America’s Silicon Valley is a combination of different factors all bought together in one place. It is a fearsome combination of experienced people, capital and ideas. Several attempts have been made to put in place in Africa the start-up and early stage capital required to create the funding end but they have in the past foundered on lack of experience and a sufficiently large funnel of “deal flow”. 4Di Capital’s Justin Stanford talks to Russell Southwood about trying to do this in South Africa and why it has focused on Cape Town.
In Silicon Valley, you have ex-employees of successful tech start-ups with share options, who re-invest some of that money back into the business. There is a significant concentration of both the technological expertise to produce ideas and entrepreneurs and managers to drive those ideas to success.
This track record of success feeds on itself for if VC investing is more akin to horse racing, then there are more people there (and in the USA more generally) who have “bet on the horses” and won big. Overall, there are greater levels of wealth and a better understanding in the investment community that some element of a portolio might go into high-risk like VC investing.
4Di Capital’s Justin Stanford knows the scale of the challenge his company has set itself and chose to focus on South Africa and mainly on Cape Town. Because there was a lack of community amongst would-be ICT entrepreneurs and actual ICT entrepreneurs that might help mimic the Silicon valley ethos, it got involved in launching the Silicon Cape Initiative in 2009, the year it started. To his great surprise, 1000 people turned up to the launch and they had to turn people away. There are now 5,000 members:”It helped to bring people out of the woodwork.”
These people were a mixture of existing small-scale entrepreneurs and university graduates looking to do something more than go into big companies. However because of the overall skills shortage, big South African companies are willing to offer good packages to graduating students. So you have to be very determined to want to go the more risky start-up route, especially with parental pressure to play it safe. Nevertheless there are now more people willing to travel this route and Stanford sees several hundred opportunities a year.
However, because the start-up investor space is not a crowded place, Stanford says they have to combine several stages that might be separate elsewhere and offer a lot of time giving “nurture capital”: We’ve had to straddle Angel, 1st round and second round funding because these don’t exist as separate offers at the moment.” Yes, there are a few start-up investment funds run by larger finance houses (Hasso Plattner Ventures and Rembrandt’s Venfin) but they tend to be more cautious. However things might be about to change with the launch of Angel Hub in Cape Town.
“We haven’t got to the point where people recycle their wealth.” There is no shortage of wealth looking for opportunities in Cape Town but the challenge is to convince those that control it that VC investment might be a sensible use of their portfolio. To deal with this trust issue – and it will be there whether you’re in Cape Town, Nairobi or Lagos – there need to be more successful “exits”. Investors need to be able to see that some of the investment bets pay off handsomely, whilst offer sufficiently modest returns for the combination of these two to be able to cover the inevitable failures and “ho-hum” results.
Silicon Valley practice seems to indicate that it’s possible to grow companies to a point where an exit can be made at 7-8 years but Stanford feels confident that on some of its investment portfolio they might be able to come out earlier than that, which will be key to raising subsequent rounds of investment.
Its investment portfolio includes: SMEasy (an, all-in-one, cloud-hosted business and financial management system for small businesses); Snapt-UI (enterprise grade management front-ends for open source server software); wireless ISP Skyrove; Personera (using Facebook to create personalised print media and branded merchandise); Motribe (a cloud platform with drag-and-drop creation of socialised mobile publishing and communities online for any handset); and mobile and web betting platform BetTech.
Some of these companies are looking to markets in the developed world, whilst others are more focused on markets on the continent itself. This orientation will to some greater or lesser extent determine where future buyers come from. Our own personal favourites in terms of the continent are: Motribe which is already powering mobile and online communities in large markets like Nigeria; Skyrove, which has the wireless expertise to create hot spots and remote community connectivity; and SMEasy, as the SME market is one that will grow now that is a greater level of connectivity and critical mass of users.