Noth­ing ven­tured, noth­ing gained in VC in South Africa

Sunday Times - - The Back Page -

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 Get­, 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 Gad­ Fol­low him on Twit­ter @art2gee and on YouTube

Arthur Gold­stuck

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