One of the biggest mistakes often made by tech entrepreneurs when navigating the roller coaster journey to business growth is they lack understanding of their business unit economics – the direct revenues and costs of a business, measured on a per-unit basis.
This was the word from venture capitalist Clive Butkow, co-founder of newly launched venture capital (VC) firm Conducive Capital, during an interview with ITWeb TV about SA’s tech start-up landscape, and the top traits that attract venture capitalists to a technology-focused start-up.
Butkow stepped down from his role as CEO of Kalon Venture Partners in the last quarter of 2023, after almost eight years at the helm of the South African digital VC firm. He has close to 40 years’ experience in helping to build and grow over 100 businesses on the continent.
Butkow and his partner at Conducive Capital, Mitchan Adams, co-founder of Ozow, have invested more than R300 million in early-stage funding, with an internal rate of return of over 30% during the last seven years.
Describing the local tech start-up scene, Butkow believes SA is blessed with tech start-ups that are disruptive and “incredibly innovative”, with leapfrogging in emerging technologies such as machine learning and blockchain.
However, lack of the right amount of capital to make that innovation come to life is hurting agile companies that have great potential to become unicorns in future, he asserts.
Discussing mistakes often made by entrepreneurs in their journey, he points out: “Part of my bugbear from a financial point of view is that most entrepreneurs don't understand their unit economics, they don't understand their accounting.
“Often, when I ask them what’s their revenue forecast, or how do they know their money is not going to run out? They respond by saying, ‘well my accountant is not here with me’. What they need to understand is that every entrepreneur doesn't have to be an accountant, but they need to know their numbers,” he explains.
Quoting Warren Buffett, co-founder, chairman and CEO of Berkshire Hathaway, Butkow points out: “Accounting is the language of business.” I will not invest in an entrepreneur that cannot understand what an income statement is, and what a balance sheet is, and what a cash-flow statement is. At least know what those three key statements are.”
The majority black-owned, Conducive Capital, aims to invest in growth-stage disruptive technologies that are post-revenue, capital-efficient and have healthy unit economics, with a good product market fit.
The VC firm plans to raise its first close in July at $15 million (about R300 million), with a target final close of $50 million (about R1 billion) within 24 months, he explains.
Butkow points out that he sees an average of 100 monthly pitches by entrepreneurs who seek funding from potential investors.
“Entrepreneurs need not only financial capital, but they also need mentorship capital, they need human capital, they need someone who's walked the journey before, holding their hand and guiding them,” he states. They also need to access the best of CFOs, marketing people, and sales etc and we provide that at Conducive Capital.”
According to Butkow, the five key traits that attract VCs to a tech start-up are premised on the letter T – Team, technology, total addressable market, tenacity and traction
Five traits that venture capitalists look for in start-ups:
- Team: If a business doesn't have the right team, venture capitalists won’t invest. A tech company needs to have a team of at least three people: the hacker (engineer) that can build the solution; the hustler (marketer), that can sell the service or solution, and the hipster (designer) that can design a brilliant product. If you can build, but you can’t sell a product, then you don’t have a business.
Technology: Venture capitalists don’t want to invest in a “me too technology”, for instance, a payments company that looks exactly like the next one. The product must be 10 times better than everything else in the market. It is also very important for entrepreneurs to know their competition and what their value proposition and competitive advantage is – this is a critical part of every business pitch.
Total addressable market: Venture capitalists want to invest in businesses with a large target addressable market. They don’t want a business that targets a $1 million market, because if a business gets half of that market this means they’re a $500 000 company and that doesn’t move a dial. There’s a big market in SA, Africa and globally and it’s important to understand who your market is and the revenue opportunity available in that particular market.
Traction: Many venture capital firms do not invest in seed capital because they are targeting companies that have some traction. They want to see “the dogs eating the dog food “and that the start-up has some reference-able customers because investors will want to speak to some of those customers as part of the due diligence process. Entrepreneurs should be solving a big problem with their technology and customers should be raving about it.
Tenacity: Venture capitalists want to see entrepreneurs that are tenacious, have conviction and courage, and that are not going to give up when they encounter challenges. Starting a business is really tough and tenacity is critical because entrepreneurs will get to a point where they can’t make payroll or their biggest client churns. Someone once said, “In Silicon Valley, life for entrepreneurs is like going on a roller coaster ride backwards in the dark, because you never know what’s going to hit you.”
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