Black tech startups in SA still struggling finds new Ventureburn survey

While 15% of SA tech startups founded by white entrepreneurs are turning a profit, just seven percent of their black counterparts are making a profit, 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 appears to be on the rise, most are struggling to make money or access finance.

Black startups on the rise

In all, 56% of the 153 startup founders surveyed by Ventureburn in an online survey, listed themselves as black – up from 46% in a 2017 survey by Ventureburn of 260 founders and 26% in a 2015 survey of 197 startup founders. The percentage of black African founders has risen too – from 17% in 2015, to 31% last year and now to 35% of all founders.

Four percent again chose not to reveal their race (eight percent in 2015).

The majority of black startups, or 62% (2017: 53%) list Gauteng as their base, while 27% (2017: 42%) say the Western Cape is their home. The remainder are based in the country’s seven other provinces.

Just 14% generate income above R1m

Yet despite growing in number, most are struggling.

First off, black startups are in a worse financial position that their white counterparts. Of white founders, 28% say they have three or fewer months left of funds left to operate on – significantly lower than black founders, where 51% say they will run out of funds in three months’ time.

It’s clear to see why. Over half or 51% of black startups surveyed (2017: 61%) make no revenue at all – because they are still working on their concept or are in the seed stage. Just 20% of white startups say they are yet to make money (2017: 30%).

In addition, while 39% of white startups (2017: 29%) bring in a revenue of over R1-million, just 14% of black startups do so (2017: 9%). Almost two-thirds of black startups (2017: 75%) generate no revenue or less than R100 000 a year — compared to 37% of white startup founders.

Likely because fewer black startups are generating revenue or making a profit, only a third, or 33% of black founders say they pay their staff market-related salaries, versus 43% of white founders.

In addition, about a third (35%) of white startups operate from offices, compared to 17% of black startups (of which half have both black and white founders). While 40% of black founders operate from home, a lower 29% of white founders say they run their operation from home.

Just six percent get angel funding

When it comes to access funding more white founders (11%) have accessed angel funding than black startups (six percent), while white founders accounted for 50% of all those startups that reported having tapped angel (2017: 59%).

It suggests better resourced white startup founders who often have access to more capital, skills and experience and better networks are able to out perform black startups.

When asked how they plan to raise funding in the future, 46% of white founders say they will need to raise private equity, VC or angel funding to bankroll their startup, versus 37% of black startups that say they will raise funding through this means.

Likely because of the disparities caused by South Africa’s apartheid past, a higher percentage of white founders are self-funded (40% versus 35% of black founder).

Of those that have received funding, 48% of white startups (2017: 24%) have received a R1-million or more, whole just 20% of black startup (most of them racially mixed startups have landed a R1-million of more in finding (2017: 8%).

White founders’ outlook more bold

Crucially more white founders are thinking big than black founders.

In all, 80% of white founders say they will need to raise over a million rand in the next three years, compared to 64% of black founders. Most black founders expect that they will need less than this.

Added to this, while 35% of white founders expect to serve a R1-billion plus a year market, just 19% of black startups do. More white founders also expect to grow at 100% or more next year than black founders do – 35% versus 17%, respectively.

However, when it comes to the market they serve, the percentage of both black and white startups that list SA only as their market is similar – 39% in the case of white founders, and 40% for black founders. Seven percent of white founders say their market is the whole world – the same percentage as black startups do.

White startups more established

White startups may in some way be doing better because those white founders who were surveyed are running firms that are more established than their black counterparts. For instance, of those surveyed, 72% of white startups have been in operation for over a year, compared to 63% of black startups.

In employee numbers the gap is slightly smaller, likely because running a tech startup doesn’t demand as many employees as firms in many other sector do.

In all, 26% of white startups have six or more employees, compared to 20% of black startups. In addition, 17% of white startups have no employees, while 22% of black startups have no employees.

Yet in terms of experience however, a slighter higher percentage of black founders report having been involved with one or more startups before their current one – 73% versus 70% of their white counterparts.

In addition, a higher percentage of black founders worked previously for a large company or corporate – 82% versus 72% of white founders.

More white founders operate in B2B sector, have own IP

There are some further clues as to why white startups are generating more revenue and why more report turning a profit.

In part it may be because more white founders have a business that has developed its own intellectual property (IP) than black founders, as developing ones own IP rather than using another’s is a surer way to boost revenue.

In all, 69% of white founders say they run a business in which they have developed their own intellectual property (IP). In comparison just 39% of black startups have their own IP.

Added to this 61% of white startups operate in the more lucrative business-to-business (B2B) space (over business-to -consumer or B2C space), compared to 46% of black startups.

Another clue is that a far higher percentage of white startups operate in the money-spinning sectors of fintech and insurtech sector and Software as a Service (SaaS) than do black startups.

In all, 26% of white startups, compared to 13% of black startups (three quarters of these are firms that have both black and white founders) operate in the fintech and insurtech sector, while 28% of white founders surveyed run Software as a Service (SaaS) startups, versus 15% of black founders.

Age could also make a difference. White founders are older than their black counterparts – 48% are over the age of 35, compared to 36% of black founders.

In addition, black founders are more likely to have a background as software developers, than white founders are (82% have a technical background, against 70% of white founders). It could mean that more white entrepreneurs are motivated to set up a tech firm out of spotting a market opportunity – rather than because they are developers already in the tech sector.

Interestingly when quizzed on why they decided to start their own business, a higher percentage of black founders said they did so for personal development or to find more meaning in life, than did white founders.

In all, 16% of black founders said personal development played an important role in their decision to start their own business, while a further 10% said they did so to find more meaning in life. Only six percent of their white counterparts said they did so for personal development and five percent to find more meaning in life.

Whatever this exactly means, it is clear that black startups have some way to go before they are as successful as their white counterparts. More support and funding could therefore help.

*Note on the methodology the survey used: In all there were 169 respondents to the survey which was conducted using an online questionnaire, by data analytics firm Qurio. Of this number, 16 respondents were found to be employees of startups (rather than founders) and were excluded. The survey therefore sampled 153 startup founders. 

To ensure the integrity of the data, PwC will be involved to perform specified procedures, the results of which will be included in a report that will be available for inspection upon request.

More information on the Ventureburn Startup Survey:

Gauteng home to most tech startups, but Cape firms still more successful – survey
SA startups with combination of male-female founders most successful – survey
SA tech startups still out of touch when getting angel, VC funding – survey
Infographic: the 2018 Ventureburn Tech Startup Survey
View the full 2018 Ventureburn Tech Startup Survey presentation

Featured image: WOCinTech Chat via Flickr (CC BY 2.0)