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No interest in VC funding

South African entrepreneurs are obviously loaded.

How else can you explain the fact that the next First Tuesday, which was meant to be a

“panel discussion to determine the state of VC funding in South Africa, what funders are looking for and how you can go about gaining access to the funds available”

has been cancelled due to lack of interest?

And here I was, worried that our super-smart South Africans are at a disadvantage when it comes to creating killer applications that can take the world by storm. Rather, they are too busy ducking from all the money thrown at them to attend a meeting to encourage them to get even more.

I remember a couple of years ago chatting to Julia Long from HBD Venture Capital, when I commented that fielding all the proposals for funding must sometimes be a nightmare. To which she replied that, in fact, they were not getting enough good proposals!

So what’s going on? Have we become experts at developing applications at minimum cost? Are founders putting up their own money? Are lenders over eager to lend?

Or, heaven forbid — are we just not developing applications any more?


  • Eve Dmochowska spends her day playing on and with the Internet, and thinks it is a rather fun way to make money. She is the founder of Crowdfund, a crowd sourced fund to help local online startups get off the ground, and of the Geekspace, Joburgs first hot desking space for geeks. She is also the co-founder of The Broadband Bible which helps SAfricans find the perfect ADSL plan and the Airtime Bible, which compares the costs of cellphone contracts.


  1. Justin Hartman Justin Hartman 29 August 2007

    Hmm… an interesting topic and set of questions. From my own personal experience I have to admit this First Tuesday thing is very poorly marketed and new to most entrepreneurs. Where is it advertised and how is it marketed because I’ve never seen a single thing about it.

    I for one would have loved to meet some VC for but alas if we don’t know about these things how can we show an interest?

    To answer one of your questions I’d like to say that SA Entrepreneurs, particularly in the new media and web space, have learnt to develop apps on a shoe-string budget.

    We just don’t have the buy-in of influential people in this country for them to justify investing say R1 million on a web application which puts all of us at a disadvantage.

    As a founder of 5 web-based applications I know that unless you can do it yourself, financially that is, no one else is going to do it for you.

    One of the key rules here is that you’ll only attract money and VC when you’ve become popular and successful which is the irony in this whole debate.

    Anyway, that’s my 2 cents worth.

  2. Vincent Maher Vincent Maher 29 August 2007

    I agree with Justin on this one, we have learnt to do everything on the cheap. It’s a good thing in a way, but it really doesn’t promote innovation at all. I think VCs need to make themselves more accessible and start coming to things like the 27 Dinners etc and meeting people. There are some people with great ideas in SA that just don’t get to realise them because they don’t have the means.

  3. Justin Hartman Justin Hartman 29 August 2007

    Exactly Vince. It’s a part of my move to a big media company – I’m just sick and tired of putting in so much effort for so little reward. Any first world country and you and I would be starting with $1 million+ to develop our ideas but this just isn’t encouraged in SA.

    I do believe it will change as big corporates and media companies are starting to realise this Internet thing is here to stay but when it will transform no one knows.

  4. Darren Darren 29 August 2007

    Has the world [or at least SA] gone mad?

    This article and the comments illustrate the sorry state that our VC industry is in – hopefully just a [severe] lack of focus. Surely it can’t be a lack of funding, with the dti and other investors reportedly soitting on cash reserves with nowhere to put it. Or perhaps they’re just looking for the sure thing, rather than taking chances on a high growth potential startup [certainly there is risk involved] – further contributing to SA’s status as a poor innovator globally.

    As Justin said: “One of the key rules here is that you’ll only attract money and VC when you’ve become popular and successful which is the irony in this whole debate.” – the same was always said about banks. Now even the guys who are meant to be “risk-takers” are being labelled like this.

    Funding is always a problem for new businesses – globally, if I’m not mistaken. But there must be a way to solve this creatively, just putting the right pieces in place… which will lead to frustrations as expressed here being removed and a high energy, high growth, exciting entrepreneurial environment!

  5. Eve Dmochowska Eve Dmochowska Post author | 30 August 2007

    Thanks for a all your comments. You all raise valid points: from getting the word out about First Tuesday to shoestring budgets.

    I am hosting the next OpenCoffee Joburg next Wednesday. For this time, it is a by invitation only, because I actually want to sit around the table with eight or so people and have a proper discussion as to how/if any of the funding issues can be resolved. If you are interested, drop me an email at [email protected]

  6. Vinny Lingham Vinny Lingham 30 August 2007

    My view on this is that South African investors typically look for discounted cash flow investments. Web/Tech investments are rarely cash flow positive in the first few years.

    Even though I’m now setting up a VC fund, this means that I’ll be making investments in companies that have a path to traction, but are already past the seed capital stage. Bootstrapping is the only way to go, unless you have rich relatives or friends.

    The VC’s in Silicon Valley use the “Angel” investors to filter out the crap, but having them make the initial investment, and after there is “something” there, then pursue it with a Series A round of investment.

    We need to create a greater culture of R1m-R3m “seed capital” investors who assist young companies with startup capital, and have confidence that if they choose the right one, there are true VC companies around the corner that can take the risks of making a larger and more substantial commitment to a venture. This will take time, but I think it will happen.

    I’m trying…

  7. Vincent Maher Vincent Maher 30 August 2007

    Vinny so glad you’re in this conversation. In your opinion, is the problem that local VCs are not public enough about how to access them or are they simply not looking in the R1-2M space?

  8. Vinny Lingham Vinny Lingham 30 August 2007

    Vince, in my opinion, there are three problems:

    1) Lack of Angels investors in the Internet space in South Africa, that are willing and able to put anywhere from R500k to around R3m into a startup venture.

    2) The lack of Angels is a direct result of a lack of Venture Capital investors that are willing to inject VC into a prototyped business that angels have invested in, at the R2m-R10m level. These are pre-revenue businesses. We’re enamoured with DCF based valuations.

    3) Third problem is that startups do not look at the global picture, and often just think local, which is not sustainable at the moment due to ad revenue budgets.

    The other major problem we have is that our advertisers have not woken up yet. Online advertising in the US will exceed somewhere around $30bn this year – for us, it’s still less than $100m. Ad revenue powers many online businesses elsewhere in the world.

    We have a long way to go before this changes, but hopefully, with a few successes mounting under our belts, things will change.

  9. Gareth Ochse Gareth Ochse 30 August 2007

    A couple of perspectives here, based on my role (historic) as an early-stage VC guy in London, and as an online entrepreneur with global ambition from SA (current).

    1) The main problem is a lack of quality ideas in SA: simply put, its very hard to justify a fund of sufficient capital for this kind of space, when there are so few quality ideas around.

    Here are some quick fund economics – you need a fund of about R350M+ before the fund management fee can carry a good enough team to make the correct investment decisions. Bear in mind that VC management time is their scarcest resource, so a deal of under, say R10M becomes more expensive from a time perspective than a cash perspective, so most funds would prefer not to look at small amounts. Most early stage investments are incredibly time consuming from a VC perspective – the businesses need hands-on management and nurturing far more than ‘established’ businesses.

    Then you need enough quality ideas to justify spending R10M on them. No doubt one or two exist. However, for a fund to work, one needs about 100 deals in the pipeline. 10-20 of these would be investigated beyond a first meeting. Maybe 5-10 would actually get investment, and if global lessons in early stage investing are anything to go by, only 1 in 10 would actually produce a good investment return. Most would fail outright. So, if you’re talking investing R10m x 5 investments, you’d need about 300 good ideas to be around before you’d be able to justify a ‘viable’ fund size, given that you’d expect to save about half the fund to spend in the subsequent funding rounds that the successful businesses would require. We just don’t have that in SA.

    2/. Early stage investments only make sense if you can flip them to someone. Put simply, as an investor you need to be able to make an early investment (Series A) then follow it through subsequent funding rounds, and finally exist through listing or a trade sale. Ideally, a trade sale is best. Without an established capital market that will buy the deals as they mature, not to mention the associated ‘ease of transaction’ through off-shore structures etc, its very hard for an SA fund to exit a deal to an international player.

    3/. What it takes to be global: Lets face it, aside from having a quality idea (these are the commodity element) everything else is about the team involved. Its execution, execution, execution – early stage businesses require a lot of balls and a lot of expertise. South Africans have a lot of the former, but unfortunately there are not a lot of world-class start-up teams in SA. As an investor or start-up company, you have to be asking yourself if you have what it takes to compete against some of the best and brightest in the world. There are very few start-ups who understand this and very few who actually have the ability to attract and retain such teams.

    4/. Luck: A lot of start-up success is really attributable to luck. Honestly. Its right place, right time kind of stuff, and one needs a lot of it to make a success of anything.

    5/. Bootstrapping: this is one we all go through. I’m not sure its good or bad – good in that it forces financial rigor early on and forces risk taking. Bad in that some ideas need a lot more capital than their founders have if they are ever to start. If you’re bootstrapping things, then you need a lot of luck.

    How this all ads up:
    – if you’ve got a great idea, you need to implement it well otherwise you’re nowhere. Implementation and execution requires excellent people, period. Excellent people cost more and have real choices that pay them a lot more than a bootstrapped start-up. The result is that a start-up with a good team will need more funds than one with a poor team, but I’d never invest in the former.
    – a big idea with global potential requires ammo. Not R2-3M rands, more like $5-10M, yes, for Series A.
    – you need a lot of these from SA to make a fund viable, plus the capital market and ease of sale stuff. We dont have either the supply of quality ideas, or the demand from the capital markets.

    What to do: we’ll, were bootstrapping here and are live and are lucky. We’re innovating and are in conversations about a big Series A round. There are local people who can do this. At the end of the day we’re focusing on managing risk and growing a business. Hopeful that the rest will follow, and that we’ll build something with that’s global, that eventually makes us money, so that we can run a fund one day!

    I’m open to comment on this post above or at ‘garethochse at gmail dot com’

  10. Eve Dmochowska Eve Dmochowska Post author | 30 August 2007

    Gareth: Wow, that was all well said. It’s good to have a dual perspective of one who has funded in the past, AND one who wants to be funded in the future. Usually it is the other way round.

    I want to clarify something, though. You say that “you would never invest in [a start up with a good team]”, and prefer one with a poor team. I assume (and hope) that that is a typo?

    Your point about needing 300 good start up ideas makes such sense, and yet I cannot help but feel that it also therefore means doom for start ups here.

    Not for you, of course! Good luck with Buzzfuse – we’re all rooting for you!

  11. Gareth Ochse Gareth Ochse 30 August 2007

    Yip, apologies – typo. To make it clear – early stage investing is 80% about having the right team, 20% about what you think you’ll be doing when you start. VC always invest in teams.

    re the 300 good ideas. Its true, but it doesn’t mean that if you’ve got a good one you shouldn’t pursue it – there are people who fund them, and one good thing about SA is that you can test the market with a beta here at lower cost than if you were doing it in, say, London. Only if it works you have to plan to move very quickly internationally.

  12. Darren Gorton Darren Gorton 30 August 2007

    Excellent to hear this perspective! Interesting though that most of the time is spent discussing and debating the ideas and the viability thereof.

    The best way I’ve heard typical VC wisdom described is “Bet the jockey, not the horse”, and looking at the quality of experience of commenters on this page, seems to me the people involved are more often discounted in the SA environment, with the idea driving funding decisions. Pity, but understandable in an “immature industry”.
    Gareth – your comments on the strength of the team are great.

    Sure, as a country, we’ve got challenges to overcome, but once we’re over the hill, the upside is HUGE!

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