Don`t blame venture capital
In SA, corporates see SMEs as social responsibility, not investment opportunities.
South Africa dropped three places to 37 (out of 115) in the World Economic Forum`s latest network readiness index. SA`s poor education and the venture capital (VC) sector are blamed locally for not supporting fledging businesses. The index is the most respected assessment of how ICT can boost a country`s competitiveness and economy.
South Africa`s VC sector is small and ICT is not necessarily the ideal investment opportunity for VCs.
VCs worldwide are generally risk averse, preferring ready-to-market opportunities with established markets and product lines. Seed funders have an appetite for more risky ventures, but few operate in SA.
State supported bodies, like the Innovation Fund, are increasingly relied upon to finance early stage technologies, filling the void left by private funders. Universities and research councils, which generate fundamental research, develop their own commercialisation infrastructures, or they partner with public funded incubators to mature new technologies for the market, rather than waiting for VCs to take an interest in blue sky thinking.
Seed funding by "angel investors" to offset reduced VC interest in early stage technologies has not materialised - they too are risk averse. Most local "venture capital investment" in SA is really private equity.
Technology entrepreneurship is relatively new in SA; it was the domain of Armscor and the CSIR when there was no need for seed financing. The skills and experience required for technology start-ups are not readily available in SA.
Many of the flagship technologies and products equated with the VC sector, like the Walkman or iPod, were commercialised by established businesses which then attracted VC interest. They were placed in an existing market with clear supply channels, supported by partners that had the required skills to steer them to success.
Technologies from small and medium enterprises (SMEs) require skills and experience not all found in any single SME, ie technical, financial, marketing, sales and business management. So the risk of failure is high.
South Africa`s VC sector is small and ICT is not necessarily the ideal investment opportunity for VCs.Stephan Lamprecht, GM of Technology Top 100, a brand of Da Vinci.
Low liquidity - buying and selling businesses (or exiting) - severely hampers the local VC sector as it restricts opportunities to realise returns. The best-known method for exiting is via listing on a public stock exchange. Google and eBay secured legendary returns for their owners through their listings. But only one in 600 VC investments in the US exited through a listing last year. The majority exited through sell-offs to large corporations, or mergers and acquisitions. In SA, corporates see SMEs as social responsibility, not investment opportunities.
The introduction of the AltX on the JSE, a securities exchange for small-cap SMEs, will provide exit opportunities and inject more capital into the system, and increased liquidity.
So, is money really the problem?
Generators of new ideas are not waiting around for VC interest. Instead they incubate their technologies in-house, or through arm`s length partners. They establish the benefits of licensing technology, or aspects of the R&D process, even before the product is marketed. Many successful technology businesses began by consulting or selling someone else`s products, in order to generate cash to self-fund new technology developments.
Outside investment has its place but is not the ultimate barrier to entry. Taking ideas to market is risky and it takes time to generate real cash flow. It requires several interventions - one of which may be external funding.
VC and seed finance are vital components of a knowledge economy, but the sustainability of the ICT sector in SA does not depend on the VC sector. To grow the local market, ICT players need to address local problems like access to skills, cost of doing business, and infrastructure limitations such as bandwidth.
Being in ICT today means being in business globally; the rules for local and international business are becoming the same. The international market presents further challenges such as the protection of intellectual property, servicing and supporting technologies far away from the head office, and competing with a horde of players in the local market.
To simply lay the shortcomings of our ICT market at the feet of the VC sector is incorrect. Although a thriving VC sector is a boon to any national system of innovation, funding is not our problem. Business is about people and VCs support successful people. A well-motivated business plan with proven market feasibility will find its way into the market.
* Stephan Lamprecht is GM of Technology Top 100, a brand of Da Vinci.
GM of Technology Top 100, a brand of Da Vinci.
Stephan Lamprecht is an industrial engineer. He started his career as a consultant in the management of technology and innovation with the consultancy Venture Solutions, before joining Da Vinci to head Technology Top 100.
He is vice-president of the Licensing Executives Society of South Africa, a professional society for people with an interest in the business of licensing and technology transfer, having 11 000 members in 93 countries.
Stephan Lamprecht is an industrial engineer. He started his career as a consultant in the management of technology and innovation with the consultancy Venture Solutions, before joining Da Vinci to head Technology Top 100. He is vice-president of the Licensing Executives Society of South Africa, a professional society for people with an interest in the business of licensing and technology transfer, having 11 000 members in 93 countries.