A picture of two worlds – black tech startups struggling, finds new survey

While 16% of South African tech startups founded by white entrepreneurs are turning a profit, a mere four percent of black-owned tech startups are doing the same, a new survey by Ventureburn has revealed.

The Ventureburn Tech Startup Survey powered by Telkom Futuremakers – which was released today – found that while the number of black (black African, coloured, Indian or Chinese South African) entrepreneurs running technology startups might be on the rise, most are struggling to make money or access finance.

Number of black startups growing

In all, 50% of startup founders listed themselves as black – up from 26% in a 2015 survey by Ventureburn of 197 startup founders. The percentage of black African founders has risen too – from 17% to 31% of all founders.

Of the 260 founders, 46% listed themselves as white, while four percent did not want to reveal their race (compared to 66% who said they are white and eight percent who didn’t want to reveal their race in the 2015 survey).

In all, 44% of the startups surveyed were wholly white owned, while a further 44% were black owned (31% are held by black Africans, seven percent by coloured people and four percent by Indian). A further 10% listed their founders as both black and white. In addition, four percent of startups preferred not to list the race of their owners.

Just four percent generate income above R1m

Worryingly, the survey reveals how black-owned tech startups (including those with both black and white founders) are struggling compared to their white counterparts.

Just nine percent of black-owned startups (and four percent of black African startups) generate a revenue of above R1-million – compared to 29% of their white counterparts. Three quarters (75%) of black startups generate under R100 000 (and 78% of black African startups).

Most worrying is that 61% of black startups (60% of black African) have yet to generate an income – because they are still working on their concept or are in the seed stage – compared to 30% of white startups.

Likely because of this, just 10% of black startups rent or own office space – compared to 24% of white startups. Most black startups work from home (49%), remotely (16%) or from incubator spaces (12%) and shared office space (12%).

Another sign that black startups are less well off than their white counterparts, is that fewer can afford to pay their staff well. While 37% of white startups claim to pay their employees market-related salaries – just 26% of black startups (24% of black Africans) say they do.

Alarmingly, 19% of those that work for black startups do so as volunteers (possibly the founders themselves), while just 11% of workers in white startup do.

In addition, only 11% of black startups report that they employ 11 or more employees – compared to 17% of white startups. Most black startups employ five or fewer employees (59% versus 52% of white startups).

This might not be too surprising given that 52% of black tech startups (48% of black African startups) are less than a year old, compared to 33% of white tech startups. In all, 24% of white startups are three or more years old, while just 10% of black startups have been in operation for two or more years.

Black startups less ambitious

Given that fewer black startups are turning a profit than their white counterparts, it’s not surprising that black founders are less optimistic about future growth than white founders.

While 29% of white founders are betting on doubling their revenue over the next year, just 17% of black founders project their revenue to rise by 100%. Instead, over a third of black startups project that they will grow their revenue by 10% or more revenue over the next year.

Furthermore, just six percent of black startups (and four percent of black African founders) list the whole world as their market, compared to 11% of white startups.

In addition, while just less than a third (32%) of white startups use ecommerce facilities that have payment gateways on their websites — just 20% of black startups do the same (21% of black startups).

Gauteng based

So who are these black startups? The majority of black startups are based in Gauteng (53%), with 42% based in the Western Cape.

As with white startups, most tech black startups operate in the software sector (19% compared to 21% for the former). This is followed by the marketing and media sector (16% versus 17% for white firms). Next up is the fintech and insurtech sector, education and consumer products and services.

In 36% of white startups the founder is the main developer – compared to 44% of black startups.

Interesting – and perhaps indicative of employment equity (where white founders are dissuaded from formal employment) – far more black founders report having worked for a corporate before starting out (83% — including 75% of black Africans) than white founders did (68%).

White founders are older

The survey has also revealed that white startup founders are significantly older than black founders. Over a quarter (26%) of white founders are 40 years or older, compared to just 13% of black founders.

In comparison, almost three quarters of black founders (72% and 84% of black Africans) are aged 35 and younger, compared to 62% of white founders.

This raises various questions on what is driving more middle-aged white founders to start up their own business and whether employment equity is behind this or not.

In addition, this might also explain why so few black startups are making a profit compared to white startups. Older founders are typically more experienced, better networked and have more capital than younger entrepreneurs.

Black women are more likely to run a startup than white women

Black women are more likely to start a startup than white women — 25% (34% of black African) of black founders are women, compared to just 15% of white founders being women. It is not certain why this is.

Fewer get angel investing, over R1m funding

The survey also reveals that fewer black than white startups have tapped angel funding or more than a R1-million in funding.

In all, white startups accounted for 59% of the startups that tapped angel funding, while 24% of white startups report having raised R1-million or more to fund their businesses, compared to just eight percent of black startups (and 2.5% of black African founders).

In addition:

• Just seven founders reported getting venture capital – all of them involved white founders (one had both black and white founders). This, while 10 of the 15 founders that got private equity investment were white.
• Just three of the 10 startups that reported getting bank loans were black-owned firms. Furthermore black owned firms accounted for eight of the 22 firms that used their credit cards to fund their business.
• Twelve of the 13 startups that reported getting grants were black-owned, while six out of eight startups that got government funding were black.

Yet, like white-owned startups, most black startups rely on their own savings to fund development and growth and on investment from family and friends (39%, compared to 40% of white startups).

The majority of black startups tapped R50 000 or less in funding – the survey reveals that 56% of black founders (and 65% of black Africans) reported accessing less than R50 000 to fund their businesses – compared to 25% of white startups who tapped R50 000 or less.

It’s not surprising then that 61% of black startups list access to funding as their biggest constraint. In contrast, just 43% of white founders say accessing finance is their biggest headache.

White founders are more likely to describe a lack of skilled staff as being a bottleneck (20%) over black startups (14%) — quite possibly because more white founders might be dealing with employees more often, being bigger hirers than black founders.

Red tape is not a key hassle for startups — but slightly more white founders (eight percent) report it as being a key problem than black founders (six percent).

Clearly the survey reveals that while they share many challenges and characteristics, the world of black startups is quite different from that of white startups. Far more support and funding is needed for black tech entrepreneurs.

More information on the Ventureburn Startup Survey:

A picture of two worlds – black tech startups struggling, finds new survey
White males in Western Cape the most successful startup founders – survey
Slowing economy is biting into startups’ profit reveals Ventureburn survey
Startups hold unrealistic view on securing VC, angel funding suggests new survey
New survey suggests SA startups could be out of touch in paying employees
Infographic: the 2017 Ventureburn Startup Survey
View the full 2017 Ventureburn Tech Startup Survey presentation