In the run-up to the My World of Tomorrow conference in October, a panel comprised of innovators and incubators at Leaderex last week discussed the trouble startups have in securing funding when using a business incubator.

The panel, lead by broadcaster Jeremy Maggs, discussed the matter from both the perspective of startups and incubators such as The Innovation Hub.

Chief executive officer of mLab, Derrick Kotze, believes that the biggest problem with securing funding is linked to the time it takes for funding to reach the correct party. “Funding programmes take time to release funding. As a result by the time the funds reach the business an owner needs to disrupt the original business to create a second opportunity”.

This has been the experience of Khaya Cokoto-Maqhwazima, co-owner of UmoyAir Communication and X Spark.  Cokoto-Maqhwazima speaks frankly about the five-year-long struggle she endured to get funding. She still feels the effects of this struggle today as she attempts to scale her business.

At this stage, as Kotze points out, a business may have failed or have had to rework its idea completely. This stems from an inherent problem with the funding model used by many banks and business incubators, whereby they use a template or a predetermined outline to assign funding.

When assigning funding it is easier, and more fiscally viable for a bank or large enterprise to direct larger portions of venture capital to one or two businesses that have exhibited growth. This makes sense because as an investor you want to know that your investment will bear fruit. As Grace Baloyi, Investment Case Specialist at Technology Innovation Agency puts it, “investors want to see the customer base before the product”.

This may seem like a case of putting the horse before the cart but in the case of government-based incubators, Baloyi raises an interesting point: “There is a lot of [venture] capital in South Africa. What you must realise however is that they [SA government] are the custodians of tax payer money. They have to show a return on investment.”

Given this selective process, it’s easier to see why directing smaller amounts of funding to smaller businesses that have not, as yet, drawn a customer is seen as a greater risk, no matter how innovative the product on offer might be. As Kotze explains, this risk coupled with the degree of work needed to assign smaller portions of funding and the tracking of these funds deters big business from investing in startups.

Speaking to htxt.africa, Kotze explained just how much this effectively stifles small business: “Some people that approach us need 25 US dollars to get a publishing account with Google, or even just a notebook, which doesn’t sound like a lot. However, if they don’t have a credit card or you’ve spent a large portion of your capital on [the] development of your product this inhibits your growth.”

He concludes by stating that in order for the sector to see real change, “…disruption in the [startup incubator] sector needs to happen.”

htxt.africa is a media partner for the My World of Tomorrow Conference.