The venture capital community in South Africa is too risk averse and doesn’t understand the start-up model, particularly when it comes to high-growth start-ups.
That’s the view of San Francisco-based South African Internet entrepreneur Vinny Lingham, who sold his last start-up, online gift-carding venture Gyft, for a rumoured US$50m-plus to First Data Corporation in 2014.
The East London-born Lingham, who is now CEO of fast-growing digital identity start-up Civic, said in a wide-ranging podcast interview with TechCentral (to be published later on Tuesday) that South African venture capitalists are too focused on making sure investments fit a theoretical model.
“As a start-up, you need good investors to support your growth,” he said. “The investment community in South Africa doesn’t understand start-ups, and especially high-growth start-ups. So, when valuations double in three months, they don’t understand how that’s possible, because it doesn’t fit their spreadsheet model.
“The problem with looking at spreadsheets is they (investors) become very valuation sensitive. Instead of looking at the big picture of what this [venture]could be, the mentality of South Africans is: how do you protected the capital in venture capital? That’s an oxymoron. Venture capital is not about protecting capital.”
He said the “biggest mistake” start-ups can make when taking money from investors is to try and protect themselves from failure “in the sense that they give up instead of failing”. He cited the example of a start-up he’d invested in that wanted to return a third of his money that they hadn’t yet spent and close down the business. He convinced them to refocus and carry on. His original investment has now doubled in value.
“Don’t give up,” Lingham said. “Failing is better [than giving up].”
‘What’s the point?’
As for investors, if they are averse to risk, they simply shouldn’t be in venture capital, he said. “And if you want venture capital returns, don’t give [money]to people who are risk averse. What’s the point of giving venture capital to people who think like bankers? If you want venture capital returns, you have to give it to people who think like entrepreneurs.”
He said that Newtown Partners, the South African-focused venture capital firm he founded with Llew Claasen, has invested in “maybe 20-25” companies. “Probably 15 of those are outright failures, but the top three are paying for all of those in spades. You don’t have to win every hand. You have to balance risk, and I don’t think the South African venture capital community understands that.”
Lingham said the local technology start-up community needs more high-profile exits similar to the recent sale of online education company GetSmarter to Nasdaq-listed 2U for $103m.
“I’m definitely seeing the quality [of South African start-ups]improving over time… There’s just not enough of it,” he said.
“South Africa doesn’t have enough high-growth companies that go from zero to hero in a couple of years. It’s a long slog, and that’s a problem, because people get tired and burnt out and so the money doesn’t recirculate.” — (c) 2017 NewsCentral Media