Earlier today, it was announced that SA technology business Sensor Networks had secured venture capital funding to expand its offering. While information on the transaction is limited, there are some quite interesting lessons here for entrepreneurs looking for funding for their business.
Each month, we receive 50 – 60 enquiries from entrepreneurs seeking access to funding. The requirements vary from R25 000 all the way up to R250m and yet many of the same themes play out time after time.
- Unrealistic expectations around how much capital investors are going to inject is a regular theme. The media release around this transaction indicated that the business raised $1.2m (roughly R13m). The average deal in South Africa (if you exclude angel investors) is R10.6m. If you are looking for more than that for your start-up, you’re unlikely to be successful.
- Venture Capital (VC) businesses rarely invest in start-up businesses with no track record. Sensor Networks was established in 2015 and has built itself up through Series A (and now B) funding. This is a business with revenue, clients and experienced staff involved.
- The R13m didn’t come from one funding source. There is often an idea that you simply need to wave your business plan in front of a VC and they’ll jump at the idea. In this case, the funding partners were Sanari Capital, 4Di Capital and then the ASISA ESD Fund. That’s three lots of external investors who all require comfort that their investment is going to be carefully managed.
- Familiarise yourself with the right funds and partners. A generic finance application will have less chance of success than preparing an application for partners who specialise in certain types of funding. In this case, they have brought technology and finance skills together.
- The secondary market for non-listed equity / venture deals in South Africa is very under-developed. Using the last SAVCA data, just 14 exits took place in 2016 and only 55% of those exits were profitable. We can argue the reasons for this, but a VC investor is going to want to mitigate risk. The investor needs to ultimately exit their investment and you as the entrepreneur need to understand that “exiting” is going to be a key part of their decision-making process.
Where do VCs invest?
Building on Point 1, here is an interesting graph detailing the average size of Venture Capital funded deal in South Africa between 2000 and 2016.
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