South Africa’s start-up industry isn’t for the faint-hearted. According to a new survey by Ventureburn, employees and founders of start-ups are often paid below-market salaries, get close to zero benefits and are subject to high-pressure environments. Moreover, just 17% of start-ups are profitable, with only 3% making it to the sought-after venture capital investment stages.
But this begs the question: why is creating and working for start-ups an increasingly popular option? Although entrepreneurs will make it big if their start-up succeeds, making money doesn’t appear to be the primary driver for many of them. The survey reveals that entrepreneurs are generally driven by the need to “innovate”, “be a pioneer”, or for reasons of “personal development”. Many also start their own fledgling companies because they have spotted a “gap in the market”.
Another key finding is that the start-up industry has seen a surge in black entrepreneurs, more than that recorded by any other start-up survey to date.
The Ventureburn Start-up Survey partnered with First National Bank (FNB), investment advisory firm Clifftop Colony and analytics company Qurio to poll just under 200 tech start-ups. Each of the start-ups was asked 42 questions, ranging from funding, the profile of their founders, to their revenues and the everyday challenges they face.
The survey defines a tech start-up as a company with annual revenues below R20-million, and staff numbers of anywhere between 1 and 100. The survey sample size assumes a population of 5 000 tech start-ups in South Africa, with a 95% confidence level and a seven percent margin of error.
Funding has always been one of the biggest challenges in South Africa’s start-up space. Various reports, from Ernst & Young to the Omidyar Network, indicate that a lack of financial support is crippling the country’s entrepreneurs. The survey confirms that this is still very much the case.
Nearly half (43%) of all South Africa’s tech start-ups find access to funds their biggest challenge. Bootstrapping remains the most popular way to raise initial funds (56%), followed by investments from friends and family (11%). This group is more likely to invest directly than hand out loans (4%).
While angel investors, venture capitalists, and private equity firms grab all the headlines, the survey suggests that very few go on to make it to these rounds. In fact, just three percent of start-ups make it to the venture capitalist stage in their funding evolution.
Interestingly, credit cards (3%) are more popular than bank loans as funding channels. Bank loans are one of the least popular sources of funding (2%).
While crowdfunding often grabs the headlines as a funding option, the survey indicated that this type of funding is simply non-existent in South Africa, with exactly zero entrepreneurs indicating that they’ve used this as a funding source.
Even when start-ups do get investment, the amounts aren’t generally that large. The bulk (44%) of the country’s start-ups received investments totalling less than R50 000.
Despite the apparent propensity for bootstrapping, only a third of the companies say they are not looking to raise funding within the next three years. Of those looking for funding, most (45%) hope to raise between R1-million and R25-million within this period. A select few (6%) want a R25-million-plus payday.
And, although the survey indicates that very few go on to make it to the venture capital, angel investor, and private equity investment rounds, just over a third of start-ups indicate that they hope to tap these for future investments.
People might not get into the start-up game to make money, but without revenue, a business is dead in no time. For an alarming number of South African start-ups this is a looming reality.
A sizeable 75% of start-ups said they would run out of funds within the next 12 months, with 58% of those indicating they won’t last longer than six months.
Just 4% of start-ups generate more than R5-million in annual revenue. The vast majority meanwhile (58%) bring in less than R100 000 a year. A further 30% of the start-ups generate revenues between the range of R100 000 and R1-million per annum.
It looks like the face of the South African start-up space may be on its way to becoming more diverse, according to the survey results, which indicated that 17% of start-ups in the country had black founders. This is a significant increase from a national survey undertaken by the Silicon Cape Initiative in 2012 where just over 6% of start-up founders were black.
More still needs to be done when it comes to achieving gender parity, with the survey indicating that only 6% of the country’s start-ups have female-only founders. By comparison, 68% of start-ups have male founders, while 27% are run by combined male and female founder teams.
The Western Cape is often referred to as South Africa’s Silicon Valley or the “Silicon Cape”. The survey substantiates this claim as nearly two-thirds of the country’s tech start-ups are based in the Western Cape (59%), followed by Gauteng (29%) and KwaZulu-Natal (5%).
Just under half (49%) of start-up founders prefer to work from home or their garage. That’s in line with the image of some of the world’s most renowned start-ups beginning life in people’s kitchens, lounges or garages. The next most popular place to run a start-up from is an office (23%), with 12% running their companies remotely.
BEE compliance amongst start-ups is low. The majority of companies surveyed are non-compliant or do not know their status. Just under a quarter of start-ups are Level 4 compliant, which is not surprising considering this status includes companies with less than an annual turnover of R5-million or those less than one-year-old.
While multi-million dollar investments and funding rounds get a ton of attention, they aren’t actually the reason most South African founders start their businesses. The survey found that the need to “make the big bucks” (4%) are not the most popular motivators in the industry.
Tech start-ups are instead driven by the “want to innovate”, “be a pioneer” (15%) and to find “opportunity”, or exploit a “gap in the market” (17%). The next most popular motivations for creating a start-up included “personal development” (9%), “be my own boss” (9%), “lifestyle/flexibility reasons” (9%), “creative outlet” (8%) and “more control over the work I do” (8%).
A full 70% of start-up founders have a corporate background and only 4% of those would consider going back.
Despite the stresses, only 25% of the entrepreneurs would not recommend the “start-up lifestyle” to other people. Some 42% consider themselves promoters of this lifestyle with a further 33% sitting on the fence.
While entrepreneurs are overwhelmingly positive about start-up life, things are decidedly less glamorous for their employees. Nearly 40% of tech start-up employees are either volunteers or get paid salaries that are below the market average.
If you’re looking for a pension you probably won’t find it at a tech start-up. None of the companies surveyed offer pension plans. Medical aid isn’t all that common either, with just two percent of companies offering it as a benefit. The most standard office benefits are those of “coffee”, “lunch and office perks” (18%).
One way start-ups can look to solve the issue of low pay is to reward employees in company shares – a trendy method of remuneration in Silicon Valley. Yet only 8% of South African start-ups reward their employees in shares.
The survey sheds some light on what the most successful start-ups have in common.
Ventureburn looked at what the profitable start-ups were doing differently from the rest, and found the following:
* While the majority of all start-ups surveyed have their own product or IP (43%), the profitable companies surveyed tend to be service-oriented. Some 67% of the companies reporting profit “sell hours”. This may be due to two major reasons. One, that start-ups that have their own IP (and which have the potential to be bigger, more scalable business than service start-ups) are not initially profitable in the early stages and take a long time to show profitability. Or two, and controversially, it may also show that South Africa’s market is more conducive to service start-ups rather than IP-play start-ups which are the type of start-ups more prevalent in Silicon Valley.
* Most (58%) of the profitable companies surveyed have been operating for more than two years.
* Being motivated by a gap or opportunity in the market doesn’t necessarily mean profit
* Of all the start-ups that reported profitability, 72% are self-funded, adding weight to the belief that lean and efficient operations from day one forces companies to perform. This is followed by bank loans (6%), “investment by friends and family” (4%), “loans from friends and family” (4%).
* Only 9% of successful start-up founders are motivated by an “opportunity” or a “gap in the market”, compared to 19% of those that are not profitable. “Lifestyle and flexibility reasons” (12%) and “more control over the work I do” (12%) are the most popular drivers among successful start-up founders.
The survey found that only 15% of the start-ups focus on the global market. The South African market is the most popular, with 65% of start-ups focused locally, while 13% are taking on the African continent. Developed markets like North America (2%) and Europe (3%) have low appeal.
The majority of start-ups (41%) plan to dominate their target markets, with over half estimating those markets to be worth more than R100-million per annum.