Oh the weather outside is frightful, but it’s not snowing in the south-western tip of Africa. The wind’s howling and four seasons are constantly…
PoweredbyVC is a venture capital fund based in Cape Town, initially established in 2010 by members of emerging market investment group Here Be Dragons (HBD) — the company created by famous internet entrepreneur Mark Shuttleworth. PoweredbyVC now runs HBD’s portfolio, and is always on the lookout for businesses to invest in.
Keet Van Zyl, executive director at PoweredbyVC spoke to Memeburn about what he looks out for in a startup, discusses the investment environment right now and delivers some sound advice for young entrepreneurs looking to attract venture capital.
MB: Is this a bad time to be looking for venture capital (VC)?
PoweredbyVC: Great innovations and associated returns emerge from troubled financial times, so the VC space is very exciting at the moment. As the banks and other traditional finance providers became more conservative with their lending policies, entrepreneurs turn to alternative sources of finance, adding to an influx of VC deal flow. However, the number of South African VC transactions, as well as transaction values, decreased significantly over the past two years as VCs conserved capital by assisting portfolio companies to maintain a low cash burn rate (planning, cost cutting etc). It is also more difficult for SA entrepreneurs to obtain seed or start-up capital today as VC investors moved up the ladder towards later stage development- and expansion-type deals as a result of the recession.
MB: What are the kind of factors that you look out for which tweak your interest?
PVC: Our 80-20 rule for VC deal screening is to look for the following key elements in a proposal before spending time analysing the rest of the detail:
- Management Team – The business should have a strong, passionate management team with relevant experience to successfully execute an ambitious business plan;
- Uniqueness – Businesses/ products/ concepts should be unique in order to create a higher barrier to entry by competitors;
- Scalability – There needs to be a high probability that revenue could grow significantly faster than expenses;
- Growth Industry – The industry or market niche in which the business operates needs to show future growth prospects to facilitate corporate activity and enhance exit potential. Current growth industries that are more competitively forgiving than the market as a whole include alternative energy, the mobile space, software and IT services.
MB: Where should a young entrepreneur put his focus in the beginning?
PVC: In the beginning, the focus should be on defining the business concept and setting some business boundaries to avoid trying to be all things to all people in the hunt for revenue streams. Networking and building relationships with key stakeholders should be a focus area from the outset. A young entrepreneur should ensure that he perfects his craft, while developing a customer-focused growth strategy. An innovative technical solution in isolation will not guarantee success of the product. Ultimately, it is all about disciplined execution.
MB: How well developed should a business be, before approaching VC?
PVC: A business does not necessarily have to be well developed before approaching VC, but one cannot simply wake up with a brilliant idea and expect to raise funding on the back of that alone. There is a difference between someone with a good idea and an entrepreneur who takes some risks to develop that idea further and turn it into a viable business. Seed and start-up funding is available where ideas are combined with strategies to outline a clear growth path and implementation plan.
MB: In terms of infrastructure for a new business, where should your priorities lie?
PVC: Infrastructure requirements will differ for each business but, in general, fixed costs should be kept to a minimum while strategy and business development is prioritised in order to build a transaction pipeline. A new business should nurture its distinctive competencies (those unique strengths that allow the business to achieve a competitive advantage) but the rest could most likely be outsourced. Carefully increase resources and staffing in line with business growth.
MB: How involved do you get with the businesses you invest in?
PVC: We become intricately involved in each portfolio company to ensure that we take each R1 invested by the hand and lead it through the growth path to a profitable exit. This is done firstly by establishing a close relationship with the management teams, but also through formal structures like non-executive positions on the board of directors. We act as a partner by sharing business expertise and using our networks to increase shareholder value.
MB: What’s the best idea you’ve heard in 2010?
Because of confidentiality we can’t divulge details of entrepreneurial ideas, but some of the best of 2010 include revolutionising niche areas in the spaces around computer architecture compatibility, web activation, renewable energy and mobile payments.
MB: Advice for young entrepreneurs?
PVC: Build a clear vision. If you can’t describe your business in a tweet it should probably not be a business. Establish a fast, agile, adaptable business that is flexible enough to evolve along with your ideas and experiences. Shrug off the pessimists but seek and follow objective advice from people you can trust. Hang on to your day job for as long as possible while formulating your idea without losing your sense of urgency.
MB: What are some common misconceptions about finding VC in South Africa?
PVC: A common misconception is that VC is only obtainable by technology ventures. South Africa is not Silicon Valley — some of the best ideas are simple and focus on addressing emerging market needs. Very few established businesses consider VC as an option where it can be utilised as a catalyst for an aggressive growth spurt. Some people also seem to think venture capitalists will purchase an idea and run with it on their own resources, while the reality is that VC relies on the entrepreneur to execute his vision.
Memeburn: Give us your take on the VC scene in South Africa at the moment?
PVC: The Venture Capital (VC) market in South Africa is at an early growth stage and there are only a few players in the true VC space. We compete for deals on some level, but mostly work together to build the industry in this country. VC is becoming a more established form of investment in South Africa, and indirect factors are also assisting the positive momentum in the industry. Initiatives like Silicon Cape are bringing together different stakeholders in support of entrepreneurship; international investors are looking towards diversifying into emerging markets and the angel investment scene in SA is more active than most people would imagine.