Welcome to the New Year! I’m been very quiet lately, for a variety of reasons, but let’s just say that you can expect the quantum of posts on this blog to pick up considerably in the new few weeks. Since my previous post, things in the global market have gotten far worse (as expected), the only glimmer of hope for the world economy being President Obama’s election. His inauguration speech moved me, and in my opinion, he is one of the few politicians that I’ve seen, that has truly noble intentions.
Vincent Maher wrote a very controversial article today that has received much fanfare in the South African blogosphere. I have much to say on this topic, so instead of just commenting on Vince’s blog, I’d rather detail it in a blog post. I affectionately call my home, Silicon Cape (Cape Town) – that’s where we’re (SynthaSite) from and we still have strong roots there with our development office now bursting at nearly 20 people, in addition to the 25 strong we have in San Francisco.
Nice article Vince – but the real question you are asking is, why are there not enough breakthroughs in the South African web space, like SynthaSite. Like Eve (who commented on the post), I am also aware of many Cape Town startups (much more than the two that Eve mentioned) that have now successfully raising funding either locally or internationally – and in large sums – expect a number of press releases in the next 8 weeks. I’m not going to delve in the Johannesburg startup scene, as I’m not familiar with it, so my comments here are regarding Silicon Cape based startups. Many of my comments applies to startups that are not just based in South Africa, but around the world – why are there not enough web based success stories from outside Silicon Valley?
A question has also been raised, asking if there is a bubble – how can there be a bubble if no one has made any (real) money in this space, yet? I agree that far too many startups with stupid ideas have received funding in the past 2 years, but technically a bubble is when people are making a lot of money, not spending a lot. Most people just don’t realize that when investors put money INTO a company, that’s where it goes – not into the entrepreneur’s back pocket! The money is used to build a company – the payoff is the exit or the profits.
That said, here are a number the key reasons why the SA startup scene has not taken off yet, IMHO:
1. Punishment for failure
South Africa is not friendly on those who have failed in business – it’s like you’re a criminal if you do. I’ve been there. Broke, unemployed, living in Johannesburg in 2000 with major student loan debt and a failed business attempt. I had two options, try to start a company with bad credit and no capital, or take a nice stable corporate job with a high salary. Guess what, I took the salary and got stuck in the corporate trap for 3.5 years, which as it turned out, was a good thing as I learned some excellent skills, but the key was getting out of that trap (read: Rich Dad, Poor Dad). In the US, you can declare bankruptcy and walk into a VC the next day and raise capital for your next business – in SA and many other parts of the world, you would be ostracized for failing the first time. Most solid entrepreneurs have had a couple of major failures, and will continue to do so their entire life. Failure is just a part of the learning process. If we punish those who fail, we prevent ourselves (society) and them from benefiting from their learnings and their subsequent future successes. Unless you’ve been to the edge of the cliff and peered over it, no-one can ever understand what you’ve seen.
2. Failure to take risks
After leaving Clicks2Customers, and before raising capital, I literally put every cent I had into SynthaSite. I was selling shares and other assets on a monthly basis to fund SynthaSite and keep it going in the hopes of raising capital. I put a very large % of the wealth I had created in the previous 4 years on the line for my “risky” venture. Most people I spoke to thought I wouldn’t make it out the gate. I maxed out credits card and overdrafts yet again (as I did the first time round with Clicks2Customers) in the belief that by getting the business further and further down the line from concept to prototype, I would attract capital. Yes, I risked it all, arguably – but if you believe in yourself and you’re willing to take risks, your chances of success are much higher than taking the low road and protecting yourself – yet you can still fail. But I wasn’t willing to fail… those who know what I went through during this tough time understand the stamina it took to raise capital during a time where both my personal and business life was in flux. I just never gave up – I probably spoke to at least 20 VC’s & Investors before raising the capital it took. And this is from someone who had already had moderate success locally with a prior company. I had a profile, a track record and good experience – and it was tough – if I hadn’t taken the risks I had, we wouldn’t have raised our $5m in funding. I had to take the risks to in order to get far enough down the road.
3. Unavailability of capital
It’s very easy to blame the unavailability of capital in South Africa in particular, and to a large degree it’s true, but it’s changing rapidly. In the past year – no fewer than 3 VC/startup investment funds have announced/launched. The biggest issue they are having is finding battle-tested entrepreneurs who see the bigger picture. At the end of the day VC’s are looking to make money from their investments. If you want to build a business that serves the South African web, all the power to you – but don’t expect it to be easy to get investment. Even if you create web service that people would pay for, assuming the South African web is 5m people and you get 1% paying you R100/year, that’s only R5m/year turnover. If you are able to make R500k profit per year ($50,000 USD), it wouldn’t even pique the interest of the smallest VC – the economics just don’t make sense. The money is out there, but mainly for ideas that address a broader market problem. Remember, the Internet is global. Over 50% of Google’s revenue comes from outside the USA – just because they are a Silicon Valley startup, doesn’t mean they have to make their money from the USA. They serve a bigger need. South Africans needs to start thinking in the same vein. Build Web business that appeal to 1bn+ people worldwide, build it from South Africa and bring those revenues into the country, creating much needed employment and skills transfer! Unless you have big global ideas, capital is largely going to be unavailable. South Africa need to get over the idea that if it’s not homegrown, it’s unpatriotic. One of the comments suggested that we should stop using Facebook and Twitter – that’s just stupid. Why would anyone use a local version which would have far less utility given the diminished network effect? In short – thing global and raise capital to address a real market need, where there is real money to be made. Be commercial – focus on making money and addressing under served markets and the capital will present itself. A University of Cape Town student who has a student loan to pay off and decides to take the high paying corporate job – arguably it’s far easier in the US to get student loans, but that also acts as a filter – those who are unwilling to take personal risks using debt, probably shouldn’t go into business either.
4. Too many consultants
I do agree with Vince – I see far too many so-called “SEO, PPC, Social Media, blah blah” “Experts” in the market today. How many of these people have ever build a business or made real money? If these guys would put their skills to good use, they would be building products and using their great marketing skills to build a successful business. It’s much easier (and safer) though to sell hours and help some else with their “strategy” – if it doesn’t work, then nothing lost right? Well, that’s the problem – no risk, no return. My hat’s off to the guys who create real value through consulting – but then again, I ask them : Why are you not building and marketing your own product or service? If you’re billing by the hour, you’re making someone else rich. Trust me, I know. Having established myself as an “online marketing expert”, I realized that I spent many years building other people’s company and generating hundreds of millions of dollars in revenues for them. Enough was enough for me. SynthaSite has grown in one year, from 10,000 users to over 1m people building and maintaining their website and we’re already generating healthy and fast growing revenue streams from that user base. I’m putting my marketing skills to good use by not consulting and instead creating value – shouldn’t the same apply to all these other “experts”. Even with all the market presence SynthaSite has in South Africa – it still accounts for less than 10% of our customer base. We are achieving a major economy of scale by going global – this is critical for building a successful business.
5. Lack of global experience
Too many startups look at the foreign markets from their hole in the wall in SA. Many startup entrepreneurs never get the chance sit in traffic on the 101 (main highway in Silicon Valley), breathe the somewhat dirty air here, attend at meeting or two at Google and Yahoo, attend a conference in the US or UK and see your global competitors. It’s very difficult building a solution for a market you’ve never seen and an invisible enemy. Reverse engineering is not enough -without substantial data it’s stupid to “guess” why competitors do certain things, and then try to do them differently because it’s “cooler” or better – this is why so many clones fail. Without a user base, you cannot make data driven decisions. You need to be in the thick of things. Flights are so cheap these days ($500/R5k to get to London and back) – there is no excuse. The good thing is that with companies such as Google & Amazon who have offices now in South Africa – there is effective skills transfer. Eventually these guys move on – make sure your startup is positioned to hire from them!
6. No liquidity events
Other than Mark Shuttleworth’s sale of Thawte to Verisign back in 1998, there has not been a major exit of a South African web company (ok, maybe a few more, but I can’t recall offhand) in ten years!! The lack of liquidity events for entrepeneurs is a problem. Seed capitalists (the angel investors who put money in), often have their cash trapped for many years inside a company – either the company makes a profit and pays dividends or closes down. Without any liquidity, the money does not recirculate from one startup to another. The lack of liquidity in the SA market is the main reason, I believe, for the stagnant innovation. Also, those who control government funds are not in touch with the market and therefore don’t know where and how to allocate the money. Angel investors are urgently needed to get prototypes to market. Most VC’s cannot invest in a concept, they need more than that and there are to few angel investors around. I myself have invested in a few companies – and I had to take a long term view, knowing that there is no liquidity – either they become very profitable or close done. Exits are not really an option as all the major web companies are based in Silicon Valley (eBay, AOL, Yahoo, Google, etc) – and they do not want small offices in Africa with no one to run them.
7. Too much focus on advertising
Most startups I meet today are monetizing using advertising. It’s not sustainable during downturns. Those who understand online advertising and business understand that advertising rates are a function of business efficiency (this is a topic for another day!). Companies that can advertise, acquire customers at a certain price point and then need to monetize at a rate higher than the cost of acquisition. The biggest issue comes in when there is a downturn – the dumb money leaves, the smart money stays and unless your business is capable of driving real value to advertisers, you will fail. Period. Advertising revenues should be the cream on top – not the milk. If you can’t build a business that sustains itself on creating true value for users, you’re at risk when the dumb advertisers leave. And this is coming from an online advertising “guru”…
Where South Africa really succeeds is that entrepreneurs who get out of the gate have been through such a large number of filters (struggles!) that invariably there is no other destiny but for them to succeed because they are the best of the best. The toughest steel is forged in the harshest conditions. I’ve met so many top SA entrepreneurs living in the US, UK & Australia who are magnificently successful, due to the fact that it is so much harder to achieve any level of success in SA, that after running a business there, and then moving to a more developed country, the conditions are much easier for business to be conducted. The reason I say this is a success, is that we are breeding a better class of entrepreneur – those who will weather the current global storm.
I could go on, and there will be many opinions as to whether or not I’m right or wrong. The bottom line is, that I think we need to celebrate our heroes, our successes and our failures. Only then can we make true progress. I am very positive about the Silicon Cape – we have a number of success stories and future success stories to be proud of – it will take time, but I’m betting that over the next 5 years, SA will become virtual hub of web successes.
Paul Graham wrote a great essay about 2 years ago, on how to create a Silicon Valley. If you read this – those who live in Cape Town will agree, we have most of the ingredients already. While living here in San Francisco, I must say that the lifestyle is very similar – small community, great city, beautiful outdoors.
To end off, I’d like to highlight my top Silicon Cape startups to watch out for in 2009, in no particular order (and I’m excluding SynthaSite because I’m clearly biased ):
ChessCube (Disclosure: I am an investor)
SkyRove (Disclosure: I am an investor)
Mine Bang (currently in stealth mode)
Weddinic (niche, but global appeal)
Springleap (Disclosure: Eric, the CEO is a good friend of mine)
(apologies if I left anyone off – this post has taken nearly 2 hours and I have to run!)