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Reality check for African start-ups

Paula Gilbert
By Paula Gilbert
Johannesburg, 01 Sept 2015
Silvertree has invested over R20 million in consumer-focused technology companies this year so far.
Silvertree has invested over R20 million in consumer-focused technology companies this year so far.

Cape Town-based seed investor Silvertree Internet Holdings says Silicon Valley-style entrepreneurship is growing rapidly across Africa but local tech start-ups must be careful not to fall for the glitz and glamour and forget the business.

Silvertree co-founder Paul Cook says Silicon Valley-style entrepreneurship is not itself a problem but copying only the surface of this type of entrepreneurship and focusing on only PR, tech demos and start-up competitions can be dangerous.

"What we need to do are the same things that businesses have always needed to do: identify a product that can make money, attract customers and then deliver the product or service successfully. Start-ups need to remember cool tech is a tool, not a business by itself -- they also need to build all the other pieces of the business."

Silvertree's money is behind the success of e-commerce businesses such as Faithful to Nature, Cybercellar and WineCo, as well as financial services comparison Web site Click n Compare.

"We in Africa can be too quick to try to copy the surface activities of Silicon Valley, with its focus on 'cool' ideas and disruptive innovation, and sometimes forget that building a viable business requires finding customers and generating revenue. Smart potential investors are seeking businesses that have proven they will be able to make money - not just great ideas."

Funding gap

Tech-related businesses that subscribe to the Silicon Valley culture are on the rise across the continent, as evidenced by the increasing numbers of incubators, hubs and co-working spaces. Silvertree says despite this, there are still relatively few real success stories of start-ups that grow large enough to substantially impact the continent's economy.

Cook says securing "real investment capital" is often a big challenge.

Start-ups can secure small investments from hubs, competitions, etc, but seldom the amounts required to really scale up. "This gap is partially due to lack of investors in this range, as well as lack of businesses operating aggressively enough to justify these investments."

Silvertree has put its money where its mouth is by investing over R20 million in consumer-focused technology companies in the first seven months of 2015. Previous investments proved to be good business as the company has seen month-on-month revenue growth of over 10% across its portfolio in 2015, with as much as 40% monthly for some ventures.

So far this year, the investment company has put over R16 million into three first-time investments. A little over R10 million went to organic online retailer, Faithful to Nature.

"They have built a great company so far, and we are excited to be working together, with our deep experience in online commerce, to help the company become even more successful."

Cook says the other two investments will be announced soon but he has to stay mum for now as he doesn't want to "steal their thunder".

The company also re-invested another R4 million into ventures already in its current portfolio. This money was mostly for Click n Compare and WineCo.

"We're very happy with the progress of both," says Cook.

Active input

Comparison Web site Click n Compare had a successful year, with strong month-on-month growth of 40%. The company, which is fully funded by Silvertree Capital, last month announced expansion plans for both Nigeria and Kenya.

But Cook maintains that although real investment capital is important, a business's success is about way more than money. He says the businesses in Silvertree's portfolio gain active involvement from the Silvertree team for things like operational and marketing execution.

"We all have a management consulting background, plus lots of experience in e-commerce and online businesses. By sharing and implementing best practices, we find we're able to help cover 'blind spots' that inevitably exist in any early-stage business, and so help grow the business faster than would otherwise be possible.

"Especially in Africa, many start-ups are being run by first-time entrepreneurs and the market ecosystem is very young, so there are often large 'quick wins' operationally," according to Cook.

He says that beyond that, the recipe for success is fairly simple: "Simple concepts that have been proven elsewhere, in exciting market segments; a great team; and then focus on execution. Execution means continuous adjustment of strategy, especially on marketing, a continuous focus on the numbers and just getting things done."