The case of the missing startups
Vincent Maher generated a great debate late last week with his question “Where are all the South African social media millionaires?“. Vinny Lingham then responded with some of his reasons why the SA startup scene has not yet taken off.
The question Vincent asked in his article that hits on the main issue [and I take it is in response to his title question]:
Is it a lack of skills, a lack of VC or just a lack of commitment (or a combination of all three).[?]
Vinny’s response essentially covers the following main reasons for the dismal failure of startups:
- Punishment for failure – failures are viewed as disqualifying rather than qualifying experiences
- Failure to take risks – pretty self explanatory
- Unavailability of capital – due to few angel investors and VC funders willing to take the risk
- Too many consultants – entrepreneurial people taking less risk by focusing on others’ businesses
- Lack of global experience – not enough skills utilised in SA
- No liquidity events – no major exits providing capital and success stories
- Too much focus on advertising – and not enough on other types of revenue for online businesses
The point that struck me most, under no. 6 is:
those who control government funds are not in touch with the market and therefore don’t know where and how to allocate the money. Angel investors are urgently needed to get prototypes to market. Most VC’s cannot invest in a concept, they need more than that and there are to [sic] few angel investors around.
An excellent reply, and to me they all relate to one bigger major issue – the South African business environment is not conducive to startups – in general, we are setting startups up for failure rather than success. All stakeholders are responsible in some way, but I won’t go into that here.
Instead, just to quickly look at Vincent’s rhetorical question/answer [relating specifically to SA internet startups]:
- Lack of skills
Finding skilled/talented people is a problem in most industries. So with that said and understanding the natural skills shortages, I would have to say this isn’t the main cause as there are many people doing amazing things in the arena. There may possibly be a case of not having the right skills in the right place though, since people with high potential and great abilities are stuck in corporates working on mediocre projects.
- Lack of VC
Um, well… yes. Why would you invest in an internet startup? [especially after reading some of Vinny's points]
- It’s a lot less risky to go the Private Equity route and invest in established businesses which have a track record of good earnings and some stability.
- Even Venture Capital firms have strict qaulifying criteria that probably exclude many of the startups looking for funding [eg only over R2m, specific contracts and systems in place, etc]
- In the current financial climate where cash is king, finding investment of any type is incredibly difficult.
- Government is hardly pushing investment in startups [Blue Catalyst is one of the exceptions to this] or smaller businesses, and sadly not incentivising it strongly either.
Bottom line is that it isn’t pretty out there, and all the stakeholders are to blame – government, investors/businesses and the entrepreneurs. We can each do something better/different, but I’ll expand on that another time.
- Lack of commitment
By the entrepreneurs? Possibly true, but more directly, as Vinny pointed out, probably an unwillingness to take on the risk rather than a lack of commitment.
By the funders? Probably very true. And an extreme desire to avoid risk. [along with all the possible upside]
All in all, I think all stakeholders have caused the problem, making it slightly more complex to solve as well.
What do you think? How can we solve the problem and create an evironment to stimulate internet [and other] startups?
[These are my earlier thoughts for possible solutions]
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