MANY of SA’s emerging technology startups are struggling to stay afloat. Three out of every four say they will run out of funds within the next year, according to a new survey.
The Ventureburn Startup Survey, released in June, found access to finance to be the top concern for 43% of tech startups.
The survey was released in partnership with local startup news site Ventureburn, FNB, investment advisory firm Clifftop Colony and analytics company Qurio. It polled 197 tech startups, defined as firms with an annual revenue of up to R20m and with fewer than 100 employees.
Local startups — as is common elsewhere in the world — are mainly founded by men, two-thirds of whom have a software-engineering background and are under 36. Over half of SA’s tech startups are based in the Western Cape (59%), followed by Gauteng (29%).
Most tech startups have been operating for less than two years (71%); have few employees (only 12% employ more than five people); and have small revenues (58% bring in less than R100 000 a year). Fewer than one in five (17%) are profitable.
The majority (56%) fund themselves by bootstrapping, while another 11% rely on friends and family. A mere 2% reported having been able to get a bank loan.
In addition, just 3% of start-ups tapped venture capital. The latest figures available — from the 2012 SA Venture Capital Association (Savca) Venture Solutions VC survey — show that between 2009 and 2012, R835m was invested in 103 deals by 22 funds, at an average of R8,1m a deal.
Stuart Thomas, who helped compile the Ventureburn survey, said this did not necessarily suggest that venture capitalists and angel investors should feel obliged to fund more startups, but simply that more needed to be done to educate startups about the available funding. His bigger concern is that so few startups are funded by banks.
"Given the capital they have access to, there could probably be more done on that front — in terms of both perception and reality," he said.
The survey also reveals that of those that did get funding, 44% received investments of less than R50 000. Only 16% received more than R1m.
The authors said this raised the question of why SA does not have more seed funding rather than equity or royalty splits for financing such startups.
Keet van Zyl, of venture capital fund Knife Capital, suggested government could put out challenges to startups to solve specific issues to catalyse growth.
"Things like the TIA (Technology Innovation Agency) seed fund or Design Innovation seed fund could go some way to assist in general," he said.
TIA ran one round of seed funding in 2013, disbursing R26m to 70 projects. Its CE, Barlow Manilal, said in July that there were plans for another round soon.
But Alexandra Fraser, who handles stakeholder relations for startup lobby group Silicon Cape, isn’t quite convinced that more seed funding alone is what SA’s startups need. She points out that many startups are not necessarily scalable and that one had to be careful of simply using seed funding to pay salaries.
Seed funding, she said, needed to be coupled with business mentoring. She added that what SA probably needed was more angel investors.
Some progress may be being made here. Since amendments to national treasury’s venture capital tax incentive (which has stumbled along since its launch in 2009) came into effect in January, nine new venture capital companies have been approved by the SA Revenue Service.
This brings to 16 the number of such companies that can now take advantage of the incentive by attracting investments from high net worth individuals, and lend these on to small firms.
The real problem, says Fraser, is access to markets, which preliminary findings from an upcoming survey by PwC and Silicon Cape had indicated is a greater challenge than access to funding.
Perhaps startups can grow to scale if they target the international market. But few do.
In the survey, 65% of start-ups listed SA as the market they operate in. By comparison, 15% operate across the whole world.
A survey released in January by India’s IT association Nasscom found that 43% of start-ups in India focus on global customers.
Van Zyl said it was concerning that the survey found that only 13% of local startups focus on African expansion.
"Particularly because, in theory, SA is in the unique position of being a Third-World and First-World combo that should give us a comparative advantage to come up with African solutions to African challenges and enable our entrepreneurs to scale this through Africa and other emerging markets."
Many startups complain about SA’s strict exchange control rules which make it difficult to sell intellectual property (IP) overseas and so hold the sector back from expanding faster.
Those startups wishing to internationalise their IP have to domicile their company in an offshore tax haven. Addressing exchange control rules was one of the recommendations put forward last year by Simodisa, a local lobbying group for start-ups.
However, Van Zyl said though exchange control rules are not making it easy, good entrepreneurs find ways around this. He pointed out that almost all the firms in Knife Capital’s year-long accelerator programme have international clients.
"It is true that SA tech start-ups don’t focus enough attention on the international market, off the bat. But as these companies grow and move into scale-up phase, this ratio increases, for the successful ones."
Van Zyl was recently in Dallas to assist orderTalk, one of the venture capital company’s portfolio companies.
"(The company) started in SA but of the current 18 employees only two remain there. So SA loses some of the great tech entrepreneurial companies as they grow and look for markets elsewhere."
Tech startups still face obstacles. More help from seed funding and angel investors might help them overcome these, along with a relaxation of exchange rules on IP.