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Business Management

David Blakey (South Africa): Tech Business Start-Up Funding in South Africa

Walking the 90 / 10 Tight Rope

One of the fastest games in the world is venture capital and tech business start-up funding. In the last 12 months we have seen LinkedIn make its IPO and now Facebook finally going public is causing serious rumblings around the world. Of course these are big, center stage companies, but there is a plethora of start-ups that are less well known, but performing as well, if not better, for their venture capital partners. This continued drive in tech start-up venture capital is not relegated to America alone. It is a worldwide phenomenon.

So why are there so few tech start-ups in South Africa?

Conservative Capitalists

A venture capital investor once said to me that out of ten investments, he expects seven to fail, two to return his investment and one to make a fortune. Those are pretty scary odds for someone investing large amounts of capital. But those odds become terrifying for someone about to leave the security of the job market to launch a start-up business. The people funding you believe there is a 90% chance of failure, and the South African commercial financiers don’t particularly fancy those odds.

We are, at the best of times, conservative and very wary of risk. Of course this means South Africa’s banking and property markets are able to weather the current global financial storms. But it also means that leaving the safe haven of an office job to go it alone is very rarely on the top of our to-do list. What’s more, our bankers and financiers are generally not so keen on funding something as airy-fairy as a great tech idea, funnily enough the same goes for the creative and entertainment industries. So it’s no wonder that many South African start-ups end before they even crank up the proverbial engine, the main reason being they couldn’t raise the venture capital financing required to start.

Bootstrapping to Success

There is always the option to bootstrap your way there whilst moonlighting as a network engineer or software salesman. It takes longer, but eventually it means you end up with a track record that the financiers trust, though it’s hardly Mark Zuckerberg or Reid Hoffman style. It’s far more Steve Jobs, Bill Gates or Mark Shuttleworth in execution. But my question to you is: “Is that such a bad thing?”

The reality of start-up and venture capital funding revolves around three core concepts: the big start-up idea; the management of money; and the management of people. You cannot get away from these three foundation blocks. It is rare that someone comes along with a really big idea that crashes servers overnight because it suddenly goes so viral that not even the guys who created it can hold on any more. More often than not, real success comes from doing your homework. The most important part of the big idea is ensuring that your product is something that people really want. Do the analysis, beta test your product, see who bites, don’t be afraid to put out a free tester. Once the thumbs go up and the market says “yes please”, then keep building and start selling. The primary positive to bootstrapping is that the risk is lower. You are not so desperate that you are going to starve, but you are not so comfortable in your job that you want to be there forever.

Managing Cash-Flow and People

Now you need to put together the pitch and build a team. At the beginning you will be the team, you and your buddy Bob who developed the new piece of software. Or it might just be you, so you will need to pull someone in on a profit share agreement. Get clear on who is doing what: who is doing the maintenance, customer support and bug iron-outs; and who is handling sales and cash-flow.

Remember sales don’t just mean more money; sales mean a solid track record and give your prospective venture capital investors something to measure ROI against. If you can manage a solid growing flow of sales, then your prospective VC partners also feel a lot more secure about you nurturing their seed capital. Professional VC companies in South Africa have a very strict litmus test on profitability. Most will not accept a loss-to-win ratio of less than 50%, so you really need to be able to show them that your idea has the capacity to go all the way and that you can take it there, not just on the cash-flow side but on the people side. Also be realistic about what you need in terms of the VC investment - do you need 100 offices worldwide with 10,000 staff, or are you planning to stay in for another year and sell out as soon as the offer gets big enough?

These are just some of the things that you need to consider before running the start-up gauntlet, but also know that things are changing, Silicon Cape is attracting international venture capital interest and the opportunities are increasing. It is possible to get the funding and to make a good idea work. I have only given you a rough idea on the start-up process, but know that it is possible. The key is do your homework and ensure that you have a solid financial person and a solid human capital manager in place. Sometimes bootstrapping it means you don’t even need the VC, but they do open doors and their network of prospective buyers is also something that is highly attractive.

The important thing to remember is that a successful start-up is more often than not the product of consistent ongoing work and improvement. If you do happen to be the next big thing, great, but you can still be super profitable and attractive to the Venture Capitalists if you have a solid product and great services.

By David Blakey, Snapt

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