Financial

WCape tech start-ups are more successful, established

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Black-owned tech start-ups are in a worse financial position than their white counterparts, revealed the survey.
Black-owned tech start-ups are in a worse financial position than their white counterparts, revealed the survey.

Western Cape-based tech start-ups are more successful and generate significantly higher revenue than their counterparts in other parts of SA.

This is according to the 2018 Ventureburn Tech Start-up Survey, conducted by start-up news publication Ventureburn, in partnership with Telkom's enterprise and supplier development programme, Telkom Futuremakers.

The nationwide online survey was run in October, among 153 technology start-up founders, whose companies make revenue of under R20 million and employ less than 100 staff members. Around 55% of the founders operate in Gauteng, 37% in Cape Town, 4% are based in KwaZulu-Natal and 2% in the Eastern Cape.

The Western Cape, according to the survey, is seen as an attractive place to establish a successful start-up, with 36% of Western Cape start-ups reporting turning a profit or generating significant revenue in the past year, compared to 22% in Gauteng.

Speaking at the launch of the survey results in Johannesburg yesterday, Stephen Timm, editor of Ventureburn, said one of the main reasons behind this success is the higher prevalence of venture capital (VC) funding in the Western Cape.

"While there is still a long way to go to get a good understanding of the tech start-up ecosystem in SA, what the survey reveals is that although Cape Town may not have as many tech start-ups as Johannesburg, those based there are generally more established and more successful than those operating in Johannesburg.

"This can be attributed to various factors, such as a more innovative and advanced tech eco-system and access to VC firms and accelerator programmes, which help start-ups with funding and development support, giving them a competitive advantage."

Across all participants, 27% said their business was either profitable or making significant revenue, 40% said they were not generating any revenue, while 33% said they were making an insignificant amount of revenue.

Just 21% said their start-up was turning over R1 million a year, while 27% generate between R100 000 and R1 million a year.

According to the Small Enterprise Development Agency, there were as many as 5.6 million small, medium and micro enterprises in SA, as of June 2017, which contributed an estimated 34% of the gross domestic product.

Unyielding challenges

Half of respondents operate in only three verticals: software-as-a-service (19%), the fintech and insurtech sector (18%), and the media, advertising and marketing sector (13%).

While most (38%) start-ups were self-funded from the start, the biggest challenge is access to funds (52%) and a lack of technical staff (10%), with 7% saying the market they are operating in is "too small".

Almost a third of respondents believe they will grow their business by securing VC or funding from angel investors, yet the reality is that only 11% report having been able to secure such funding, the survey reveals.

Alex Nelson, CEO of Qurio, the data analytics firm that analysed the results, noted: "It's a tough economic period and many start-ups are frail. They felt incubation programmes could add more value when it comes to access to market, while providing funding opportunities. So it's not so much about helping them become more creative with their ideas, but rather about providing capital.

"When asked how much funding they would like to receive over the next three years, 70% said between R1 million and R5 million. Interestingly, 78% generate less than R1 million revenue, so that tells us these founders are going to have to work hard to sell their business idea to prospective funders."

Aisha Pandor, co-founder of on-demand home cleaning services platform SweepSouth, said the only way local tech start-ups can be successful is by building a sustainable business aimed at resolving a particular challenge or meeting a certain requirement in society.

"Our vision when we established SweepSouth in 2014 was not just to build cool technology for home-owners but to make an impact by addressing the problem of access to domestic workers, while creating employment opportunities for the over one million domestic workers in SA.

"Some of the challenges we faced in the early stages of the business were echoed in the survey findings: we were establishing a company that is the first of its kind on the continent and we were faced with the challenge of creating our market where one did not previously exist. Concerns over online card payments and cash flow were other issues we encountered," says Pandor.

Black start-ups struggling

Around 56% of respondents listed themselves as black (African/Indian/coloured) and 41% said they were white.

While the number of black tech start-up entrepreneurs is growing in SA, respondents revealed black-owned start-ups are in a worse financial position than their white counterparts.

While 15% of local tech start-ups founded by white entrepreneurs are turning a profit, only 7% of black respondents said they are making a profit.

In addition, of white founders, 28% said they have three or fewer months left of funds to continue operations, while 51% of black respondents said they will run out of funds within three months.

Almost two-thirds of black start-ups generate no revenue at all or less than R100 000 a year, compared to 37% of white start-up founders who make under R100 000.

When it comes to access to funding, more white founders (11%) have had angel funding than black start-ups (6%).

"While Gauteng's rapid rise as the new centre for tech start-ups bodes well for the country's burgeoning tech start-up ecosystem, more will need to be done to boost black entrepreneurs in the sector," notes Ventureburn.

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