Nothing ventured, nothing gained in VC in South Africa
It’s a well-known conundrum that venture capital in South Africa is not about venture at all, since investors who call themselves VC tend to back only businesses that are already generating profits.
The result is that technology start-ups are rarely funded by investors, and usually rely on the pitch playground: innovation competitions and hackathons, start-up incubators and accelerators, on-stage pitches and performances, which look more like beauty contests than investments.
The flaw in financing runs deeper than mere risk aversion, though. Vinny Lingham, one of South Africa’s most successful tech entrepreneurs, having exited a string of start-ups at values running into hundreds of millions of rands, believes the problem lies with both investors and money managers.
“You can’t give risk capital to people who don’t want to take risks,” he told Business Times. “A lot of money is given to money managers who can manage money but can’t help entrepreneurs manage businesses. You can’t ask them to invest in risk-takers. So you have the contradiction that people who have run successful companies give money to people who’ve never run companies, to back people who are running new ones.”
Lingham argues that former company founders should completely bypass the VC sector. “The best capital is sweat capital: someone who has earned their money from building companies, not from banks who are never doing it themselves.”
To their credit, South African banks are increasingly investing in or acquiring tech start-ups that fill gaps in their own offerings. FNB, Standard Bank and Sasfin are all fertile territory to plant new ideas in financial technology.
Lingham does not buy this argument, however.
“There’s a lot of windowdressing in the fintech world, a lot of people building startups that solve corporate problems. The best fintech companies of tomorrow are ones that try to disrupt. Instead, we see a lot of them need corporate partnerships to be successful. They’ll be OK, but not game-changers.
“The ones who disrupt the status quo are the ones who will change things. It’s the disruptive innovation, not the incremental, that will make the big breakthroughs.
“These fintechs are designed for the purpose of becoming part of banks rather than replace them. In the US, what’s successful is services built around banking but that compete with existing services rather than augment them.”
Lingham has put his money where his mouth is. He has made a small investment in RobinHood, a $5-billion (R68.5-billion) business that offers free stock trading to all.
“It’s a small holding, more for the theme behind it. I want to invest in the next generation of apps.”
He also helped Cape Town cryptocurrency start-up Getwala.com, which aims to be a bitcoin for the unbanked, raise more than $1.5-million in what is known as an initial coin offering. His own identity management company, Civic, raised $33-million in an ICO. His previous start-up, an e-commerce service called Gyft, was sold for $50-million.
It is telling, however, that he is now based in Silicon Valley, near San Francisco: it is the heartland of real venture capital.
‘You can’t give risk capital to people who don’t want to take risks’
Goldstuck is the founder of World Wide Worx and editor-in-chief of Gadget.co.za. Follow him on Twitter @art2gee and on YouTube