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SA venture capitalists slam inaccurate valuations by local angel investors

Inaccurate valuations from local South African angel investors are skewing the value of companies venture capital (VC) funds are keen to invest in, two leading venture capitalists have charged.

Speaking yesterday at an event held by Southern African Venture Capital and Private Equity Association (Savca) to launch a booklet (opens as PDF) on 20 local VC success stories, Angel Hub Ventures lead investor Brett Commaille pointed to a recent deal involving an angel investor.

“We had a deal recently where the guys from (financiers) Business Partners asked us to come along. And we were about to do a co-investment with them and the entrepreneur went and found an angel investor who after a meeting put the money in (the entrepreneur’s) bank account, no docs signed, no DD (due diligence) signed and at some or other crazy number.

‘If you dupe someone into a valuation do you really want that person as an investor, because they’re stupid’

“And then the entrepreneur was like ‘okay guys are you prepared to match that’. And I was like, ‘no, fantastic. You are an awesome entrepreneur to do that, but no thank you. Good luck’,” said Commaille.

The 2017 Savca Venture Capital (VC) survey released last month revealed that angel investors invested about R89-million, of which R44-million was invested in 2016 and R45-million in 2015 (see the below graph pulled from the report).


Also speaking at the event, Knife Capital co-founder Keet van Zyl said he had recently been liaising with a local startup in which the VC company was looking to co-invest with other funders when a debate over the company’s valuation ensued.

“It was like we were just a few million (rand) off — and we were still negotiating and the guys then said no, anyway they had found an angel that would give them R1.5-million at a higher valuation and they were first going to take that,” he said.

Van Zyl said the entrepreneur took the R1.5-million and the company subsequently burnt through the funds in only a few months such that the CEO had to leave because the company had run out of money.

While he conceded that it is good for the ecosystem when there is competition between angel investor and VC funds over funding deal, this should not be at the sake of a poor valuation.

“If you dupe someone into a valuation do you really want that person as an investor, because they’re stupid. So they’re not going to help you,” said Van Zyl.

He also placed part of the blame on SA startups themselves who he believes often have an unrealistic idea of how to value their startup.

“Alot of these South African startups have a bit of Silicon Valley fever, they read too much Techcrunch, they have an idea and spreadsheet which goes from month one, two, three, four, five and by the end of year one they are making R20-million Ebitda,” said Van Zyl.

Featured image: Angel Hub Ventures lead investor Brett Commaille (Screen grab via Youtube)

  • Alex Leigh

    Guys, we are talking about £80k…

    We live in a global society so if you want to play internationally then you have to at least act like you can.

    Entrepreneurs in the UK and US are raising seed rounds (from Angels) of £300k to £500k with the same ideas as South Africans… or often worse.

    South African VCs need to join the global party and provide capital, networks and strategy that will allow SA startups to scale internationally without being hamstrung by poverty conciousness.

  • Keet van Zyl

    Stephen & team as you know I’m a big supporter of VentureBurn but afraid you got it wrong with the negative slant you put on a positive discussion with us ‘slamming’ local angel investor valuations and their grasp on Startups. We were talking about some of the challenges hampering the local VC industry…

    We noted that calling it an ‘industry’ yet is premature as we are still building and VC Funds are mostly backed by Angel Investors or so-called Super-Angels. More institutional investment is required (leading to your other negative headline of the day where I ‘bemoaned’ this). As you will recall I said that I celebrated the fact that startups now have more options than 5 years ago when it comes to taking Angel Investment, and that the ecosystem is winning because Angels are starting to take deals off VC’s at better valuations. We talked about how there is much more Angel Investment activity in SA than VC and we are only aware of the tip of the iceberg. We love the fact that Angels can make quick decisions without a DD. It is their money after all. But that VC’s need to do bigger deals to assist companies with international scale at the next level and the gap is still in sub-R50m risk investments… R10m to R30m deal sizes. Where ideally some of the local VC’s need to invest more actively because local Startups needing that kind of growth capital have to raise it offshore. But we need local Institutional Investors to back this asset class if we want to get there. Things like the SAVCA VC Success Story Compendium assists.

    But then we discussed this challenge… I really see a lot of SA startups [80/20 rule] without traction having an inflated sense of value as they compare themselves to the latest Silicon Valley round/ exit. Interestingly, when it comes to the scale-up phase the companies have more robust financial models and valuations become more sensible. Most of these Startups never raise funding because of it, and some Startups get it wrong by taking a smaller investment from an Angel purely because of a valuation up-kick, instead of considering the bigger picture. Valuation 101 is willing buyer (investor) – willing seller (Startup) sure, but one needs to consider where your next funding round is going to come from if you only raised enough for a few months of traction at inflated value. Or co-invest between Angels and VCs as we have done many times. This blog by Jason Fried illustrates my point: https://m.signalvnoise.com/press-release-basecamp-valuation-tops-100-billion-after-bold-vc-investment-c221d8f86ad7. Also there are Series Seed Investment Documents developed by Newtown Partners to assist with valuations via SAFE’s (Simple Agreement for Future Equity) or consider Standard Term Sheets: http://www.seriesseed.co.za/index.php?title=Series_Seed_Investment_Documents_for_South_Africa. We are in the growth phase of this space so I guess it is natural that things are fragmented.

    Anyway. Keep up the important Startup ecosystem work at VB but keep it balanced.
    Catch me at Africa Arena 6 Nov [Venture Capital in Africa: A Different Approach] where I will touch on these subjects again or at the African Angel Investor Summit 15 Nov [State of Play: Current Investment Climate].

  • I read Stephen’s report and Keet’s and Alex’s responses and my view is that this sort of disconnect between VCs and angels is to be expected in a nascent start-up funding scene such as ours. What is needed is more communication between the various players, such as the SAVCA get together provided (sadly I could not attend as I was at our caucus meeting in Parliament), so that each others’ views can be shared. Clearly in a free market there will be winners and losers, but I agree, Keet, funding should be seen as a series of steps, where a strategic view is required, instead of taking what appears to be the best offer on the table now.

    What are your views on Gigaba’s announcement of a start-up fund under the watchful eyes of Ministers Zulu and Pandor? His budget speech gave no detail but I have put a Parliamentary written question to Zulu asking for more detail.