up with and build great businesses. The more control a venture capitalist firm tries to establish over a small firm - the slower the response of the entity. Momentum and creativity is lost. We need to build fast moving self-reliant business entities in South Africa. Entrepreneurs. You can get a million bright ideas from commited entrepreneurs. Guys like Steve Jobs can invent a million Ipods and Notebooks and Personal Computers given the time and space.
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Permalink Reply by Justin Stanford on -
That we lack a vibrant VC ecosystem in South Africa, without a healthy spread of all of the various stage components (seed/angel to early to later stages), is one of the key issues facing the whole Silicon Cape movement.
With the entrance of 4Di Capital into the SA market place, we have specifically sought to address the early stage gap that exists currently (pre-revenue oppportunities), and then finding that there is an even earlier stage need (seed stage), we also devised an internal 'seed fund' to plug that gap where the current lack of an angel / seed capital ecosystem is impacting our capacity to get nicely qualified deal flow.
It's not necessarily ideal as we are essentially financing our own deal flow with a specific "ultra high risk" portion of our funds, however it seems quite a number of major VC funds in the US are now adopting a similar approach... interested to hear more from you Mark on this..?
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