Angels, maturity and risk – The roadblocks local tech startups face

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The local startup space can be incredibly tricky to navigate but what exactly causes that can sometimes be unclear.

Is the market down or do folks simply not want your product or service? Do you really need investment or are your operational costs too high? These questions and many more plague entrepreneurs.

Somebody who knows this all to well is Dominique Collett (pictured), a senior investment executive at Rand Merchant Investments and the head of incubation hub AlphaCode.

The AlphaCode head says that she sees several factors which inhibit local tech startups having been deeply involved in the space for some time now.

One of those factors is an immature ecosystem. Compared to the informal entrepreneurship sector (folks selling goods on the street or at robots), the formal entrepreneurship sector is very immature. While that makes a degree of sense given the time both have had to mature, more needs to be done so that local tech startups can compete with those in developed markets such as the US and UK.

Part of this immaturity, says Collett, is a lack of angel or seed funding.

“This is the startup capital that is needed to give entrepreneurs time to develop their idea and build. This applies to every sector of business creation not only tech. There is a lot of funding available for business creation, but critically, this is mostly late stage funding in the form of venture capital and growth financing. In South Africa, we need much more angel funding to give young entrepreneurs a real chance at developing their ideas,” the executive explains.

In other parts of the world – especially in the aforementioned nations – angel funding is abundant. A press release from the city of London reveals that 2019 has been a record year for US investment into London and the UK. Investment in UK businesses has climbed to a staggering $4.4 billion this year.

Of note from that is Monzo, a fintech unicorn acquiring a $144 million in its series F funding round. Here in Africa, the Jack Ma Foundation recently handed out $1 million among 10 startups. We’re not saying that the Jack Ma Foundation should be investing more than it should but the parallels between investment in a UK firm and the entire continent of Africa is hard to ignore.

“In comparison to the US and UK, we also don’t have a sophisticated retail investor base. This means that individuals are highly unlikely to invest their cash into promising startups,” adds Collett.

Another factor, in addition to a lack of angel funding is best described as, well, folks in South Africa not really being willing to take a risk.

As you might imagine, people aren’t exactly willing to take a risk when it comes to supporting themselves and their loved ones.

“South Africans tend to have a risk averse mindset when it comes to their careers. Particularly among young people from previously disadvantaged backgrounds, there is a tendency to take the safe route of a corporate role upon graduating from university. This approach is encouraged by parents and elders, who generally see entrepreneurship as too risky,” explains Collett.

In other parts of the world, entrepreneurial spirit is celebrated and encouraged. There is also seemingly greater support from a financial standpoint. This may also inspire greater confidence for those on the fence regarding a leap into entrepreneurship.

Not all bad

The local startup space is not without its strong points however, says Collett.

One of those is a strong regulatory environment compared to other emerging markets.

This, Collett says, gives up and comers a clear guide of what can be done and how far they can push boundaries.

“In addition, young South Africans can use their insights to solve economic and societal challenges with fresh and inventive solutions. People from different backgrounds can see gaps and challenges which others can’t recognise – and this contextual insight can fuel entrepreneurship and give rise to transformative business concepts,” adds the executive.

There are complex challenges faced by local entrepreneurs and they won’t be solved in a day. What is needed is funding and support and not just lip-service.

Brendyn Lotz

Brendyn Lotz

Brendyn Lotz writes news, reviews, and opinion pieces for Hypertext. His interests include SMEs, innovation on the African continent, cybersecurity, blockchain, games, geek culture and YouTube.