Why South Africa needs patient ‘co-opetition’ between venture investors

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Money Jar

A couple of weeks ago Ventureburn asked Marc Herson of mobile social network 2go, what the South African startup tech ecosystem needed, especially its Venture Capital ecosystem. This ecosystem is quite young but it’s a very active one and people are getting excited about Africa. In last few months we have explored a lot on South Africa’s tech ecosystem as well some funding dilemmas that the country’s startups face. Herson, a former VC partner at Hasso Plattner Ventures Africa, gave us the following response about what South Africa needs to have a healthy tech ecosystem. — Editor

A healthy tech startup ecosystem requires a continuous stream of quality new deals, together with visible examples of exits that generated outsized returns for investors. The reality is that we have few of either in South Africa at the moment.

Get the right team, chase the right opportunities

VC 101 mandates a quality team and a large market opportunity. The team needs to be adaptable, inventive and execution focused. The opportunity needs to be substantial and capable of rewarding investors with outsized returns. Systemically, South Africa has challenges in both regards: our local market is small in comparison, but our cost base is only marginally lower; and technology talent is difficult to access. We also lack a broader supportive macro environment with a flexible labour market, government incentives for startups and venture capital as a broad institutional investment category.

Reality bites doubly hard if you are sitting in South Africa battling it out in the global market.

Access to resources

One of our biggest obstacles is access to resources, especially engineering talent. The universities are just not producing enough engineers and scientists; and technology companies like Amazon, Google and Facebook are often headhunting our best and brightest at globally competitive salaries.

Local tech companies are also often competing head on with better resourced international competitors, who have the luxury of chasing growth rather than profitability.

I returned back to South Africa a few years back to find that local VCs do not usually co-invest. When working in the US and Germany I don’t think I saw a single investment at my time at Softbank Capital or Bertelsmann Capital where there wasn’t at least one other venture investor on the same deal. Syndication leads to smarter screening and company strategy and ultimately a broader base of investors to capitalize the business as it enters multiple financing stages.

In South Africa, where we have such a small base of venture investors I think syndication is absolutely critical. The reality is that when there are few deals – and a small market with limited exit opportunities – venture capital investors should be working more closely together not less so.

Aiming global might not be so great

Many South African early stage businesses focus on the lure of global markets, but the reality is that driving high growth global businesses from South Africa is incredibly difficult.

There has been a promising shift to focusing on technology businesses that focus on local markets.

Ironically this has been driven by international investors such as Rocket Internet and Tiger Global piling cash in to local businesses who are largely pursuing tried and tested digital clones of business models that have been proven in developed world markets.

Patient and smarter capital is needed even more so for startups in Africa, and co-opetition between investors will be key to driving the ecosystem.

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