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Unwrapping the mysteries of SA’s venture metrics landscape [Infographic]

With additional reporting by Mich Atagana

South Africa’s startup landscape is an industry wrapped in mysteries and enigmas. It’s a world of near facts and almost could be truths, especially when it comes to funding. The average entrepreneur is not a 21-year-old University dropout. Also not all of them are men, yes women start companies too.

In a survey conducted by Knife Capital, around 337 entrepreneurs shed some light on this cloak and dagger industry and provided some interesting insights about venture seeking entrepreneurs and what they think their business is worth, how the founders met as well their risk assessment.

We have extrapolated the information from the survey and created an easily digestible infographic with the data. We have also explained some of the key insights to better contextualise the figures and interpret the data.

Company Profile

The average entrepreneurial venture seeking growth funding was founded by a 32-year-old male (one in seven founders are female) as result of an opportunity spotted in the market, is now three years old, has six full-time employees and plans to employ another 10 people over the next three years while achieving a 120% year-on-year growth rate.

While these ventures span across many different sectors, not surprisingly the Technology, Media & Telecommunications sector comes out top with 41% representation. One in every four ventures is 100% black-owned, while one-third have some empowerment credentials. It seems like the Cape is the place to be for entrepreneurs, with Cape Town plus Stellenbosch playing home base to 62% of ventures (Johannesburg: 19%, Pretoria 7% and Durban 3%). While it may be slightly skewed because Knife Capital itself is Cape-based, this trend can be compared to the 2012 SAVCA VC Survey when it was found that 35% of VC transactions happened in the Cape (Johannesburg: 30%, Pretoria: 18%, KZN: 8%).

Financial Position

Thirty-one percent of the businesses surveyed are not trading yet, but of those that are, two-thirds are yet to break even, resulting in a monthly cash burn of (mostly) below R50 000 per month.

The average current revenue of these ventures is a respectable R3.5-million, projected to grow to R6.8-million in year one, R18.6-million in year two, and R37-million in year three (assuming that funding is raised). Expansion plans include internationalisation into Africa and other key markets such as Europe and North America.

Funding and Valuation

Eighty-two percent of entrepreneurs have personally invested in their businesses while many bootstrap to extend the business runway. While there is a notion that there are limited available funding avenues for early-stage ventures in South Africa, sixty-eight percent of them obtained external capital before, mostly from the so-called three Fs (Friends, Family, Fools) and from Angel Investors.

Most entrepreneurs rated funding as the key business growth inhibitor, followed by mentorship/support and access to customers. Sixty-seven percent of these entrepreneurs are looking to raise less than R3-million with the median funding requirement amounting to R2-million.

Venture investors often get criticized for being too risk averse by not backing good entrepreneurial ideas or providing seed funding. But there is a counter-intuitive inverse relationship between deal stage and value. On average, local entrepreneurs value their ideas at R6.5-million. If you then do something about organizing this idea into starting a business, the value goes up to R8.6-million. However, if this business then gains traction and gets some paying clients, the value halves to R4.2-million. The scientific term for this is: ‘Reality Check’. Not surprising then that many local investors in this space only back post-revenue ventures that are de-risked to some extent offering better value.

The average valuation of these ventures is R10.1-million. Using the average revenue of R3.5-million, one can calculate that local entrepreneurs value their ventures at a 2.8x current Revenue Multiple. Compare this against the SEG Software Index (comprised of 133 public software companies that are more established and marketable), at more or less the same Revenue Multiple of 3x.

The Golidlocks moment

One of the most interesting insights to arise when extrapolating this data was the self valuation metrics. For investors there is a sweet spot moment when an investment makes sense — early stage companies. It’s what we are terming the Goldilocks moment, the risk isn’t too high and neither is the company’s valuation. Not too hot, not too cold, just right. It is the moment when a startup starts becoming a company and begins to see some revenue. Interestingly, it seems that the Goldilocks moment is also when entrepreneurs realise what their business is actually worth rather than what they would like it be worth.

Check out the infographic below. Complete the 2014 Venture Metrics Survey.

South African venture funding metrics infographic

Author Bio

Keet Van Zyl
Keet is a ‘Venture Catalyst’ with extensive high-growth investment experience. He structured various private equity funds in Southern Africa for a US fund-of-funds investor and worked at industry-leading companies such as Procter & Gamble, Investec Bank and Mark Shuttleworth’s ‘Here Be Dragons’ (HBD) Venture Capital. In 2010 he co-founded growth... More