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South African Money

No surprise: funding the biggest hurdle for SA’s startups

Over the past couple of years, there have been plenty of funding successes for the South African startup scene to celebrate. Just this year, WooThemes exited to WordPress holding company Automattic for a rumoured US$30-million and bike radar company iKubu was bought out by Garmin for an undisclosed sum of money.

But within the context of the space as a whole, those big deals are few and far between. What about the smaller companies? Is there enough funding for them to survive and thrive in a country that isn’t always seen as friendly toward small businesses?

The results of the 2015 Ventureburn Startup Survey suggest that small companies still face challenges in this arena.

In fact, of the numerous challenges startups face on a daily basis, 43% of survey respondents listed access to funding and capital as the biggest. And that’s above other challenges listed like “not enough skilled technical staff” (12%), “too much red tape” (7%) and the “market being too small” (9%).

The Ventureburn Startup Survey, which aims to uncover the “true picture of the South African startup landscape”, partnered with First National Bank (FNB), investment advisory firm Clifftop Colony and analytics company Qurio, to recently poll just under 200 tech startups. Each of the 200 startups were asked 42 questions ranging from funding, the profile of their founders, to their revenues and the everyday challenges they face.

But what does that lack of funding mean? Well, for one thing, it means startups have to rely heavily on bootstrapping. This is certainly the case in South Africa with more than half (56%) of startups surveyed saying they were self-funded. That’s not necessarily worrying, because if a bootstrapped business can make it through early-phase growth, it has a much greater chance of surviving later on.

When Ventureburn filtered the data to show only those startups that are profitable, there were even more startups (72%) that were self-funded. This adds weight to the belief that lean and efficient operations from day one forces companies to perform. For more information on profitable startups, see this graph or our parent article.

The next most popular source of funding, after self-funding, is “friends and family” (15%). In fact, more startups rely on investment by friends and family than on angel funding (6%). The survey indicates that just a handful of startups made it through to the bigger funding rounds, such as that of venture capital (3%) and private equity (1%).

Some of the least popular forms of startup funding are crowdfunding (0%), which is non-existent in South Africa, and government (1%), underlining the point that government can do more to support the burgeoning startup and entrepreneur sector. Banks, which tend to be more conservative with regards to their lending policies, also scored low as a source of funding (2%), but interestingly credit cards as a funding channel came out higher at three percent.

Only a minority of startups (4%) use service work to bolster their funds and revenues.

Q22

With the exception of venture capital and private equity, early-stage funding rounds tend to be very low. Among survey respondents who’d received funding, 44% received less than R50 000, with just 16% in total going over the R1-million mark. Just four-percent received more than R5-million in funding.

Q23

It should hardly be surprising therefore that 34% of respondents claim to have less than three months left before funds run out. In fact, most startups (75%) indicated they’ll be without funds within 12 months or less.

Q25

While 26% of startups are not looking to raise funding, just over a third plan to tap into venture capital (14%), private equity (10%) and angel funding sources (9%). Just over half (51%) aim to raise over R1-million.

Q27

More information on the Ventureburn Startup Survey:
Ventureburn survey sheds light on SA’s tough, but pioneering startup industry
What do South Africa’s startup founders look like, and what drives them?
Working for SA startups may be exciting, but not at all that glamorous
Go big or go home: most SA startups need to scale fast to survive
SA startup industry: all the stats and numbers you need to know [infographic]
Ventureburn Startup Survey: the full results [Slideshare]

Author Bio

Stuart Thomas: Senior Reporter
Stuart Thomas is a product of Rhodes University. Whilst completing his Bachelors in Journalism, Politics and English, he realised he was a bit of a geek, albeit one who isn't afraid of the sun. An honors in English at the same institution failed to curb this. An MA in... More