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South Africa doesn’t need more venture capitalists to expand the country’s pool of small businesses: it needs venture builders (VBs), who are prepared to put in the hard yards of both financing and mentoring start-ups to the point that they can stand on their own.
In fact, VCs and VBs could become an incredible force for good in building saleable, sustainable businesses in South Africa if they build stronger partnerships, says Mitchan Adams, the CEO and founder of venture builder Aions Creative Technology.
“Companies fail for two reasons: a lack of mentorship, and a lack of funding. VCs give funding, but no mentorship. Incubators give mentorship, but no funding. VBs bridge the gap by getting hands-on and dirty with the businesses they invest in, which gives them a far greater chance of succeeding – and that’s exactly what South Africa needs right now as we look to build the economy and grow employment,” says Adams.
The challenge with VCs is that they are risk averse by nature. To ensure they get a return on their investments back, is redundant: they demand evidence of certain revenue levels, or a track record of having been in business for three years.
The problem is that through their own stringent criteria, VCs have effectively dried up the ‘validity watering hole’. There’s a huge gap between early-stage start-ups and the more established start-ups that they’re generally prepared to invest in.
And because around 50% of start-ups fail within the first two years, many potential candidates – who could have succeeded with the right funding and guidance – have already fallen by the wayside.
As a result, the pipeline for VCs is drying up, because they’re all fighting for the same shrinking pool of candidates.
Game-changer with due diligence
Due diligence is another reason why VCs should be actively building partnerships with VBs. Due diligence is the bane of many VCs’ lives. It’s not unheard of for due diligence processes to take up to six months, often with external parties performing the due diligence at significant cost – only for the parties to walk away from the deal.
When VBs are involved, they have effectively done the due diligence already by assessing the start-up’s gaps in their processes and business models and putting the start-up in a position where it can take on VC funding.
“VCs mitigate their risks by putting tough criteria in place. As VBs, we mitigate our risk by getting involved in the day to day running of the business to ensure it is successful before we can exit, and then use those profits to plough into building the next generation of start-ups. It’s a different mindset – but we believe there’s space for both,” says Adams.
Adams is no stranger to the worlds of VC and entrepreneurship, having previously co-founded instant EFT and online payments fintech Ozow with Lyle Eckstein and Thomas Pays. From start-up seven years ago, Ozow last year procured a $48m series B investment round led by Tencent.
At this point, Adams exited the day-to-day operations of the business to found Aions, with the goal of incubating and scaling local start-ups to become scalable, sustainable businesses. Aions matches the small businesses it creates directly with corporates looking for recipients of B-BBEE funding. The company has already invested in its first three incubator companies.