How the SA government is trying to seed more startups

The South African government has quietly been piloting a new seed-funding programme and has wisely teamed up with universities to do so. A new call closes on 2 October.

The programme, which the Minister of Science and Technology Naledi Pando said in July was still in the pilot stage, was launched two years ago by the long embattled Technology Innovation Agency (TIA).

The seed fund is welcome news from an agency that has suffered from the departure of key staff and one having to deal with a recent budget cut.

South African entrepreneurs with good ideas are badly in need of small grants to help test and commercialise their ideas. Once the idea takes off they might more easily be able to get funding from a bank or venture capital fund.

Where’s the seed?

In a survey in June South Africa tech startups listed access to finance as a top concern. The survey also revealed that 44% of those that were able to get funding, received investments of less than R50 000. Only 16% said they had received more than R1-million.

Read more: Ventureburn survey sheds light on SA’s tough, but pioneering startup industry

The authors said this raised the question of why South Africa does not have more seed funding rather than equity or royalty splits for financing such startups.

In a recent Financial Mail article, venture capitalist Keet van Zyl of Knife Capital suggested that the government could put out challenges to startups to solve specific issues to catalyse growth. TIA’s latest call may show that the government is listening.

TIA has so far run two rounds of seed funding for its fund targeting universities (the HEI Seed Fund). In the first, in the 2013/14 financial year, it disbursed R26.8-million to 70 projects, while in the second, held in the 2014/15 year, it disbursed R43.7-million, according to the agency’s 2014/15 annual report.

A further R33-million had been invested in 74 projects through another seed fund where TIA partners with seven regional organisations in provinces (including development finance institutions and incubators). These organisations contributed an additional R30-million.

The organisations are as follows: the Cape Craft Design Institute, The Innovation Hub, Smart Exchange, Invotech, the Free State Development Corporation, the Eastern Cape Development Corporation and the Limpopo Economic Development Agency.

In July Pandor said discussions were ongoing between the department and TIA, as well as other stakeholders to leverage more funds.

New call

Under the latest call for its HEI Seed Fund, which went out two months ago, TIA is looking to fund 50 startups with a collective R25-million, TIA communication manager Chriszelle Vorster said this week.

Each project would be limited to a maximum of R500 000 in funding and entrepreneurs can use the funds to help develop prototypes, proof of concepts and businesses cases that could be used for further development.

Each applicant is required to work with a their respective technology transfer office which will then prioritise a list of projects and submit it to TIA to draw up the final list.

Read more: What can we learn from the successful Start-Up Chile accelerator?

Vorster said TIA has also initiate efforts to explore whether the agency can extend its partnership model for seed funding to science councils as well.

Chilean model

Partnering with universities and other organisations that can help select and assist those with good ideas seems to be the way to go.

For many years Chile’s small business agency Corfo worked with incubators and trade organisations to disburse seed funding to entrepreneurs with bright ideas.

Between 2010 and 2013, 620 enterprises received seed capital worth 12 000 million pesos (US$17-million). However in 2013 Corfo decided that entrepreneurs can instead apply directly to the agency, through specific seed funding rounds (last year it offered two such rounds).

This was partly to ensure that entrepreneurs in those regions in Chile where there are no or few entities to team up with, were not prevented from pitching.

Corfo’s experience however still offers two key lessons to South Africa.

Competitive as possible

The first is to make the decision on which firms to fund, as competitive as possible. Last month Corfo awarded its first 2015 round of seed funding to 53 entrepreneurs — chosen from a mammoth 2 200 that applied from April.

An external panel of experts evaluates applications, to ensure fairness and objectivity in the selection process. Those that Corfo opts to fund are then announced on its website.

Marcelo Diaz Bowen, the former manager of IncubaUC, said those that aren’t selected in one round can always apply for funding in the next one. Corfo also provides feedback to applicants and in this way applicants can opt to adapt their idea.

Skin in the game

The next lesson is to ensure that entrepreneurs also contribute some of the funding themselves. To get funding from Corfo’s seed fund (which contributes up 25 million pesos — about US$35 000) applicants must cover 25% of project costs.

Ultimately TIA’s introduction of seed funding is a welcome development and could help fund many new bright ideas, some of which could good turn into potential money spinners, creating the thousands of jobs that the country badly needs.

Image by Chris Eason via Flickr

This article originally appeared on Small Business Insight, a Burn Media publishing partner, with the headline ‘South Africa hopes to seed new start-ups’. Stephen Timm writes on small business and is presently in Cape Town, South Africa. Click here to sign up to his monthly newsletter. Follow him on Twitter at @Smallbinsight and on Facebook.