There’s usually something at the cause of a shift in pattern, and looking past Black Friday’s whirlwind, there was a definite shift in consumer…
The announcement of the judges for the South African version of Dragons’ Den was pretty much the headline news of the week in the country’s entrepreneurial space. The show is set to air in South Africa in the coming months, with 13 episodes of startups pitching to the Dragons for investment.
One said Dragon, Vinny Lingham, of Yola and Gyft fame, popped round Ventureburn’s Woodstock offices in the Silicon Cape for an interview. Lingham was very hush-hush about any of the show’s secrets or the amount of money that was invested. Despite much prompting, he refused to budge.
“Over 10-million?” I asked.
“Can’t say,” he smiled knowingly.
“How about 13? We can average it out at a million per episode.”
“I can’t,” he said. And that was all we got on that.
However, Lingham was happy to share his thoughts on some of the lessons he learned from the show, his recently exited startup and what he thinks of the African and South African startup and investment landscape. The seasoned entrepreneur argues that African entrepreneurs need to stop trying to compete with the United States when it comes to the consumer internet. Instead, he says, they should focus on exciting new innovations such as Bitcoin.
He also takes issue with the VC community in South Africa and the gap between good entrepreneurs with good ideas that are worth investing in and the people who have money to invest. He reckons that too much capital is being handled by “pencil pushers” (VCs) and not the entrepreneurs who actually understand how to build businesses. He thinks these VCs don’t really understand the tech industry and are unable to truly assess the risk and the opportunities in the space.
Lingham says that South Africa has a lot of challenges to conquer before its startup scene can really become formidable. He argues that businesses are too easily replicated, labour is cheap and there are not enough differentiating skillsets to truly take the market to the same level as Silicon Valley.
Ventureburn: Tell us a little bit about Dragons’ Den and what we can expect from the show.
Vinny Lingham: I can’t really talk about the show. However, what I have learnt with this is that there is such a major gap in the market between people who have a great ideas and competence to execute and the people who have money to back them.
The fact that all the entrepreneurs are not getting backed before coming to Dragons’ Den is shocking to me. So many guys with great businesses, great ideas and some of the metrics are amazing but they can’t get funding because the banks are useless. The government can’t deploy money and bureaucrats are deploying capital for entrepreneurs, so there is a mismatch.
In South Africa, there are too many businesses starved for capital that actually have good business principles, metrics and models. Things are different in the UK and such markets, where there is so much capital that the worst entrepreneurs make it onto Dragons’ Den and the good ones that do, aren’t actually there for the money, but for the publicity.
VB: Do you think the key differential for Africa is that this is the last frontier for good ideas to get funding?
VL: Yes. What I have seen in South Africa is that there is great potential for investment into startups and entrepreneurs, but it is a massively underserved market. There are entrepreneurs with great businesses and if you invest a little bit of cash, the business will grow and you will see great returns.
The reason we are not creating employment fast enough in South Africa is because those with the ability to create jobs are not getting the funding to do it. Those who have the wealth have bankers below them, so the entrepreneurs that created the wealth aren’t talking to the next generation.
Bankers and finance houses are managing the money: the pencil pushers and spreadsheet guys don’t understand the entrepreneurial process and how to build businesses. So when they look at these businesses, they don’t understand and don’t ask they right questions or get the right conclusions. They don’t have the balls to put the money in and take the risk. There is great divide between entrepreneurs who have great ideas as well as competences to build a business and the people who have the money to invest.
Africa’s fear of tech and the lack of successful exits
VB: Is the fear of technology and the risk internet businesses carry still a big problem for African investors?
VL: It is still a huge problem. You can’t manage risk if you don’t understand the environment you are playing in, so there is a lot of risk. People just don’t know how to do tech here — there are very few people in South Africa that know how to do tech investment properly.
When I announced Gyft, not one VC in South Africa contacted me to talk about it. No one said: “Hey Vinny, tell me about what you are doing? What are you up to next? You have been living in Silicon Valley for a while, maybe you have a good idea.”
No one gives a shit, they don’t understand it. The VCs in this country are just not technologists. They are basically indentured labor working for salaries for guys with money, which they are trying to deploy on their behalf but they have no idea what the hell they are doing. That’s why you haven’t seen a single successful exit in South Africa’s VC community.
VB: What about Fundamo?
VL: What is the IRR [Internal Rate of Return] on Fundamo?
VL: I am sure Hannes van Rensburg made money from the deal but what was the IRR to investors? Investors are not making money on exits in South Africa. The one thing that kills IRR is time. When you look at some of the exits we have seen, most of them took over a decade to exit. Gyft took 18 months from launch to exit. You’ve got to have a lot of quick turnarounds. Investors have got to be able to put their money in and get out in a few years not 15.
VB: What do you think South Africa’s best entrepreneur story is?
VL: There haven’t been many [tech ones]…
VB: A deal you respected or thought was good? Mxit?
VL: For who?
VL: But he wasn’t an investor.
VB: Naspers? They exited that and got their money back and more.
VL: Yes, that’s true.
VB: It was a fair deal
VL: How many years did that take?
VB: About 10?
VL: The whole point of tech is that it is disruptive, it moves quickly and there are fast returns. You should get 500% in two years; these are the type of returns you want to get for investors. If we are talking about 10 years of investing, look at the opportunity cost of capital and how it drags on. Do the maths on that, you are looking at it on a risk adjusted basis, add value propositions, why would it take you 10 years get 20% return with high amount of risk than taking you five years on 15% with no risk?
VB: What entrepreneurs in South Africa you do admire?
VL: Gil Oved, a fellow Dragon. He is very smart, what he has done with Creative Counsel is amazing.
VB: So what is the problem? Do we not have enough A-type, “go-get ’em” type entrepreneur personalities here? Or is it simply that there just isn’t the same capital availability here, compared to the US?
VL: There are a lot of issues here. South Africa doesn’t have an M&A (Mergers and acquisitions) culture. South Africans don’t like buying other people’s companies and when they do they offer low prices. If you work in an environment where labour is cheap, it is very easy to replicate someone else’s business.
The key challenges that South Africa faces are cheap labour and undifferentiated skillsets. If you want to build a media agency, you hire a bunch of guys and put them in a room, it is cheaper than buying one. Therefore you do a cost benefit analysis and decide to build your own. I have seen this happen here: WPP buys a company and gives the founder R2-million and a salary of R1-million a year, but they have taken all the people who work there because they can just hire them.
In San Francisco, it is the exact opposite because you can’t just hire those people. They all have stock options in companies that are growing quickly, labour is expensive and they all have skills that are highly differentiated. It is really hard to go and replicate businesses.
VB: One the biggest complaints VCs in South Africa have is that entrepreneurs are too big on NDAs – do you think that is down to how easily things can be replicated?
VL: That is exactly right. They can’t continue though, this NDA business has to go away. If you tell someone your idea and they replicate it faster, you deserve to lose because you are not moving fast enough.
VB: Do you think that’s where African entrepreneurs are going wrong? Not giving employees shares in startups?
VL: Yes. I am pushing any company I invest in right now in South Africa to give shares to employees. Simple as that. I did it with Gyft, people made a lot of money.
Lessons from Gyft
VB: Let’s talk about some of the learnings from Gyft. What have you taken away from that experience?
VL: Do one thing, do it exceptionally well. Don’t get distracted.
VB: Gyft had some major VC investors.
VL: Yes, Google and Ashton Kutcher were some.
VB: Did that impact the exit strategy?
VL: We don’t look at it as an exit. What happens is every three to six months we look at how the business is growing and how do we keep growing it. We had a couple of offers on the table and discussed with our investors and that was that.
VB: Did you meet Ashton? What’s he like?
VL: Yeah, he’s a good guy. Very nice, shares a birthday with me.
The next big thing
VB: Africa is trying to compete at the same level as mature markets, we think that is problematic.
VL: Yes, I have been saying the same thing. African entrepreneurs need to embrace Bitcoin and start building Bitcoin companies because that market is so nascent. It is not the internet, so there is no one country that has expertise in Bitcoin.
Africa cannot compete with the United States on consumer internet, they have history. However, Africa can compete with Bitcoin. There are these amazing Bitcoin concepts around the world and people need to realise that the tech and math is soundproof forever — though people are still sceptical. It is funny how history repeats itself: the internet came along and people were sceptical, now look at us. The same thing will happen with Bitcoin. It is the next big thing.
VB: Some ecommerce players in Africa are using Bitcoin
VL: I think Bitcoin could be a way for Africa to break down all the barriers and everything else that is holding the continent back.
VB: What is the solution to building the next Silicon Valley, is it money?
VL: It’s not just money. It is about people who have been there and done it coming back. Internally, I think a show like Dragons’ Den is going to open a lot of people’s minds. I think it is going to be an amazing platform for entrepreneurial education across all industries.