Venture capital drives small business
For many, venture capital (VC)represents the Holy Grail for funding. The internet is littered with examples of entrepreneurs or small to medium enterprises (SMEs) in Europe and the United States (US) hitting a veritable funding jackpot with VC, enabling them to grow into successful multinational operations.
But what is the situation for SMEs in South Africa? Does the VC market in the country stack up to what is internationally available?
Stuart Gast, executive director at VC investment company Invenfin, believes that while South Africa still has a long way to go to get to the levels of investment in Europe and the US, the market has been growing steadily in recent years.
“Government is also doing its bit with the budget speech earlier this year showing that there is a lot of focus on investments into young businesses.
“When we started five years ago, little was happening in this space. This has changed in the past year with a lot happening in the startup space,” he says.
Local success, international growth
Crispin Russell, chief executive of ArcAqua, a company that designs advanced sanitising solutions, says VC has enabled the company to take its business to the next level.
“Many years ago, we were looking for VC to take our product from a concept into a product. We needed someone behind us with energy and pull in the industry to let us scale our business locally and internationally. Following a process, we ended up at Invenfin and have not looked back since,” he says.But while a part of VC is the money, it is not the only thing.
“Funding always helps, but it is that person or organisation who has the expertise and who has done it before that makes the world of difference. An organisation that has the legal background, the marketing people, as well as the strategists in place to take something from a concept and help turn it into a product,” says Russell.
He agrees with Gast that the South African VC market still needs to catch up with the larger international ones, but there are other benefits that make up for its lack of size.
“In more developed VC markets, it is difficult to get potential investors interested at an early stage. Since the markets are more refined there, they are not interested in just an idea, whereas in this country you get more interest at a much earlier stage.”
Tips and tricks
But what does an entrepreneur or SME need to do to get a VC interested?
“In essence, you need to get a second meeting with a VC. This means that you have to pitch well and research the investment firm you are approaching,” says Gast.
According to Russell, VC firms have particular mandates and if an entrepreneur pitches something that falls outside that, they immediately lose credibility.
“Funds also have a lifecycle so you need to make sure that you pitch at the right time for your business. In the internet world, doing quality research yourself is not difficult.
“A good research report from the US could maybe set you back R5000 so be prepared to spend the money for the long-term potential of the business. The biggest sin is if your potential VC knows more about your industry than you do,” he says. Russell reiterates this point.
“The further you are down the road from taking your concept into something more, the better room you have for negotiations. From a VC perspective, the patentability of your product is another important aspect. After all, if you have a great concept, but millions of other people have similar ideas then it is not worthwhile.”
He says that entrepreneurs need to explore this aspect first and do their homework properly when it comes to what currently exists in the market. This, he feels, gives the business much more appeal to the VC.
“Another element is looking at how well the VC firm will fit into your business. The majority of funds are in the business to build a great product and give them a good return. However, the ones who are just in it to make a quick buck should be avoided at all costs.”
ICT the springboard for SME success
Terms such as connectedness, cloud computing and virtualisation have all become part of the business vernacular of the digital age.
But what impact does the evolving information and communications technology (ICT) landscape have on small to medium enterprises (SMEs)?
Kevin Jacobson, general manager for enterprise marketing at MTN Business, believes education forms an important step in showing SMEs the benefits of technology.
“SMEs need guidance to show them the potential that ICT gives them. Many still feel the need to work in the traditional way and often do not see all the tools they have at their disposal.”
But Wanda Matandela, executive head of SME and SOHO (small office/home office) at Vodacom Business, believes that the rate of technology adoption in SMEs is increasing.
“We have found that smartphone penetration among SMEs is the highest it has ever been. They have certainly moved with the times and are quite nimble to adopt technology, especially mobile.”
He says that the traditional problem of high mobile data costs is becoming a non-factor.
“When it comes to mobile data, pricing has become incredibly aggressive. The average cost of 1GB of data a year ago was approximately R300, today it is closer to R60.”
Both Vodacom and MTN agree that the SME market require ICT solutions that meet their specific needs and get frustrated when they are classified under the consumer segment.
“SMEs are price conscious, but they are also still looking for a quality experience. So whatever the solutions that are developed, it has to make economic sense for them,” adds Jacobson.
Sean Riley, the chief executive of digital advertising company Ad Dynamo, says that the growth of mobile in South Africa has enabled them to reach a different audience than in the past.
“Today, everyone has a cellphone. The 24/7 connectivity provided by mobile devices means people have embraced using the internet wherever they are.”
Riley believes that this has also changed the way companies such as themselves, who rely on sales people in the field, can now use different tools to manage customers, improve lead conversions and save money while doing so.
“Our Nigerian team is completely mobile and effectively run the business from wherever they are. This has resulted in faster turn-around times that is essential in a competitive market.”
This article has been made possible by the Mail & Guardian’s advertisers. Contents was sourced independently by the M&G’s supplements editorial team.