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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)