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Early stage investment in South African technology
start-ups: A comparison with international
benchmarks in terms of process, decision-making
factors and challenges faced
Research Report
Presented to
The Graduate School of Business
University of Cape Town
In partial fulfilment of the requirements for the
Masters of Business Administration Degree
By
Peter Hidden
December 2014
Supervisor: Lance Stringer
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1 Abstract Entrepreneurs often need external financing to grow their businesses. However, due to
the high risk of early-stage technology start-up businesses, it is often hard to come by.
Angel investors (Angels) and Venture Capitalists (VCs) often fill this gap. When
making these investments, Angels and VCs aspire to improve their investment
success-rate, and entrepreneurs aspire to improve their performance of achieving
investment. In order to contribute to these improvements in South Africa, this study
sought to compare the South African investment process and the decision-making
factors within it, as well as the challenges facing the industry, to international
benchmarks, which would enable unique characteristics and deviations to be
identified. This would ultimately contribute to both investors and entrepreneurs in
South Africa improving their understanding, efficiency and performance in early-
stage high-risk technology investment.
The study adopted the following qualitative approach in order to achieve this purpose.
First, a literature review was conducted to identify the international benchmarks.
Second, explorative semi-structured interviews were conducted with eight Angels and
VCs in South Africa. Third, a comparison was performed between the South Africa
findings and the international benchmarks in order to identify and discuss unique
characteristics and deviations. Lastly, the challenges facing the South African risk
capital industry were explored through thematic coding of the interviews.
The findings and conclusions of the study are that the South African investment
process and decision-making factors are similar to international benchmarks for the
participants interviewed. Only slight potential differences were found such as the
overall process taking longer; the heightened importance of networks, intellectual
property and the relationship forming potential between the parties; and lastly the
need to scale internationally. The challenges were found to be a low deal flow, a lack
of collaboration between industry players, a lack of funding, a lack of Angels, the low
quality of entrepreneurs and a lack of government support. However, most of these
challenges could be overcome with more and more successes stories in the industry.
Possible future research directions focus on these challenges.
Keywords: Angel investors, business angels, venture capital, venture capitalists,
investment process, opportunity selection, opportunity evaluation.
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2 Plagiarism Declaration I declare that this research report is my original work.
I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend that
it is my own.
I have used the APA6 convention for citation and referencing. Each contribution to,
and quotation in, this essay from the work(s) of other people has been attributed, and
has been cited and referenced.
I have not allowed, and will not allow, anyone to copy my work with the intention of
passing it off as his or her own work.
I acknowledge that copying some else’s research, or parts of it, is wrong, and declare
that this is my own work.
Signed: …………………….. Date:…………………………….
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3 Table of contents 1 Abstract ........................................................................................................................................ 2
2 Plagiarism Declaration ........................................................................................................... 3
3 Table of contents ...................................................................................................................... 4
4 Introduction ................................................................................................................................ 6
4.1 Purpose of the study ....................................................................................................... 6
4.2 Research problem, context and significance ......................................................... 6
4.3 Research questions .......................................................................................................... 9
4.4 Research limitations and scope .................................................................................. 9
4.5 Research assumptions................................................................................................. 10
4.6 Research ethics .............................................................................................................. 10
5 Literature review ................................................................................................................... 11
5.1 Early stage investors .................................................................................................... 11
5.2 Investment opportunity evaluation process ...................................................... 12
5.2.1 Origination .............................................................................................................. 13
5.2.2 Screening .................................................................................................................. 15
5.2.3 Evaluation ................................................................................................................ 16
5.2.4 Deal structuring ..................................................................................................... 17
5.2.5 Post investment stages ....................................................................................... 18
5.2.6 Full process considerations .............................................................................. 18
5.3 Investment decision-making factors ..................................................................... 18
5.3.1 Entrepreneur and team factors ....................................................................... 19
5.3.2 Investor-side factors ............................................................................................ 23
5.3.3 Opportunity factors ............................................................................................. 26
5.3.4 South African unique decision-making factors ......................................... 28
5.3.5 Differences between investment process stages ...................................... 29
5.3.6 Differences between formal and informal investors .............................. 29
5.4 South African Venture Capital Challenges ........................................................... 30
5.5 Literature review conclusions ................................................................................. 31
6 Research Methodology ........................................................................................................ 33
6.1 Research design, approach and strategy ............................................................. 33
6.2 Data collection and sampling ................................................................................... 34
6.3 Data analysis ................................................................................................................... 35
6.4 Reliability and validity ................................................................................................ 36
7 Findings, analysis and discussion ................................................................................... 39
7.1 Interview Participants................................................................................................. 39
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7.2 Investment opportunity evaluation process ...................................................... 40
7.2.1 Origination .............................................................................................................. 40
7.2.2 Screening .................................................................................................................. 43
7.2.3 Evaluation ................................................................................................................ 47
7.2.4 Deal Structuring .................................................................................................... 49
7.3 Investment decision-making factors ..................................................................... 53
7.3.1 Entrepreneur and team factors ....................................................................... 53
7.3.2 Investor-side factors ............................................................................................ 62
7.3.3 Opportunity factors ............................................................................................. 68
7.3.4 South African unique decision-making factors ......................................... 73
7.4 South African Venture Capital Challenges ........................................................... 75
7.5 Research limitations .................................................................................................... 82
8 Summary discussion and conclusions ........................................................................... 83
9 Conclusions .............................................................................................................................. 86
10 Future Research Directions .............................................................................................. 88
11 Glossary .................................................................................................................................... 89
12 Bibliography ........................................................................................................................... 90
13 Appendix .................................................................................................................................. 94
13.1 Interview instrument ................................................................................................ 94
List of Figures
Figure 1: Comparison of literature review structure to investment process models found in literature. ........................................................................................................ 13
List of Tables
Table 1: Research interview participants............................................................................ 39
Table 2: Deal origination channel in origination stage. ................................................. 41
Table 3: Entrepreneur and team factors in screening stage. ....................................... 45
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4 Introduction
4.1 Purpose of the study
The purpose of this study was to explore if there are any unique South African
characteristics, challenges and decision-making factors in the early stage risk capital
investment process. The research assessed if the process followed by South African
investors deviates from the well-established models from abroad, and if there are
additional unique challenges, characteristics and factors that South African investors
consider in the process.
4.2 Research problem, context and significance
Entrepreneurs often need external financing to grow their businesses. However, due to
the high risk in early stage start-up businesses it is often hard to come by. Angel
investors (Angels) and Venture Capitalists (VCs) fill this gap (Sudek, 2006). Studies
have shown that Angel and VC firm backed businesses tend to achieve higher
survival rates (Zacharakis & Meyer, 2000) and additionally positively impact firm
growth in technology based start-up businesses (Bertoni, Colombo, & Grilli, 2011). In
the South African context, it has also been shown that venture capital has a positive
impact on business performance (Ojah, 2011). Therefore, Angel and VC investors are
an important factor of entrepreneurial business growth.
Yet, even though it is important, research shows that the rate of entrepreneurs
achieving Angel or VC backing is very low (Maxwell, Jeffrey, & Lévesque, 2011).
Additionally, the success and survival of businesses and ultimately the return on
investment for Angels and VCs is low (Zacharakis & Meyer, 2000). Therefore, there
is an incentive to improve the performance of both entrepreneurs achieving
investment and investors making good investments.
From the investor’s point of view, they would want to improve their productivity of
opportunities assessed, as well as the effectiveness of the investments in terms of the
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hit-rate or success of the investment. From the entrepreneur’s point of view, they
want to maximize their chances of achieving investment, as well as improving their
own productivity in terms of providing the right information to investors. And finally,
from society’s point of view, if more investments are made, which are more
successful, this will be an efficient use of the scare resource of capital, leading to
economic growth and jobs as well as other societal benefits.
In order to achieve this, an understanding of how the investment process works, and
what the decision-making factors are within it would allow both investors and
entrepreneurs to improve their performance. Paul, Whittam and Wyper (2007) say
that an understanding of the investment process will highlight the key activities that
the investor needs to manage in order to increase the chance of a successful
investment. Additionally, the authors suggest that it will also enable policy makers to
have a deeper understanding of the investment arena, and therefore enable them to
create more effective pro-entrepreneurships policies. Furthermore, by understanding
the decision-making factors and the investment process, investors can increase the
efficiencies from one step to the next (Maxwell et al., 2011) and ultimately, they can
minimize adverse selection (Fried & Hisrich, 1994).
In South African, Angel and VC investment is growing. Planting (2012) says that
“between 2000 and 2010, R2,6 billion was invested in 251 venture capital deals [and
that these benchmarks will be] overtaken in the next decade” (p.12). Although the
majority of this is not used in early stage tech start-ups, and a lack of early-stage VC
investment has been identified as a South African VC challenge (Jones & Mlambo,
2013), the interest in tech investment is increasing (Harris, 2012). Additionally, there
has recently been an explosion of Angel, VC, accelerator and incubator institutions
and firms such as Google Umbono (88mph), AngelHub, KnifeCapital, Mzansi Gold,
The Bandwidth Barn, the Silicon Cape initiative, Sparkup and others developed to
facilitate the investment process between early stage tech businesses and investors
(Gander, 2014; Harris, 2012; Planting, 2012; Silicon Cape Initiative, 2014).
AngelHub was specifically created in order to facilitate early stage investing
(Planting, 2012). Koenig (2014), believes that the South African Angel and VC
industry is still in its infancy, and that the industry is desperately important to improve
the economic wellbeing of South Africans as a whole. Therefore, an understanding of
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the Angel and VC investment process and the decision-making factors within the
process in the South African context is important and relevant to Angels, VCs,
entrepreneurs and the South African economy as a whole.
Previous research has been done in South Africa that sought to rate the various
decision-making factors identified by international researchers in terms of their
importance to South African VCs (Deventer & Mlambo, 2009). Additionally,
research has been done to explore the reasons for the lack of early-stage venture
capital and the challenges faced by VCs in South Africa (Jones & Mlambo, 2013).
However, no research has been done to explore if there are any unique decision-
making factors or process deviations in South Africa.
Therefore, this study aimed to explore this gap by researching if there are any unique
decision-making factors or process deviations in South Africa. These could then be
used to bring entrepreneurs and investors together in a more efficient manner. In
addition to this, the research aimed to uncover if any unique challenges faced South
African Angels and VCs that expanded on the study by Jones and Mlambo (2013).
Similar research has been performed in other regions in the world, for example
Klonowski (2007) performed research to identify the specific challenges and
differences of the investment process in Central and Eastern Europe. As an example,
the author found that there were differences such as the need to educate entrepreneurs
more due to poor business investment knowledge amongst entrepreneurs, as well as
the need for more creative deal structuring due to a weaker legal infrastructure.
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4.3 Research questions
Early stage investment in South African technology start-ups: A comparison
with international benchmarks in terms of process, decision-making factors and
challenges faced
Sub-questions:
Are there any specific differences in the step-by-step investment process
followed by investors in South African compared to international
benchmarks?
Are there any unique decision-making factors considered by South African
venture capital investors compared to international benchmarks?
What are the major challenges faced by South African venture capital
investors?
4.4 Research limitations and scope
The following limitations applied in this study
The study was limited in scope up to the point where an investment is
concluded or is committed too. Any post investment factors and the success or
failure of the investment are excluded from this study. This study was
therefore limited to the process from the time the opportunity becomes known
to the investor to the point where the investment is concluded.
The study was limited to early stage investments, which are businesses that are
very new and growing or are not well established.
The study only focused on Angels and VC firms, and not on other sources of
venture capital.
The study was limited to investments in the technology sector.
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4.5 Research assumptions
The following assumptions have been made regarding this study
The sample of interviewees for this dissertation had the required knowledge,
expertise and skill to take part in the study and contribute to the findings of
this research.
There were similarities amongst the sample in terms of the investment process
and factors they use and any challenges they face.
4.6 Research ethics
This study was conducted in an ethical manner. The following ethical considerations
apply.
The formal ethical consent form and requirements of the Ethics in Research
Committee of the university was completed and approved.
This study involved human subjects in the interview stages. Consent was
received from the subjects before the interviews were conducted, and the
subjects’ anonymity and confidentiality was protected.
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5 Literature review
This section of the report will discuss four areas in relation to the research questions
proposed. Firstly, a definition of early stage investors, secondly the investment
process, thirdly the various investment decision-making factors and finally uniquely
South African venture capital challenges.
5.1 Early stage investors
This literature review study will focus on early stage investors of venture capital.
Early stage investors are investors who provide risk capital to new and growing
businesses. They add value to the economy by bringing capital and entrepreneurs
together in an efficient manner, as well as providing non-financial assistance that
enhances the survival of early stage businesses (Zacharakis & Meyer, 2000).
While there are many differences in terminology for how the early stage investors are
defined, such as Angel investors, business Angels, venture capital firms, venture
capitalists or seed capital, they are all essentially the same: a provider of venture
capital (Investopedia, n.d.). The core difference between these different types of
investors, as defined by Mason (2007), is between the formal and informal nature of
the investment. Angels are usually placed in the informal category. Angels are
defined as “high net worth individuals who invest their own money, along with their
time and expertise, directly in companies in which they have no family connection, in
the hope of financial gain” (Mason, 2007, p. 3). Venture capital firms are placed in
the formal category, where an institutional firm or an individual acting on behalf of a
firm rather than a private individual goes through the investment process and makes
the investment decision.
Both Angels and VC firms provide early stage finance, however, Angels typically
invest earlier than VC firms (Paul et al., 2007; Sudek, 2006), especially in technology
opportunities (Erikson & Sørheim, 2005). Nevertheless, both follow the same
investment process, but with slight variations in terms of the weighting of certain
assessment factors and the rigor of analysis performed on certain assessment factors
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(Erikson & Sørheim, 2005; Paul et al., 2007; Sudek, 2006). Therefore, this review is
not concerned with differentiating the between different types of investors, and is
rather focused on the investment process and the various decision-making factors
used.
5.2 Investment opportunity evaluation process
For the purposes of this literature review, the high-level investment process steps
developed by Tyebjee and Bruno (1984), have been used as a structure to review the
investment process literature. These steps are as follows:
1. Origination
2. Screening
3. Evaluation
4. Deal structuring
More recent researchers, such as Fried and Hisrich (1994) and Paul et al., (2007),
have defined more detailed investment process models that have slight variations
from the model initially defined by Tyebjee and Bruno, such as naming differences,
split process steps or the detailed investigation of a isolated step. However, they
generally still all follow the high level structure initially defined by Tyebjee and
Bruno (1984), and consequently this literature review will be based on this structure
(See Figure 1). Furthermore, in a comprehensive longitudinal study of 11 years of
investment deals, Petty and Gruber (2011) found that the high level investment
process steps outlined above were accurate, and that while there may be slight
variations in the details, the overall process follows the steps that will be used in this
literature review hold true.
It is also important to note that in practice, stages overlap and boundaries are not well
defined, and the activities do not fit into neatly defined stages, however the structure
allows a high level view of the different stages of the process to be analysed (Paul et
al., 2007). Furthermore, as Maxwell, Jeffrey and Lévesque (2011) point out, the
investment decision-making process’s complexity can be better understood if the
process is split into stages.
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Figure 1: Comparison of literature review structure to investment process
models found in literature.
5.2.1 Origination
The main activity in the origination stage of the investment process is for the investor
to discover promising investment opportunities and perform some initial high level
screening (Tyebjee & Bruno, 1984).
The discovery of an opportunity is essentially an investor becoming aware of an
opportunity. An investor becomes aware of the opportunity through methods such as a
chance encounter, referrals from their network or via actively searching for
opportunities (Mason, 2007). The majority of the opportunities are discovered
through referrals from the investors network, such as via investment bankers,
investors in a VC fund, commercial bankers, family, friends and consultants (Fried &
Hisrich, 1994). From a technology investor point of view, Erikson and Sørheim
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(2005) discuss how technology focused investors rely more on networks than
investors in other sectors do. The authors also found that technology investors make
more use of social networks, and have larger networks, which they utilize to find
possible opportunities.
Another source of opportunity origination are through syndicates, especially for
informal investors. Paul, Whittam and Johnston (2003) discuss that for informal
investors, being apart of a syndicate allows investors to share investments, share the
risk, share views and gather inputs and find out about more possible opportunities.
Additionally, they found that the investment is more likely to be more effective if it
originated through a syndicate.
After an investor has become aware of an opportunity, they would perform some
initial screening of the opportunity, in terms of assessing if opportunities are
promising or not (Kollmann & Kuckertz, 2010). The main aim of this initial screening
is to assess if the proposal has sufficient merit to justify the undertaking of a detailed
analysis, based on if the opportunity meets the investors objectives and their decision-
making factors, such as an appropriate industry sector, location, return as well as
numerous other factors (Smith, Harrison, & Mason, 2010). Additional initial
screening occurs in terms of the confidence of the investor in the referrer’s judgment,
which plays an important role when opportunities originate from networks (Fried &
Hisrich, 1994).
Looking at the one other investment process model, Paul et al., (2007) refer to this
stage as the familiarization stage, which comprises the two main activities of firstly
learning about the opportunity and secondly meeting the entrepreneur and building a
relationship with the entrepreneur. The learning activity is the same as the discovery
activities outlined above in that it involves learning about the opportunity through
formal or informal networks, but the authors go further in this model and include the
additional activity of reading summarized business plans in terms of actually learning
the information of the opportunity. This model also coincides with the other models
where an initial screening activity is included in this step of the process, where the
investor would immediately begin assessing factors such as the industry sector and
the entrepreneurial team experience.
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5.2.2 Screening
The main activity of the screening stage is to reduce the number of investment
opportunities to a manageable quantity according to the criteria of the investor
(Tyebjee & Bruno, 1984).
This stage involves more comprehensive screening than what was performed in the
initial screening of the origination step. The initial screening involved a quick and
high-level decision to trim the number of opportunities that the investor will be
investigating, while this stage involves extra in-depth analysis to further trim the
number of opportunities. However, there is still a large overlap with the initial
screening activities in the origination process step. The key considerations of this
stage are a fit to the investor-side factors and their overall impression of the potential
of the opportunity (Mason, 2007). This step is still not a complete evaluation, but
rather an elimination decision-making process (Maxwell et al., 2011). It is also
significant to note that since this step has an elimination focus, investors have been
found to approach this step with a negative mind-set, expecting many poor
opportunities and seeking reasons to reject it based on their past experiences (Smith et
al., 2010).
Looking at the investment process model by Fried and Hisrich (1994), screening is
split into two distinct steps. Firstly, specific factors relating to the investor or the
investors firm, such as the size of the investment, the industry sector, location and the
stage of financing are considered. This is a basic rejection involving a cursory glance
at a business plan for example, and can be linked to the initial screening step already
discussed in the origination process step. Secondly, if the first factors are met, a more
detailed analysis of the business plan will occur, which can be linked to this more in-
depth screening process step. The purpose of these two screening steps is to minimize
the investment of time by the investor, as per the definition by Tyebjee and Bruno
(1984).
The investment process model by Paul et al. (2007) found that following the
origination step (which they name familiarization), the process moves into a more
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structured set of assessment activities. In this stage, they found that more detailed
meetings are held with the entrepreneur to dig deeper into the opportunity, and to
analyse decision-making factors such as the viability and the strength of the
entrepreneur and their team. This would include a more comprehensive study of the
business plan. In addition to this, the investors would seek advice from their own
networks on the opportunity, and confirm the credentials of the entrepreneurs with
references during this screening step. This process model is consistent with the other
models discussed above in terms of the activities performed at this stage of the
investment process.
5.2.3 Evaluation
The primary task of the evaluation stage of the investment process is the careful
analysis of the opportunity (Tyebjee & Bruno, 1984). The investor will examine the
business plan in depth, seek advice from their network, meet the entrepreneurs and
stakeholders and research the proposal in-depth (Mason, 2007).
In the model by Paul et al. (2007), this step is differentiated from the screening step in
terms of the commitment by the investor to opportunity. They found that at some
point in the screening step, the investor would make an internal decision to invest, or
would become committed, and would increases their scrutiny, involvement and
assessment of the opportunity. The orientation of the investor would shift from a
negative opportunity-elimination stance to a positive detailed-analysis stance. The
evaluation factors would become more comprehensive, and normally at this stage the
business plan would be amended from investor input. Additionally, other potential
investors may be sought to join the opportunity.
In the Fried and Hisrich model (1994), evaluation is split into two distinct steps, first
phase and second phase evaluation. First phase evaluation is where the investor
begins to gather more information about the proposal. This step is thorough, however
not all factors are assessed, and the investor uses their experience and discretion in
determining the most important factors to analyse. The most common examples of
activities performed in this stage include meeting all members of the team, visiting
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the physical facilities, speaking with former business associates of the entrepreneur,
contacting existing investors, contacting potential customers, investigating
competitors, speaking with experts and analysing the financials as well as other
activities. This stage is almost entirely about gathering information and checking
information provided by the investor. The second phase evaluation occurs after the
investor forms an emotional commitment to the business opportunity, similar to the
finding of Paul et al. (2007). The same activities as the first evaluation stage continue,
but the personal commitment of the investor dramatically increases, and the focus
shifts from finding issues in the business plan to overcoming obstacles that may arise.
5.2.4 Deal structuring
The primary task of the deal structuring stage is the development of the deal and the
negotiation of the terms of the deal between the investor and the entrepreneur
(Tyebjee & Bruno, 1984). The negotiations with the entrepreneur would be over
aspects such as the valuation of the business, deal structuring and the terms and
conditions (Mason, 2007).
In the model by Paul et al. (2007), this stage is referred to as the bargaining stage.
They found that at this stage, the due diligence is completed and the negotiations are
finalized on the investment value, which investors often describe as the most difficult
aspect of the entire investment process. In addition to this, activities around future
investment needs are also considered.
In the Fried and Hisrich model (1994), they discuss how the deal structuring
particulars would have already been considered by the investor in previous stages and
a rough understanding reached between the parties, and that it would not be left to the
very end. This is because both parties would not have wanted to spend a great deal of
time in the evaluation stage, and become committed to the opportunity, only to find
out that the deal is not possible due to a difference over the price and valuation.
Therefore, this stage is characterized more by the formal activities and details of the
terms and conditions.
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5.2.5 Post investment stages
After the deal has been concluded, the post-investment stages of the process occur.
These stages mostly deal with the involvement of the investor in the businesses,
additional investment considerations and the management and future divestment of
the investor (Tyebjee & Bruno, 1984) (Paul et al., 2007). These post investment
stages are out of the scope of this review and study.
5.2.6 Full process considerations
Certain activities cannot be categorised into a specific step and are important
activities that span the entire process.
Paul et al (2007) highlights one of the most important activities that spans the entire
investment process as the personal relationship development between the entrepreneur
and the investor, which has an effect on the progression of the process and the final
investment decision.
The author also highlights that the process is also iterative, especially in the early
stages, where the investor and entrepreneur will go through many iterations of the
stages of familiarisation (learning about each other through relationship building and
learning about the opportunity through information sharing) and evaluation before
concluding the investment, and that the investment process is not always a clear step
by step process.
5.3 Investment decision-making factors
Many venture capital investment decision-making factors have been identified and
researched in literature internationally. This section will outline the majority of these
factors that have been identified. The section is broken up into the following
categories of factors: The entrepreneur and their team factors; the investor-side
factors; the opportunity factors; South African unique factors and the factors
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considered across the investment process steps and for formal and informal investor
types.
5.3.1 Entrepreneur and team factors
This category of factors is often considered the most important for investors. The
entrepreneur and their team is often what attracts an investor to an opportunity, and
often the quality of the entrepreneur is the ultimate deciding factor (Sudek, 2006).
Entrepreneur personality
The quality of the entrepreneur, in terms of their personality type traits is often
considered the most important factor. These personality factors are discussed in many
forms in the literature, which will be outlined below.
One of the most important personality factors is the passion of the entrepreneur.
Sudek (2006) found that in the screening stages of the investment process the passion
of the entrepreneur received the most interest by investors. The author suggests that
the reason for this is the perception that when an entrepreneur shows passion, this will
translate into the commitment and enthusiasm for the idea to succeed.
Another important personality factor is trustworthiness and trust. Trustworthiness is
defined in terms of communicating in a honest and straightforward manner, while
trust is in terms of the credibility and benevolence of the entrepreneur (Kollmann,
Kuckertz, & Middelberg, 2014). Sudek (2006) observed that investors preferred when
entrepreneurs would admit that they did not know the answer to a question, rather
than trying to force out an answer, which showed trust and honesty. In addition to
this, the author observed that if investors sensed that an entrepreneur was avoiding a
question, it would reduce their trustworthiness.
Generally, other entrepreneur personality traits that are being assessed are the:
Leadership capabilities (Kollmann & Kuckertz, 2010)(Fried & Hisrich, 1994).
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Character (Kollmann & Kuckertz, 2010).
Impression the entrepreneur makes (Paul et al., 2007)
Personal motivation (Zacharakis & Meyer, 2000).
Integrity (Maxwell et al., 2011)
Honesty (Sudek, 2006)
Determination (Sudek, 2006)
Enthusiasm (Sudek, 2006)
Work ethic (Fried & Hisrich, 1994)
Flexible (Fried & Hisrich, 1994)
Another point of view, in terms of the personality factors of the entrepreneur that has
been identified, is the ability of the investor and entrepreneur to form a relationship.
Paul et al, (2007) identified the importance of the investor’s assessment of whether
they would be able to work with the entrepreneur and build a business relationship or
not. This is especially important to investors who plan to have an active role in the
business after the investment deal is concluded.
From a South African perspective, Deventer and Mlambo (2009) found that this
category was rated as the most important of all the investment factors, with honesty
and integrity being the most significant in the study.
Entrepreneurial commitment
Another factor relating to the entrepreneur is commitment (Kollmann & Kuckertz,
2010). This is usually defined as the entrepreneurial stake in the firm, in that the
entrepreneur has financially committed to their business (Zacharakis & Meyer, 2000).
Sudek (2006) observed that an investor would be more interested if the entrepreneur
was committed to do whatever it takes to work through the problems and issues in the
future to make the idea succeed. An example of this would be an entrepreneur who
has put their own money into the business by, for example, mortgaging their house,
thus showing their commitment to the idea.
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Another factor relating to the entrepreneur is their commitment to maintaining contact
with the investor and being committed to building the relationship and continuing
with the investment process (Petty & Gruber, 2011). They found that entrepreneurs
who took too long to engage with an investor who has expressed interest in their
opportunity were more likely to get rejected.
Entrepreneur experience
The experience of the entrepreneur and their team is an important factor (Colombo &
Grilli, 2010). Many investors will check the credibility of the entrepreneur and their
experience in the industry, highlighting the importance of their experience (Paul et al.,
2007).
Generally, the factors that are assessed for the entrepreneur and their team’s
experience are the:
Track record (Kollmann & Kuckertz, 2010).
Technical and business qualifications (Kollmann & Kuckertz, 2010).
Management skills (Zacharakis & Meyer, 2000).
The investors are also assessing if the entrepreneur is realistic with their business
proposition, if they understand risk and if they have a thorough understanding of the
business (Fried & Hisrich, 1994).
Confidence in entrepreneur
The confidence of the investor in the entrepreneur and their team is another important
factor (Paul et al., 2007). The author goes on to gives an example where an
entrepreneur had a poorly written business plan, but the investor had intuitive
confidence in the entrepreneur and went ahead with the investment. Some investors
may gauge their confidence in the entrepreneur and their team by pushing the
boundaries of the questions and pressure they put on them to see how they react and
interact with each other (Fried & Hisrich, 1994). Another study found that the level of
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confidence correlated with the level of financing delivered (Payne, Davis, Moore, &
Bell, 2009).
Business plan and the business plan presentation
The business plan is an important factor that is considered by investors (Maxwell et
al., 2011; Paul et al., 2003). However, another study found that a business plan is not
an important source of information for an investors decision-making, and that
submitting them is “at best, a ceremonial act.” (Kirsch, Goldfarb, & Gera, 2009, p.
509). They conclude that a business plan is weakly predictive of funding decisions,
and that the actual content does not inform investors, who determine their critical
information for decision-making through alternative channels. This finding shows that
while a business plan is important to get a foot in the door, and that the basic high
level information is important for the initial screening that occurs in the investment
decision-making process, investors do not base their final investment decisions on the
information presented in business plans and rely on other factors, such as the
entrepreneur factors already discussed.
Nevertheless, even though it may only be ceremonial, it is still necessary, as
determined by Paul et al. (2003) who found that a poor business plan is the largest
barrier to investment. Furthermore, it may be due to the amount of preparedness that
the entrepreneur shows by having a business plan that is the important factor, as found
by Chen, Yao and Kotha (2009). Therefore, in summary, a business plan is a requisite
to get a foot in the door, but the usefulness of the information it contains is not a
critical factor.
In terms of the business plan presentation, this was also found to be a factor that is
considered (Clark, 2008; Maxwell et al., 2011; Paul et al., 2003). A study by Clark
(2008) determined that the higher an investor rated the quality and content of the
entrepreneur’s presentation, the greater the chance that the investor would pursue the
investment opportunity. Additionally, the presentational aspects such as the style and
delivery were found to be the most influential. Therefore, the actual presentation by
the entrepreneur is an important factor that affects the investor’s decision-making.
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Additional Team factors
The management team is often cited as the second most important factor after the
entrepreneurs themselves and the same factors as discussed in the previous sections of
this report, such as personality, commitment and experience apply to the management
team as well when assessing a business opportunity (Sudek, 2006). An additional
element highlighted that investors may assess when looking at the management team
is their survivability, which is their ability to push through difficult times and make
the business a success (Zacharakis & Meyer, 2000).
Another important aspect in assessing the management team was if an entrepreneur
was able to outline the shortcomings of the team and what gaps needed to be filled,
which is often a area that is not considered by entrepreneurs (Sudek, 2006).
5.3.2 Investor-side factors
On the other side of the coin to the entrepreneurs and management team factors are
the decision-making factors of the investors themselves. These decision-making
factors normally do not relate to the merits of the opportunity, but rather to how well
the opportunity aligns with the investor’s objectives, requirements, skills, personality
and needs.
Investor personal experience
The most common decision-making factor that is considered from the investor side is
the investor’s personal experience or familiarity of the industry sector and technology
of the opportunity (Paul et al., 2003). Normally, if the investor does not have
experience in the sector or an understanding of the technology, they will not invest in
the opportunity. This is also closely linked to an additional factor considered of
whether the investor thinks they are able to contribute to the business or not (Mason,
2007).
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Another factor related to the personal experience of the investor that influences the
chances of an investment being made is the ability and competency of the investor
(San José, Roure, & Aernoudt, 2005). The authors found that when an investor has a
poor understanding of the investment making process, it decreases the chance of
entrepreneurs getting successful investments.
Another aspect of the investor’s personal experience is there past knowledge and
learning (Smith et al., 2010). The authors found that investors show a reliance on past
decisions made when making decisions in a current investment opportunity, which
may introduce bias such as the availability heuristic, which consequently may lead to
weaker investment decisions. The reliance on past decisions, and therefore the
potential bias, was found to be less pronounced for more experienced investors.
However, another study found that after a certain point, more experience may actually
result in a reduction of investment success (Shepherd, Zacharakis, & Baron, 2003).
The authors suggest that this may be due investors relying too much on mental
shortcuts, automatic information processing and overconfidence, which consequently
makes them increasingly susceptible to cognitive errors.
From a South African point of view, Jones and Mlambo (2013) found that investor
side skills was a factor, especially in hi-tech sectors, where often a VC would simple
not have the necessary skills to assess the viability of an opportunity.
Investor networks
The availability of formal and informal networks is a factor in the investors decision-
making process in terms of seeking advice on an investment (Paul et al., 2007). If an
investor is able to get advice relating to the opportunity, they are often more confident
in their evaluation of the opportunity and the decisions they make.
Another factor relating to an investors personal network is when opportunities
originate from the investors networks. In this case, the confidence of the investor in
the referrer’s judgment plays an important role in the decision-making process (Fried
& Hisrich, 1994).
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Investor strategy
An important factor that the investors consider is if the opportunity aligns with their
investment strategy or the composition of their portfolio (Kollmann & Kuckertz,
2010; Paul et al., 2007; Petty & Gruber, 2011).
This factor was especially relevant for VC firms (Petty & Gruber, 2011). The authors
found that if a particular opportunity was in conflict with the objectives of the firms
portfolio, it was often rejected, and the typical reasons would be that the opportunity
was in conflict with an existing investment in the portfolio, or it was in conflict with
the strategy, balance and diversification objectives of the portfolio.
From a informal Angel perspective, the investors personal objectives and strategy are
more relevant factors, such as their financial growth objectives or their personal goals
in terms of personal interest or how active they wish to be in a business, or what their
post-investment role would be (Paul et al., 2007).
Control
The investor’s control of the business as a decision-making factor is unclear and there
is limited research on the topic. Business control in the form of restrictive covenants
as a part of the terms and conditions of the deal was initially identified as a decision-
making factor (Tyebjee & Bruno, 1984), however, another study did not find support
for control mechanisms as a key decision-making factor, but the study also concedes
that this area of their research was limited and more research needs to be done in the
area (Payne et al., 2009).
Another study took a different angle on control and found that the openness of the
entrepreneur to discuss the terms and conditions (which was identified as an
antecedent of perceived controllability) had a positive effect on the investor
(Kollmann et al., 2014). The reason suggested was that it is a signal to the investor
that the entrepreneur would be open to resolving future conflict situations. This
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research did not provide direct support for control as a factor, but rather an indirect
link.
Other factors
Li and Mahoney (2011) found that market uncertainty also has an effect on the
investors decision-making, with investors delaying their decision at times of
uncertainty.
Another factor identified was simply the time constraints of the investor (Petty &
Gruber, 2011). If the investor is simply overloaded with opportunities that they are
evaluating, they are more likely to reject an opportunity, even if they have expressed
interest in it.
5.3.3 Opportunity factors
The opportunity factors relate to the more factual information of the opportunity that
is being considered. These factors are the product, market and financial characteristics
of the opportunity.
Product characteristics
Generally, investors assess the product characteristics of the opportunity by
considering the following factors.
Product attributes (Zacharakis & Meyer, 2000).
Innovativeness of the product (Kollmann & Kuckertz, 2010).
Patentability (Kollmann & Kuckertz, 2010).
Unique selling proposition (Kollmann & Kuckertz, 2010).
Differentiation (Zacharakis & Meyer, 2000).
Growth potential (Zacharakis & Meyer, 2000).
Existence of a prototype (Zacharakis & Meyer, 2000).
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Market characteristics
Generally, investors assess the market characteristics of the opportunity by
considering the following factors.
Market size (Kollmann & Kuckertz, 2010).
Market growth (Kollmann & Kuckertz, 2010).
Market acceptance (Zacharakis & Meyer, 2000)(Kollmann & Kuckertz, 2010).
Market positioning (Tyebjee & Bruno, 1984).
Barriers to entry (Zacharakis & Meyer, 2000)(Sudek, 2006).
Competitive threat (Zacharakis & Meyer, 2000).
New market creation potential (Zacharakis & Meyer, 2000).
Niche market potential (Sudek, 2006).
Customer engagement (Maxwell et al., 2011).
Supply and distribution factors (Maxwell et al., 2011).
Market dynamics (Maxwell et al., 2011).
Time to bring to market (Fried & Hisrich, 1994).
Formal market studies (occasionally commissioned by an investor) (Fried &
Hisrich, 1994).
In addition to those factors, the investors may also consider the strength of the
marketing plan in the business plan as well as the marketing skills of the entrepreneur
(Tyebjee & Bruno, 1984).
From a South African perspective, it was found that market acceptance was rated as
one of the top three most important factors overall (Deventer & Mlambo, 2009).
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Financial characteristics
Generally, investors assess the financial characteristics of the opportunity by
considering the following factors.
Return on investment expectation (Kollmann & Kuckertz, 2010)(Maxwell et
al., 2011).
Cash flows (Maxwell et al., 2011).
Margins (Sudek, 2006).
Potential for growth (Fried & Hisrich, 1994).
High absolute returns (Investors don’t want to be time constrained with
smaller investments) (Fried & Hisrich, 1994).
Investment exit possibilities (Kollmann & Kuckertz, 2010)(Zacharakis &
Meyer, 2000)(Sudek, 2006).
Risk (Zacharakis & Meyer, 2000).
Investors percentage of equity in the business (Zacharakis & Meyer, 2000).
Size of the investment (Zacharakis & Meyer, 2000).
From a South African perspective, it was found that return of investment was rated as
one of the top three most important factors overall (Deventer & Mlambo, 2009).
5.3.4 South African unique decision-making factors
In two studies involving the investment factors considered by South African
investors, the factors surveyed were the same factors identified internationally and
outlined in previous sections of in this literature review (Deventer & Mlambo, 2009;
Jones & Mlambo, 2013). Only two unique South African factors were surveyed or
considered by these studies.
The first uniquely South Africa decision-making factor was the BEE status of the
business opportunity (Deventer & Mlambo, 2009). However, in the study this was not
found to be a significant decision-making factor with a very low position in the
investor’s rankings.
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The second uniquely South Africa decision-making factor identified was the ability to
internationalise the business plan, and linked to that is the domestic market scale of
the opportunity (Jones & Mlambo, 2013). Although this is perhaps not uniquely South
African, and can be applied to other countries, it is a decision-making factor that has
not been found in international literature as a part of this study.
Apart from these two studies there is no other recent research of other uniquely South
African investment factors.
5.3.5 Differences between investment process stages
The various factors vary in their importance and certainty as the investment process
progresses (Kollmann & Kuckertz, 2010). The authors found that in the early stages,
the experience and trustworthiness of the entrepreneur are deemed more important,
but are more uncertain to determine, an example being entrepreneur commitment.
Towards the end the process other factors become more important and uncertain, such
as the market acceptance and return on investment. Petty and Gruber (2011) also
found that the various factors vary in importance at different stages in the process. For
example, they found that product characteristics are more important in the beginning
stages, such as the product having a unique selling point, while financing factors are
more important in later stages.
In addition to the varying importance of factors throughout the process, most of the
factors are not considered at all by certain investors. Some investors do not consider
all the factors when making a decision, but rather use a short cut decision heuristic
where a smaller set of factors are analysed and evaluated as needed (Maxwell et al.,
2011).
5.3.6 Differences between formal and informal investors
In terms of the investment process, formal (VC firms) and informal (Angels) investors
have been found to follow the same steps, but with slight variations in terms of the
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weighting of certain assessment factors and the rigor of analysis performed on certain
factors (Paul et al., 2007; Sudek, 2006)
Informal investors give more weight to softer and personal factors such as the
entrepreneur’s personality, first impressions and the impact they make in the first
meeting (Paul et al., 2007). Firstly the authors suggest that this is because informal
investors have less factual information to perform their analysis on since informal
investors normally invest at an earlier stage of the business. Secondly, the authors
suggest that it is because Angels are usually using their own money, while VC firms
are employed by others and raise funds using their skill at unearthing opportunities,
and therefore since Angels are using their own money, and not acting on behalf on
another, the entrepreneurial factors become more significant.
The major differences between formal and informal investors is in the post-
investment arena, where Angels are usually more personally involved in the
operations of the business that they have invested in, while VC firms are less actively
involved (Sudek, 2006). This, once again, ties in with the greater importance of the
personal and relationship factors to informal investors, since the investor plans to be
involved in the day-to-day operations alongside the entrepreneur and their team.
5.4 South African Venture Capital Challenges
This section will discuss the key challenges facing venture capital investors in South
Africa.
The first challenge facing venture capital investors in South Africa is the low quality
of entrepreneurs in the country (Buys & Mbewana, 2007; Jones & Mlambo, 2013).
The Global Entrepreneurship Monitor (GEM) also identifiers the low quality of
entrepreneurs, and goes further to identify the low quality of the business plans and
business ideas as well (Herrington & Kew, 2013). Furthermore, the GEM report
discusses how entrepreneurs often have a lack of understanding of what venture
capital is and what it offers to them as entrepreneurs. These entrepreneur quality
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issues present challenges to investors who often need to spend more time educating
entrepreneurs than focusing on their core investment activities.
Secondly, the limited availability of capital and funding has been identified as a
challenge (Harris, 2012) (This challenge is more relevant to formal VC firms rather
than informal Angels who are normally private, wealthy individuals and use their own
capital to invest). The lack of capital targeted at early stage businesses is especially
prevalent (Jones & Mlambo, 2013). In addition to this lack of funding is a lack of
specialist fund managers who have the necessary sector knowledge to properly assess
an opportunity, especially in the high technology sectors (Herrington & Kew, 2013;
Jones & Mlambo, 2013). Finally, there is also a lack of public information and
education on how to find capital and funding or whom to approach to acquire it
(Herrington & Kew, 2013).
Lastly is the lack of government support for venture capital investors and
entrepreneurs (Harris, 2012). This includes the following aspects: a lack of supportive
government policies (Buys & Mbewana, 2007); labour market rigidities and
regulations that impact the level of innovation and venture capital investment; a lack
of government funding support; strict exchange controls and an inability to attract
early-stage investments from overseas (Jones & Mlambo, 2013). Justin Stanford, a
VC and Angel, is quoted in the GEM report saying that the regulatory and legislative
environment is the biggest challenge facing entrepreneurs and investors in South
Africa (Herrington & Kew, 2013).
5.5 Literature review conclusions
From an investment process point of view, the literature provides three process
models that at a high level follow the steps of origination, screening, evaluation and
deal structuring. These three processes are the models by Tyebjee and Bruno (1984),
Fried and Hisrich (1994) and Paul et al. (2007). While there are small deviations,
differences and overlaps between the steps, at a high level the three processes are
consistent. In summary: the origination step is where an investor discovers an
investment opportunity and performs quick initial screening; the screening step is a
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more in-depth and comprehensive screening with the intention of narrowing down the
number of opportunities the investor is considering; the evaluation step is a very
comprehensive evaluation of the opportunity and finally the deal structuring step is
the last step where the deal is negotiated and the investment concluded.
These models aided in addressing the research question of what the South African
investment process is by allowing a comparison to be drawn between the findings of
the research and the process models established in literature internationally, and
highlighting any key differences.
From an investment decision-making factors point of view, literature provides a
comprehensive list of factors that have been identified and researched. This literature
review has aimed to identify as many of the significant factors as possible. In
summary, the key factors are: from an entrepreneurs point of view, the entrepreneur’s
personality, commitment, experience, ability to instil confidence in the investor,
business plan quality, presentation quality and management team capabilities; from
the investor’s point of view, the investor’s personal experience, networks and
strategy; and finally from the opportunity point of view, the product, market and
financial characteristics. Lastly, from a South African point of view, there are two
possible unique factors that have previously been considered in studies, which are the
Black Economic Empowerment (BEE) status of a potential investment and the
potential internationalisation of an opportunity.
These factors aided in addressing the research question of what the South African
factors are by allowing a comparison to be drawn between the results of the research
to the factors established in literature internationally, and highlighting any key
differences or uniquely South African factors.
Finally, the challenges facing South African venture capital investors was investigated
in the literature review, with the key challenges identified as the low quality of
entrepreneurs, the availability of funding or capital and government support. An
existing study in the literature by Jones and Mlambo (2013) has recently researched
the challenges facing VCs in South Africa, and therefore this research explored these
and additional challenges uncovered.
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6 Research Methodology
This section of the report will discuss the methodology that was used to conduct the
research in this study. Firstly, the approach and strategy is discussed, followed by the
research design, data collection and sampling. Finally, the data analysis, reliability
and validity are discussed.
6.1 Research design, approach and strategy
This research report explored if the process followed by South African investors
deviates from the well-established models from abroad, and additionally if there were
any unique challenges, characteristics and factors that South African investors
consider in the process.
The research adopted two approaches in order to address the research question.
Firstly, a comparative approach was used in the investigation of the investment
process and decision making factors. Using the investment process and decision-
making factor benchmarks identified in literature, the presence of these in South
Africa was investigated in the explorative interviews. A qualitative method was
adopted for this in order to explore the comparisons in detail in order to determine if
there were any South African nuances or deviations in the process or factors.
According to Lee (1999), qualitative research is appropriate when a study is
exploratory in nature. Secondly, an explorative inductive approach was used to
investigate if there were additional uniquely South African decision-making factors
and to explore the challenges faced by the venture capital industry in South Africa.
The research strategy adopted was to conduct semi-structured interviews with
approximately 8-10 venture capital investors. According to Turner (2010), interviews
are one of the primary methods to gather data in qualitative studies. Furthermore, the
author says that semi-structured or guided interviews allow a researcher to ensure that
the same general areas of data are collected from each of the interviewees, but to still
allow flexibility to the interviewer to probe further into certain areas and to build
rapport with the interviewee.
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In addition to this, a semi-structured approach allowed the interviews to follow an
approach used by Paul et al. (2007), where participants were asked to frame their
answers in the context of a recent investment that was successfully concluded. This
not only allowed certain biases to be accounted for such as recall and self-reporting
bias, but also ensured that the entire process was comprehensively covered in the
interviews and for certain areas to be probed in more detail as they arose.
In summary, each interview followed the semi-structured outline below:
Step 1: Introduction and purpose of the interview.
Step 2: The participant discussed their investment process in the context of a
recent successful investment from the beginning to end, describing the various
steps and the decision-making factors considered at each stage, as well as any
challenges faced.
Step 3: Additional comparative questions on the process and decision-making
factors identified in literature if not already brought up and discussed in step 2.
Step 4: Additional explorative questions into uniquely South African decision-
making factors and challenges.
Step 5: Final thoughts and additions from the interview participant.
6.2 Data collection and sampling
Data collection was done via semi-structured interviews. The semi-structured
interviews granted consistency between different interviewees in terms of the content
covered, but still allowed for flexibility in terms of exploring and probing the
interviewees (Turner, 2010). Furthermore, as the interviews progressed, certain
themes and key points that arose in earlier interviews were deliberately excluded in
order to maintain consistency between the interviews and the core set of questions
were not changed across all the interviews (Strauss & Corbin, 1998). The
interviewees were limited to South Africa, and were all from the Western Cape. The
interviews took place in Cape Town at a location of convenience for the interviewee.
The interviews were recorded with the interviewees consent, and additionally written
notes were taken.
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Due to the limited numbers of possible interview candidates in South Africa, and the
difficulty in identifying them, a convenience approach was adopted to sampling. This
approach of convenience is commonly used in qualitative theory, which allows the
researcher to select convenient subjects that maximize the potential to uncover data
(Lincoln & Guba, 1985; Strauss & Corbin, 1998).
In addition to the convenience approach, a snowball method was utilized in order to
overcome the limitations of access to the sample. This involves asking an interviewee
to suggest further interview subjects. This approach allows the interview list to be
built using word-of-mouth (Biernacki & Waldorf, 1981; Wetzel, 1983).
The initial possible interviewees were arranged through personal networks, university
alumni networks and lecturer networks. Additionally, interviewees were arranged
directly using contact information gathered from their websites, the Silicon Cape
initiative, syndicates such as Angelhub as well as through incubators and accelerator
programs such as 88mph.
The interview instrument was a set of core questions to be addressed (See Appendix
1). Although the majority of the interview was focused on the investment process
used by the investor, with the researcher prompting the interviewee with questions
such as “what happened next” in detail from one step to the next, some additional
questions were addressed that can be seen in the interview instrument. Examples of
these could be what the major challenges are in the South African context and if there
are any additional decision-making factors that they consider. These semi-structured
questions were developed using the literature review.
6.3 Data analysis
Firstly, for the comparative part of the research that was adopted in the investigation
of the South African investment process and decision-making factors, a comparative
data analysis approach was used. Relevant data quotes from participants were
extracted from the interview recordings where there was a significant comparative
match with a process step or decision-making factor from literature. These
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comparisons could then be analysed and discussed and finally a conclusion drawn on
if the step or decision-making factor was similar in South Africa and if there were any
South African nuances or deviations for the participates interviewed and why these
may exist.
Secondly, for the explorative part of the research that was adopted in the investigation
of if there are any uniquely South African decision-making factors, and what the
challenges facing the venture capital industry are, a basic thematic coding approach
was adopted (Strauss & Corbin, 1998). This involved extracting the relevant data
from the interview recordings and identifying themes that highlight the key challenges
facing the VC industry and any unique decision-making factors.
In addition to this, observations were made on what the participant’s perceptions are
as to what is important or not. This is an approach used by Paul et al. (2007), where
they discuss that what is important is what participants themselves perceive to be
important. Therefore, in the thematic coding and data comparisons, what the
interviewees perceive to be important is highlighted. The written notes from during
the interview were also used in the identification and analysis of key themes and
comparisons.
Finally, the comparison of the investment process and decision-making factors to
international literature benchmarks, and the exploration of uniquely South African
decision-making factors and venture capital challenges was discussed in order to
address the overall research question and draw the final conclusions.
6.4 Reliability and validity
According to Golafshani (2003), reliability and validity in qualitative research can be
defined as the trustworthiness, rigor and quality of the research. This section discusses
some of the measures taken in order to ensure the trustworthiness, rigor and quality of
this study.
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The selection of the participants who were interviewed is the most important aspect in
terms of the trustworthiness, rigor and quality of the research. The following
measures were adopted to ensure these factors were upheld. Firstly, the researcher
ensured that the interviewees and their organisations were appropriate by conducting
a brief investigation into each candidate using public sources such as the company
website and their LinkedIn profiles before pursuing the candidate. Information
checked in this investigation was what type of investor they were, what type of
technology investments they have made and the role description and position held by
the participants. Secondly, the interviews were all conducted with candidates from
established, relevant and publically recognized venture capital firms and Angel
investment incubators or hubs that have made investments in the past. The companies
that were linked to the participants are as follows: (in no particular order) Business
Partners Venture Capital, 4Di Capital, Invenfin, AngelHub, 88MPH, Savant, Hasso
Plattner and Silvertree Capital.
The interview design adopted also contributed to the rigor, trustworthiness and quality
of the research. Firstly, the same interview setup was used for all the interview
candidates, with the same initiation, setup, discussion, and information provided to
each candidate before the interview was conducted. Secondly, the interview structure
was replicated for all interviewees through a semi-structured interview approach
(Neuendorf, 2002). Finally, the variation between interviews was kept to a minimum,
with new questions or insights that may have arisen from previous interviews
deliberately being excluded in subsequent interviews.
A potential limitation or bias concern identified in literature that could impact the
trustworthiness and quality of the research was the rationalization and recall biases
that post-hoc methodologies (such as a semi-structured interviews) may suffer from
(Zacharakis & Meyer, 1998). In order to overcome this, this study adopted a method
previously identified in similar research, which was to ask the participants to frame
their answers in the context of a recent investment, which has four benefits: 1) it’s
real instead of being hypothetical 2) it ensured more accurate recall 3) it enabled
sequential decision-making to be determined and 4) the success of the investment is
still unknown since it is recent thereby removing self-reporting bias (Paul et al.,
2007). Furthermore, Fried and Hisrich (1994) also found that by focusing on a recent
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investment, where the financial results of the investment are still unknown, self-
reporting bias can be minimized. In addition to the adoption of this method, other
literature identified has diminished these potential bias concerns. Petty and Gruber
(2011) performed a longitudinal study of eleven years of comprehensive VC decision-
making archival data and found that the decision-making factors determined from
post-hoc research match the factors employed by VCs when making actual real world
decisions.
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7 Findings, analysis and discussion
This section of the report will discuss and analyse the findings from the interviews
conducted. Firstly, an overview of the participants is given. Secondly, a comparison
between the various investment opportunity evaluation process steps and investment
decision making factors identified in international literature will be made against the
data collected in the interviews. Finally, the key findings from the explorative section
of the study on uniquely South African factors and the challenges facing the South
African venture capital industry are outlined.
7.1 Interview Participants
The interview participants of the study are outlined in table 1 below. The participants
were all sourced using local networks and word-of-mouth since the industry is very
small, and candidates are difficult to identify and gain access to in South Africa as
discussed in the research methodology section of this report. At the end of interviews,
subjects were asked to provide other possible interview subjects within the industry
that fall within the scope of the research. This process generated access to possible
participants who were then filtered for appropriateness before being interviewed
according to the reliability and validity measures discussed in the research
methodology. The final list of interview subjects is outlined in the table 1 below.
Table 1: Research interview participants.
Interview
Subject
Number
Type of
Investor
Type of
Technology
Investments
Organisation/
Company
Role/
Position
Date Interview
Conducted
1 Venture
Capitalist
Software and
hardware
technology
Invenfin Investment
Executive
3rd November
2014
2 Venture
Capitalist
Software
technology
Hasso Plattner Associate 4th November
2014
3 Venture
Capitalist and
incubator
Hardware
technology
Savant Founder
and CEO
22nd October
2014
4 Venture
Capitalist
Software and
hardware
technology
Business
Partners
Venture
Capital
Chief
Operating
Officer
30th October
2014
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5 Venture
Capitalist &
Angel investor
Software
technology
Silvertree
Capital
Founding
partner
28th October
2014
6 Venture
Capitalist &
Angel investor
Software
technology
AngelHub Founder,
CEO, Lead
Partner
27th October
2014
7 Venture
Capitalist
Software
technology
4Di Capital Partner 18th September
2014
8 Angel investor
and incubator
Mobile
technology
88MPH
and
GM Angels
Executive
Board
Member
and
Co-founder
9th October 2014
7.2 Investment opportunity evaluation process
As discussed in the literature review, the international investment opportunity
evaluation process was structured around the four key steps of origination, screening,
evaluation and deal structuring. In this section, the key findings from a South African
point of view are presented in terms of their alignment to the international process
steps and if any key differences exist.
7.2.1 Origination
As outlined in the literature review, the main activity of the origination process step is
the investor discovering investment opportunities and performing some initial high-
level screening. The key channels of discovery are through direct applications, the
investor’s networks, syndicates, chance encounters or via actively searching for
opportunities. In terms of the initial high-level screening, this would involve the
investor making quick filtering decisions around whether the opportunity is a fit or
not.
The findings from the interview participants are outlined in table 2 below, which
shows the channel that the investor most frequently relies on for deals and illustrative
interview quotes.
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Table 2: Deal origination channel in origination stage.
Interview
Subject
Number
Deal origination
channel investor
relies on
Illustrative interview quote
1 Network “We rely on our own referral networks”
2 Network “Typically, we get most of our good quality deals through our
network. We do get unsolicited opportunities, but I don’t assign
much value to those.”
3 Network “We’ve got a good network… in particular, we rely on IP and
patent attorneys. We get a couple things off the street, but that’s
definitely not the focus.”
4 Network “[We get our deals from our] network and intermediaries”
5 Network “[We get our deals from our] network mostly. Most of the time
the stuff you get [directly] is useless, you just press delete.”
6 Network and online
applications
“We force everyone to go through an application process, even
the guys we know [and get through our network]”
7 Network “All our investments to date have been through our network.
We have a portal on our website to apply, but we have not made
one investment through that”
8 Online applications “All of the [entrepreneurs] fill out our online form”
These findings show that in the origination step, the network was the most relied on
channel in South Africa for the participants interviewed. Only one interview
participant used an online application exclusively, with all of the other participants
relying exclusively on their networks, except participant 6 who also has an online
application tool. However, participant 6 described that they use the online application
as more of an administrative tool that has the specific details that they require for the
following evaluation steps of the investment process rather than a lead generation
tool, and that they still rely on their network for deals.
Not only do the findings show that the interview participants rely on their networks,
but that they do not rely on deals that come directly to them via online applications,
email or other direct channels. This is illustrated by participant 2, who says he does
not “assign much value” to deals from these channels, participant 5 who says that the
deals through these channels are “useless” and they just push “delete”, and
participant 7 who says that they have an online application portal, but that they “have
not made one investment” on deals that were received through that channel indicating
that they don’t rely on that channel. There is also further evidence of a low use of
alternative channels, such as syndicate groups. Participant 6, who previously started
an Angel syndicate group in order to try foster deal leads, discussed how they were
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forced to shut it down due to a lack of participation (see the South African venture
capital challenges section in this report for further details on the lack of Angels in
South Africa).
These findings show that, compared to international benchmarks, the VC’s and
Angel’s professional and personal network is the most important deal origination
channel in South Africa for the participants interviewed. This is further illustrated by
participant 3 saying that the industry “is all about the network”, and participant 7
saying that from an entrepreneurs point of view, the “personal network and getting an
introduction to a VC is very important”. The reason for this reliance on networks may
be due to the small scale of the South African risk capital market compared to
international markets. In international markets there are numerous entrepreneurs, VCs
and Angels as well as many good deals, and therefore more comprehensive processes
and multiple channels are required to handle the larger quantities of deals, while in
South Africa the market is still small and the VCs and Angels can manage on a
network alone. This is illustrated by participant 4 who said: “[The network] is very
small. If there is one deal coming up, everyone knows about it” and participant 1 who
said: “The ecosystem in South Africa is quite close knit” (see the South African
venture capital challenges section in this report for further details on the small scale of
the industry in South Africa).
In terms of the initial high level screening as a part of the origination step, this was
found to be present in South Africa for the participants interviewed, and was found to
be in alignment with international benchmarks with no major differences. This initial
screening took the form of a brief phone call, an informal meeting, a brief scan of a
business plan or filtering online applications. During this initial screening, the
investors would evaluate the opportunity at a high level, generally looking at the idea
or concept, the technology and if the opportunity aligns to the investor’s mandate or
personal interest. The reason for this initial screening is to filter out deals as early as
possible before further time is invested in an opportunity. These findings are
illustrated by the following interview quotes.
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Participant 1: “When we have received it, we look at it at a high level to see whether,
a- does it potentially suit our mandate b- does it have the makings of something that
makes sense to us as we do have specific exclusions.”
Participant 4: We give them an initial phone call and you can quickly assess [if]
there’s potential [or not].”
Participant 6: “One of the analysts or interns goes through it first, just applying a filter
[according to our] mandate.”
Overall, the origination step for South Africa was found to be similar to international
benchmarks for the participants interviewed, since the same tasks are performed and
similar factors are considered. The only major difference identified was the exclusive
reliance on networks for leads in South Africa for the participants interviewed.
7.2.2 Screening
As discussed in the literature review, the main activity of the screening process step is
a more in-depth analysis of an opportunity in order to decide if a more comprehensive
evaluation will be performed. Since there is a limited amount of time that an investor
has to evaluate opportunities, they perform this screening step in order to reduce the
number of opportunities to a manageable quantity. This step would involve more in-
depth meetings with the entrepreneur and their team, light research, seeking advice
from their networks, assessing the opportunity at a high level and considering the fit
with their own experience and investment ideals. Overall, this step has an elimination
focus, since investors are filtering down opportunities to the ones that they would like
to perform a detailed evaluation on.
This screening step was found to be present in South Africa for the participants
interviewed. This section of the report firstly outlines the findings of the tasks
preformed in this process step, followed by the findings of what factors the investors
assess in this step and why.
It was found that in this stage of the process, the participants interviewed would
generally set up a meeting with the entrepreneur or invite them to pitch the
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opportunity in more detail. This is illustrated by participant 2 who said this initial
meeting would be an “informal opportunity for them to come and do a presentation,
and for us to ask questions”. Following this, the investors would generally do their
own high level research. This would be basic research on the Internet, or “desktop
research” as participant 6 describes it. Additionally, the investors would reach out to
their networks in order to discuss and seek advice on the opportunity, as illustrated by
the following interview quotes:
Participant 4: “You phone people. You phone some of the experienced people or guys
in the market [to find out more about the opportunity].”
Participant 7: “We would go to our network and ask what they think of [the
opportunity].”
Participant 8: “I reach out into my network and ask for help. It’s all about contacts.”
Following this, the investors would have internal meetings (if applicable). For
example, participant 6 and 8 described how they would present the information
gathered to an investment committee, while participant 7 would meet with the full
investment team and fund partners to discuss the opportunity. Finally, the investors
would decide on progressing to a detailed analysis stage or not. Therefore, in terms of
the process step, the screening step for South Africa was found to be similar to
international benchmarks for the participants interviewed as the same tasks are
performed.
In terms of the factors considered in the screening stage of the process, it was found
that the investors would begin to evaluate certain specific areas at a high level in order
to make their decision on whether to continue or not. In general, the reason for this is
that the investors are aiming to gain a high level understanding of the opportunity, or
the “broad brushstrokes” as participant 1 described it. The most important factors
that would be looked at in this step would be the entrepreneur and their team factors,
the opportunity factors (product, market and financial characteristics) and the
alignment or fit with the investor or VC fund.
Firstly, in terms of the entrepreneur and their team, it was found that this is the most
important aspect that is being assessed in the initial stages, which is similar to
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international benchmarks that also describe these factors as the most important. The
reason why these factors are so important at this stage is perhaps because the
investors would want to assess the most important aspects upfront before they invest
more of their time. Table 3 below illustrates some of these entrepreneurial and team
aspects as described by the interview participants at this stage of the process.
Table 3: Entrepreneur and team factors in screening stage.
Interview
Subject
Number
Illustrative interview quotes and discussion
1 Participant 1 described how the people part is important, and “are the kinds of things that
you want to check upfront”. This includes if they are open to suggestions, are coachable
and if there is a chemistry and “potential to build a mutually beneficial long term
relationship”
2 Participant 2 described that they would asses the entrepreneur and their teams track record
and experience, saying that they would “Ideally we like to see people with a bit of a track
record. Someone who has been able to make a success of something before has a lot better
chances of doing it again” and also describing their preference of a team over an
individual since this is higher risk.
3 Participant 3 described the importance of the team and that they “will scrutinise their
credentials, track record… [and their] longevity and success in other areas” at this stage.
4 Participant 4 described that they assess the entrepreneurs experience in the field and their
track record, as well making judgments on their integrity and passion.
5 Participant 5 described assessing their education, drive and passion, saying that they look
at if “we trust [the entrepreneur] and will he work till 3am, does he have the drive?”
6 Participant 6 described looking at the team and their ability to pull it off, stating that
“Underpinning everything is question of the team, and [we are assessing] their likelihood
to be able to implement, and a track record of what they have done, and can they sell the
concept?”
7 Participant 7 said that the people part is the most important, and that they rely on their gut
feel in terms of their ability to work with the entrepreneur, describing it as “not a science,
but a chemistry thing”. Participant 7 also describes the importance of the team, in terms of
how they are ideally looking for a two-person team with one having a technical focus and
the other having a business focus.
8 Participant 8 highlighted the importance of the team saying that it must fulfil the “3 legs to
starting a technology business. You have got to have a techie, you have got to have a
sales/relationship role, and you have got to have an ops role”. Participant 8 went on to
say that “the team is critical.”
Secondly, in terms of the opportunity factors (the product, market and financial
characteristics), it was found that these would be assessed at this stage at a high level,
with only certain factors considered, which is similar to the international benchmarks.
The reason for this is perhaps because the investors would want to quickly assess the
important opportunity aspects upfront and gain an overall impression before large
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amounts of their time is invested assessing all the other factors. The following
interview examples illustrate what the interview participants looked for at this stage
of the process. Participant 1 looked for “ideas or concepts, which are highly
differentiated” and “satisfy a particular need”, as well as deals that have “strong
intellectual property”. Participant 2 looks if there is any existing traction, and at the
potential growth path as well as “their specific key differentiation”. Participant 3
gives more weight to the IP of the product and if it has a patent or not, as well as if it
is “interesting technology” in terms of its differentiation and barriers to entry.
Participant 4 looks at the viability of the product and does a brief market assessment
at this stage. Participant 6 looks at “how broad and wide the need is. Who is the
person who is likely to use it? How are [the entrepreneurs] going to reach that need?
Who else is doing this, so the competition, and along with that are the barriers to
entry” as well as the business model, saying that they look at “how it’s actually going
to make money. If they don’t know how it’s going to make money, we can’t work with
them.” Participant 7 described how they “look at the concept, and if it’s realistic” as
well as the IP, the potential market and scalability. It is interesting to note that these
findings show that for the participants interviewed, the most common factors
considered at this stage are the product concept, the differentiation, the competition,
the barriers to entry and the IP. These all seem to point to the strength of the product
concept relative to the competitive landscape and its defensibility in terms of IP. This
is perhaps due to the South African investors trying to minimise the risk of the
product being quickly stolen and copied internationally - if this were to occur they
would not be able to easily compete against the resource rich international
competitors. Additionally, it is perhaps because of the cluttered and fast changing
nature of the technological landscape that the concept needs to stand out if it is going
to potentially succeed and deliver a return to the investor.
Finally, it was found that the investors would also consider the opportunity at this
stage in terms of the alignment and fit with their own experience, skills, ideals and
strategy. This is similar to international benchmarks where this analysis would also
occur at this stage. The reason for this would be to filter out deals as early as possible
before further time is invested in an opportunity. The following examples illustrate
some of the aspects that the interview participants considered. Participant 2 prefers
“business-to-business” opportunities, as they are “not consumer experts”, as well as
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opportunities that address the African market. Participant 3 says that the “idea needs
to fit into what [they] feel [they] are good at”. Participant 5 describes how they
“know how to run an e-commerce business” and therefore can add the most value to
those types of opportunities. Participant 7 says that they “ask what value [they] can
bring” to the entrepreneurs, and participant 8 said that for “some of the start-ups you
can add very little value” and therefore the personal fit is “totally important”.
Many other factors in terms of the entrepreneur, the team, the opportunity and the
investor are assessed at a high level at this stage of the process. More of these aspects
are explored in further detail in the investment decision-making factors findings
section of the report.
Overall, the tasks performed in the screening step and the factors considered do not
differ significantly from the internal benchmarks identified in literature for the
interview participants interviewed. Both perform similar tasks and both give similar
weighting of importance to the factors considered, with both identifying the
entrepreneur and their team factors as the most important.
7.2.3 Evaluation
As discussed in the literature review, the main activity of the evaluation process step
is the careful analysis of the opportunity. This step would involve detailed
information gathering, fact checking and a comprehensive evaluation of the business
plan aspects of the opportunity. In this step, the investor would increase their scrutiny,
involvement, assessment and commitment to the opportunity.
This evaluation step was found to be present in South Africa for the participants
interviewed. This section of the report firstly outlines the findings of the tasks
preformed in this process step, followed by the findings of what factors the investors
assess in this step and why.
It was found that in this stage of the process, the participants interviewed would go
into a much deeper level of detail in assessing the opportunity, which would normally
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involve the information sharing with the entrepreneur, thorough investigation, gaining
a detailed understanding of the opportunity and more formal interactions. The reason
for this is that the investor would become more serious about the potential investment
and would want to consider all of the aspects of the opportunity in detail before
making a final investment decision. The following examples illustrate these findings.
Participant 1 said that “the investigation is very thorough” and that they would
“request very specific information” around the product, market and financial aspects
and would “get detailed in [their] insight”. Participant 2 says that “once [they] get to
a point where [they] proceed beyond the initial meeting, [they] go into more detail
and delve deeper” into the market and financial aspects. Participant 3 described this
stage as a “pre due-diligence”, where they get a “deeper understanding of the idea”.
Participant 4 mentioned that at this stage for the process, it “gets more formal”.
Participant 6 mentioned that they will “go meet with the [entrepreneurs] again and
again to get detailed into their business model”. Participant 7 described that there will
be a lot of back and forth, information sharing, research, clarification and internal
discussions, and also described this stage as an “extensive due diligence before the
actual formal due diligence step”. Therefore, in terms of the process step, the
evaluation step for South Africa for the participants interviewed was found to be
similar to international benchmarks as the same process tasks are performed.
In terms of the factors and information considered at this stage, it was found that the
business plan or opportunity factors (the product, market and financial characteristics)
take focus. The entrepreneur and team factors are still considered at this stage,
however they take less of a focus. Additionally, it was found that the investors adopt a
fact-checking stance at this stage. These findings are illustrated by the following
examples form the interview participants. Participant 1 describes how at this stage
they are investigating if “what [the entrepreneurs] are saying holds water” and
checking in more detail if the product, market and financial aspects of the
“opportunity are plausible”. Participant 2 investigates “market research like Gartner
and Forrester” and the business plan, the scalability, the financial model and judges
if it is “well though through”. At this stage participant 3 wants to “understand the
market, the strategy and what [the] business is going to look like” and how are they
going to take the product to market. In addition to this, participant 3 will begin to re-
write or develop the business plan and the overall strategy, showing a far deeper level
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of time commitment. Participant 4 looks in detail at “the business plan and cash
flows” and preforms an initial due diligence. Participant 6 would complete an internal
formal investment proposal, and evaluate the “business model and the financial
model” in detail. In addition to this, participant 6 described how at this stage they
would create their own business plan and financial model for the opportunity as a part
of the investment proposal, which indicates a larger amount of commitment at this
stage. Participant 7 would “meet with clients if there are existing clients and do
research on the individuals”, which shows an increased level of time investment, in
addition to the other detailed analysis and research on the opportunity. These findings
show that the participants increased their level of scrutiny, commitment and
involvement with the opportunity and additionally shifted their focus to the business
plan or opportunity factors. The reason for this may be that the softer people factors
have already been evaluated in the origination and screening stages and the process,
and therefore the factual information, the nuts-and-bolts and specifics of the business
model become more important at this stage. In comparison to the international
benchmarks, the factors and information considered at this stage in South Africa for
the participants interviewed is similar since the same shift in focus to the business
plan or opportunity factors was found and the same increase in investor involvement.
Many other factors in terms of the business plan, the entrepreneur, the team, and the
product, market and financial characteristics are investigated and considered in detail
at this stage of the process by investors. More of these aspects are explored in further
detail in the investment decision-making factors findings section of the report.
Overall, the evaluation step for South Africa was found to be similar to international
benchmarks for the participants interviewed because the same tasks are performed
and similar factors and information are considered.
7.2.4 Deal Structuring
As discussed in the literature review, the main activity of the deal structuring process
step is the development of the deal, the terms of the deal and the negotiations thereof.
This would include the aspects such as the valuation, equity percentages and the terms
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of the deal. In addition to this, the formal due diligence would be completed (if
required), the legal documents drawn up and finally the investment deal would be
concluded.
This deal-structuring step was found to be present in South Africa for the participants
interviewed. This section of the report firstly outlines the findings of the tasks
preformed in this process step, followed by the findings of what factors the investors
assess in this step and why.
It was found that in this stage of the process, the participants interviewed would first
shape the deal and issue the term-sheet. According to the interview participants, this
process task involved the structuring and negotiation of the deal in terms of the
valuation, the investment amount and the equity percentages, as well as the high level
heads of agreement of the term-sheet. The participants described the term-sheet as a
formal commitment that is agreed and signed, but that it is not a formalised legal
document. Following this task is the formal due diligence which the interview
participants described as a formalised fact-checking step, where the information
provided by the entrepreneur and their personal history (such as their liabilities) is
formally checked to make sure that what they say is in fact true. The interview
participants described that the due diligence would result in different outcomes, such
as a deal breaker where certain information is found to be untrue, or a deal pause
where certain information would need to be resolved before the process continues, or
a continuation where minor issues could be resolved in parallel with the following
tasks or if no issues are found. Following the due diligence, the interview participants
described that the formal legal agreements and contracts would be drawn up and
signed, and therefore the deal would be finally concluded. These process task findings
are illustrated by the following interview quotes.
Participant 1: “Usually, if there is a decision to proceed, we are already busying
ourselves with the structuring of an offer, and a term sheet, so its really about making
sure the deal terms and proposal are prepared, and [then] the terms are negotiated
and agreed before due diligence [is done, and after due diligence we do the
contracting and execution”
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Participant 2: “Next would be the issuing of the term sheet. [Then] there’s always
negotiation. Then we go into the formal due diligence step, the purpose of it is to make
sure everything the entrepreneurs have said is true. [Then] you would draft
agreements, and then you ready to go”
Participant 4: “[We then] say we will do the deal on the following conditions, and
that’s where you start negotiating the shareholders agreement and term sheet”
Participant 6: “[Next] we shape the deal, [and the] term sheet. If we agree and sign,
then two things happen in parallel, the one thing is we start the due diligence and at
the same time the legal agreements are drawn up, and finally signed after a bit of
back and forth.”
Participant 7: “We then negotiate, and then we offer the term sheet. Its like a heads of
agreement, its like a formal commitment. The term sheet is signed and we then we do
due diligence, and the final decision is made and we do the [legal] agreements.”
Therefore, in terms of the process step tasks performed, the deal structuring step in
South Africa for the participants interviewed was found to be similar to international
benchmarks as the same process tasks are performed, namely the development of the
deal and the terms and the negotiation thereof, the formal due diligence and the final
formal agreements. (Note: This finding is not a comparison of the actual terms and
structure contained within the deals, but rather just a comparison of the process step
tasks performed).
Another interesting finding, relating to the deal structuring process step, is that the
process step tasks were discussed in detail by the VC participants (1, 2, 4, 6, 7) as can
be seen in the quotes above, while the participants who are Angels or incubators (3, 5,
8) did not discuss these process step tasks in the same level of detail. However, this is
in line with international literature discussed in the literature review section, where it
was found that Angels give more weight to the softer and personal factors such as the
entrepreneur’s personality and also are less rigorous in their analysis.
In terms of the factors and information considered at this stage, it was found that the
financial factors and the control factor are the most important at this stage of the
process.
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Firstly, looking at the financial factors in terms of the value, equity and investment
amount, the reason that these are important at this stage of the process is because they
are the most important aspects of the deal and the negotiations thereof. The following
interview quotes illustrate this finding.
Participant 4: “[We look at] the valuation and percentage. We won’t carry on if it’s
crazy.”
Participant 6: “The last aspect [we look at] is the actual deal, so how much money is
required, what do [they] value [their] business at, and how much equity [are they]
expecting to give away”
Participant 6: “I need to understand how much money we putting in and how far that
is going to get the business. You need to allow for further and further rounds of
dilution.”
Participant 7: “The valuation and equity percentage are important. We are also
concerned about return of investment. Say the company is valued at R10million, we
say to ourselves, can this be worth R100million, 10 times the size, in 3 or 4 years
time?”
Participant 8: “if the valuation is too high, forget it, [we wont invest].”
Secondly, looking at the control factor, the reason that this is important is because the
term-sheet of the deal, which involves the control terms and restrictive covenants, are
discussed and negotiated at this stage of the process. This is illustrated by participant
7 who said at this stage of the process, when the term-sheet is negotiated, they would
look at “the rights, and the controls or restrictive provisions”. The control factor is
discussed in detail in the following section of this report.
Finally, in terms of the due diligence, it was found that all the factors would be
considered again. The due diligence is a formal fact checking of the information
gathered in the previous steps of the process, and would therefore include all the
factors such as the entrepreneur, their team and the opportunity factors such as the
product, market and financial characteristics. This is illustrated by participant 2 who
said that the due diligence “is to make sure everything the entrepreneurs have said is
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true.” These factors have been previously discussed in this report and will be
discussed again in more detail in the following section of this report.
Overall, the tasks performed in the deal-structuring step and the factors considered do
not differ significantly from the internal benchmarks identified in literature for the
interview participants interviewed. Both perform similar tasks such as the
development of the deal and the terms, and the negotiation thereof, the formal due
diligence and the final formal agreements, and both consider the same factors of the
financial characterisers, control factors (in the terms) and the due diligence factors.
7.3 Investment decision-making factors
As discussed in the literature review, there are many international investment
decision-making factors that have been identified. In this section, the key findings
from a South African point of view are presented in terms of their alignment to the
international decision-making factors identified in literature and if any key differences
exist and why.
7.3.1 Entrepreneur and team factors
The entrepreneur and team category of factors involve the areas such as the
personality, commitment, experience, the business plan, the presentation and the
entrepreneurial and management team. Each of these is discussed below in terms of
the findings from the interview participants and how they compare to international
benchmarks.
Entrepreneur personality
In international literature, the entrepreneur personality is a highly important decision
making factor considered that involves the aspects of the entrepreneurs passion,
trustworthiness, integrity, honesty and relationship forming potential with the
investor.
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In South Africa, for the participants interviewed, these aspects were found to be
decision-making factors that are considered. The following interview quotes illustrate
this finding.
Participant 1: “Absolutely, [the entrepreneurs passion, experience, integrity, honesty]
are the kinds of things that you want to check upfront. [Also you want to] get a sense
as to whether there is that chemistry, whether there is potential to build a mutually
beneficial long term relationship”
Participant 3: “Understanding how to work with [the entrepreneur] is important.”
Participant 4: “[The entrepreneurs passion, experience, integrity and honesty are]
always important. The entrepreneur must be someone who is passionate about what
they do”
Participant 5: “[We look at if] we trust him and does he have the drive [to succeed]”
Participant 6: “Integrity is a fundamental. We walk away from a deal where we doubt
it or they are not trustworthy. Their passion is absolutely important. [Also] you want
to know what you can actually handle being around them and that they are someone
that will want to work with you”
Participant 7: “We invest more in the person than the idea. Which is one of the biggest
criteria of our analysis. There must be a chemistry [between us].”
Participant 8: “That’s the first thing you look at. The person. Are they prepared to
listen? Can they hustle? Do they have resilience? They have to have incredible
determination… They must have an inbuilt drive, or passion to succeed.”
As can be seen in these quotes, similar traits are identified such as trust, integrity and
passion, as well as the need for a relationship building chemistry. Additionally, this
was highlighted as a very important decision-making factor. Therefore, the
entrepreneur’s personality aspects in South Africa are similar to international
benchmarks for the participants interviewed.
Additionally, an interesting finding is that the chemistry or ability to form a
relationship with the investor was also the most frequently mentioned factor for the
participants interviewed. This is perhaps because of the longer-term relationship
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between entrepreneurs and investors in South African investments when compared to
international investors, who often have shorter periods of investment before achieving
an exit. This is discussed in more detail in the venture capital industry challenges
section of this report, and relates to the lack of funding in South Africa which
therefore requires investors to make follow on investments themselves, and
consequently they have a longer-term involvement. Therefore, because of this longer-
term relationship and the need to have a good business relationship, the evaluation of
the chemistry is perhaps more important than other aspects.
Entrepreneur commitment
In international literature, the entrepreneur commitment is an important decision
making factor that involves the financial commitment of the entrepreneur. For
example, if an entrepreneur has invested their own money or has left the security of a
salaried job to work on the opportunity, this makes the opportunity look more
appealing to the investor since the entrepreneur has indicated their commitment to the
idea, and also stands to lose financially if it does not succeed.
In South Africa, for the participants interviewed, this was found to be a decision-
making factor that is considered. The following interview quotes illustrate this
finding.
Participant 1: “ [The financial commitment of the entrepreneur is] very, very
important.”
Participant 3: “Yes, [financial investment by the entrepreneur] shows commitment, it
shows belief.”
Participant 4: “We prefer someone that also stands something to lose. So we know
[they] will get up in the morning because there’s something keeping [them] there. So
commitment is extremely important.”
Participant 6: “If [the entrepreneur is] not committed enough that [they] are prepared
to back it and take a risk on it, why would we be prepared to take a risk on it?”
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Participant 7: “It is massive, hugely [important]. It would be very unusual for us to
invest in someone who is doing it part-time. They need to be 100% invested. It also
helps if they have already put money into the concept themselves.”
Participant 8: “They must be prepared to bootstrap. To not eat properly.”
As can be seen from the interview quotes, the investors do consider the entrepreneurs
commitment in their decision-making and regard it as an important factor. Therefore,
the entrepreneur’s commitment factor in South Africa is similar to international
benchmarks for the participants interviewed.
Entrepreneur experience
In international literature, the entrepreneur experience is a decision making factor
considered that involves the experience, skills, qualifications and track record of the
entrepreneur.
In South Africa, for the participants interviewed, these aspects were found to be
decision-making factors that are considered. The following interview quotes illustrate
this finding.
Participant 1: [The entrepreneur must] have deep domain experience and be well
regarded in their field… and [they must] have the requisite depth of knowledge of
what they are looking to do”
Participant 2: “Ideally we like to see people with a bit of a track record. Someone who
has been able to make a success of something before has a lot better chances of doing
it again”
Participant 3: “We will scrutinise their credentials and track record, [and their]
longevity and success in other areas”
Participant 4: “[We look at if the entrepreneur has] experience in that field, [if] he has
done it previously”
Participant 7: “Track record is important. But whether they failed or made a success
makes no difference, [what’s important is that they have tried and learnt].”
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As can be seen from the interview quotes, the investors do consider the entrepreneurs
experience in their decision-making, identifying the aspects such as the entrepreneurs
experience, credentials, track record and domain knowledge. Therefore, the
entrepreneur’s experience factor in South Africa is similar to international
benchmarks for the participants interviewed. However, the interview participants did
not stress this factor to be highly important when compared to the entrepreneur’s
personality, commitment or team factors.
Confidence in the entrepreneur
In international literature, the confidence in the entrepreneur is a decision making
factor considered that involves the confidence that the investor has in the entrepreneur
and their team to be able to succeed, regardless of what their experience or abilities
may be. Additionally, the literature found that some investors would push the
boundaries to see how the entrepreneurs react as a part of assessing this factor.
In South Africa, for the participants interviewed, this factor was found to be a
decision-making factor that is considered. The following interview quotes illustrate
this finding.
Participant 1: “[It makes it] believable that, okay, they have got the ability to take this
thing to the next level. [You want to] get a sense of how articulate they are being, how
clear they are being [and] how well do they react to [us] probing?”
Participant 4: “You get a good feeling [and] you want to know that the entrepreneur
doing this believes it can work”
Participant 6: “If nothing else, they need to at least be able to say we believe it will be
this, we might disagree, but [the entrepreneur] needs to at least stand up and go: this
is what I believe and this is why I believe it, instead of only having an idea and a
dream.”
These interview quotes illustrate that the interview participants are looking for the
entrepreneurs to create the confidence in them by making the opportunity believable
or showing their belief in it. For example, participant 1 says that they want the
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entrepreneur to make it “believable” to them that they can succeed or “take this thing
to the next level”. Participant 1 also gains confidence by pushing the entrepreneurs
boundaries, or judging how they react to the “probing”. Participant 4 refers to this
confidence as having a “good feeling” about the entrepreneur and the opportunity,
and participant 6 says that their confidence grows when the entrepreneurs shows
belief in the idea. Thus, the investors do take into account the confidence that the
entrepreneurs instil in them. Therefore, the confidence in the entrepreneur decision-
making factor in South Africa is similar to international benchmarks for the
participants interviewed.
The business plan
In international literature, the business plan is a factor considered. However, it was
found in literature that the majority of the business plan content is regarded as
unimportant and that the business plan is more of a ceremonial act to get a foot in the
door. Nevertheless, literature shows that some high level information is important and
a business plan also shows that the entrepreneur has gone through certain steps or
thought processes, and is therefore still necessary.
In South Africa, for the participants interviewed, these same considerations were
found regarding the business plan. The following interview quotes illustrate this
finding.
Participant 2: “I would like to see something on paper, like a high level overview of
the opportunity. It gives you an indication of how well thought through the idea is. I
don’t think a 30 page business plan is of much value.”
Participant 4: “Its very important [but we say to the entrepreneur] don’t give us the 50
page one, give us the 2 page executive summary.”
Participant 6: “A documented business plan is not something I’m ever going to ask for.
I want the executive summary. ”
Participant 7: “We will just look at it to see if it fits the mandate… We never look at
numbers, its pointless. [We don’t want long plans], if you can’t distil your idea to a
few slides, then you don’t know your business.”
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These findings align with international literature. As Participant 2 says, the business
plan is still required in terms of showing a “high level overview” and that it gives “an
indication of how well thought through the idea is”, but a full business plan is
unnecessary and offers little value. This shows that the business plan is ceremonial
since it’s required and the high level information is important, but that the majority of
it is not necessary. This is also illustrated by participants 4, 6 and 7 who still require
the plans, but only want executive summaries or a few slides of the high level
information. These findings illustrate that the interview participants have the same
business plan considerations. Therefore, the business plan decision-making factor in
South Africa is similar to international benchmarks for the participants interviewed.
The business plan presentation
In international literature, the business plan presentation or pitch is a decision making
factor considered in terms of the confidence and presentation skills of the
entrepreneur when doing their pitch.
In South Africa, for the participants interviewed, this was found to be decision-
making factor that is considered. The following interview quotes illustrate this
finding.
Participant 1: “[You want to] get a sense of how articulate they are being, how clear
they are being [and] how well do they react to [us] probing?”
Participant 7: “[We look at] how he presents.”
Participant 8: “[The presentation] must be simple [and the speaker]confident. The
pitch is critical. The founders need to know and understand every element of the
business.”
As can be seen from the interview quotes, the investors do take into account the
entrepreneurs presentation abilities, referring to how articulate they are, how clear,
how confident and their overall presentational ability. Therefore, the business plan
presentation decision-making factor in South Africa is similar to international
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benchmarks for the participants interviewed. However, the interview participants did
not stress this factor to be as important as other factors.
The entrepreneurial and management team
In international literature, the entrepreneurial or management team is often cited as
the second most important decision-making aspect considered (with the entrepreneur
factors being the most important as discussed previously). This factor involves all the
previous factors discussed such as the experience, confidence, commitment and
personality of the team members as well as the team’s survivability. Another aspect
considered is the shortcomings or gaps in the team, for example, if a specific required
role is missing from the team.
In South Africa, for the participants interviewed, this factor was found to be an
important decision-making factor that is considered. The following interview quotes
illustrate this finding.
Participant 2: “the managers play an important role.”
Participant 2: “You don’t ever invest in a single person… the team [must be] pretty
strong. The majority of our time is invested in assessing the teams capability [in terms
of their skills, experience, track record, personality and if there are any shortcomings
or gaps] ”
Participant 3: “[As an investor you want to] understand [the entrepreneurs] skills and
weaknesses, their strengths, where they are good and where they are bad, and then
you try identify a team around those [shortcomings]… at a certain point we will bring
in specific skills [to build up the team to cover the shortcomings and plug the gaps]”
Participant 4: “[The team] is very important. In the initial meetings we would have got
a feel of who [the entrepreneurs] team is and the shortcomings [of the team in terms
of experience, skills, personality].”
Participant 5: “Yes, we want a strong team [in terms of their skills, experience, track
record, personality]. Most of the time we invest in the team, not the idea.”
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Participant 6: “Underpinning everything is question of the team, and [we are
assessing] their likelihood to be able to implement, and a track record of what they
have done, and can they sell the concept?”
Participant 7: “We want one guy being the techie guy, one guy being the business guy,
[from our experience we think] that’s the perfect start-up team.”
Participant 8: “They have got to understand that the are 3 legs to starting a technology
business. [From my experience in this industry a good team has] got to have a techie,
you have got to have a sales/relationship person, and you have got to have an ops
person… The team is critical.”
As illustrated by the interview quotes, the team is a very important decision-making
factor in South Africa for the participants interviewed. It was found that the investors
would assess the strength of the team in terms of their experience, track record and
skills with the ultimate goal of evaluating the ability of the team to be able to do what
is required and to make a success of the opportunity. It was also found that the
interview participants evaluate what gaps and shortcomings there are in the team.
However, it was found that this may not always be a deal breaker, but rather the
investor would begin to consider how these gaps and shortcomings could be resolved
or filled through their own involvement or their contacts at a later stage.
Therefore the entrepreneurial and management team factors were found to be similar
to international benchmarks and a decision-making factor that is considered in South
Africa for the participants interviewed. Additionally, this factor was highlighted as
being very important, which is similar to the international benchmarks.
Summary
Overall, looking at the entrepreneur and team category of factors, the most important
factors were identified as the entrepreneur’s personality, the entrepreneur’s
commitment and the entrepreneurial and management team for the participants
interviewed. The less important factors were found to be the entrepreneurs
experience, the confidence in the entrepreneur, the business plan and the business
plan presentation.
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In terms of the comparison to international benchmarks, the entrepreneur and team
category of factors were found to be similar to international benchmarks identified in
literature, and furthermore the relative importance of the various factors was also
similar. A slight difference was identified in terms of the need for the investor and
entrepreneur to form a relationship and the need for chemistry, which was more
prominent in South Africa for the participants interviewed.
7.3.2 Investor-side factors
The investor-side category of factors involves the areas such as the investor’s
experience, the investor’s networks, the investor’s strategy and control. Each of these
is discussed below in terms of the findings from the interview participants and how
they compare to international benchmarks.
The investors experience
In international literature, the investors experience is a decision making factor
considered in terms of the investor’s personal experience or familiarity of the industry
sector and technology of the opportunity.
In South Africa, for the participants interviewed, this was found to be a decision-
making factor that is considered. The following interview quotes illustrate this
finding.
Participant 1: “[We want] to add significant value.”
Participant 2: “We prefer business-to-business [opportunities] as we not consumer
experts”
Participant 3: “The idea needs to fit into what we feel we are good at”
Participant 5: “I know how to run an e-commerce business, so I can help in that [when
I am looking at potential opportunities]”
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Participant 7: “We ask the [entrepreneurs] what value we can bring to [them], as we
don’t like to just put in money, we are very hands on.”
Participant 8: “Some of the start-ups you can add very little value to. [For example],
these guys sent me this plan, and it’s an infrastructure project, and I said I can’t add
any value to them. [The personal fit] is totally important.”
As can be seen from the interview quotes, the investors do take into account their
personal experience. Participant 2 is experienced in “business-to-business”, while
participant 5 is experience in “e-commerce”, and participant 8 explains that an
“infrastructure project” is not a fit to their experience. Furthermore, Participant 3
highlights how a fit is needed to what they are good at, and similarly participant 1 and
7 says that they want to be able to add value and consequently look for opportunities
where their experience allows them to do so. These findings illustrate that the
interview participants do consider their experience in their decision-making.
Therefore, the investors experience factor in South Africa is similar to international
benchmarks for the participants interviewed.
The investors network
In international literature, the investors network is a decision making factor in terms
of the investor seeking advice on an investment, which affects their confidence in
their evaluation of the opportunity. Additionally, the network plays a role when
opportunities are referred to an investor, and the investor will consider their opinion
or judgment of the referrer in this case.
Firstly, in terms of the investor seeking advice on an investment, this consideration
was found to be decision-making factor in South Africa for the participants
interviewed. The following interview quotes illustrate this finding.
Participant 4: “You phone people. You phone some of the experienced people or guys
in the market [to find out more about the opportunity].”
Participant 7: “We would go to our network and ask what they think of [the
opportunity].”
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Participant 8: “Absolutely. I reach out into my network and ask for help. It’s all about
contacts.”
Secondly, in terms of the investor’s opinion or judgement of the referrer, this
consideration was found to be a decision-making factor in South Africa for the
participants interviewed. The following interview quotes illustrate this finding.
Participant 2: “[The entrepreneur] would be someone that’s referred by someone we
trust, and that’s very important. I’m not sure how much value I would assign to an
opportunity coming to me through someone [I didn’t trust].”
Participant 3: “[An opportunity] referred to you has had a level of due diligence [or]
thought process applied to [it], and particularly if [it] comes from a patent attorney,
the ones that we trust the most, they wont refer stuff to us that they don’t believe in.”
Participant 4: “They know what we want, what we are looking for. They bring you the
right deals.”
Participant 4: “They trust us, we trust them. The network is everything.”
Participant 7: “Definitely, the credibility and trustworthiness [of the referrer] is
massive.”
As can be seen from the interview quotes, the investors do use their networks as a part
of their decision-making process. Firstly, they reach out to their networks to ask for
advice, help and opinions that aid them in understanding technologies and the
opportunity potential. Secondly, they consider their level of trust and judgement of
the referrer. Furthermore, the interview participants stressed this trust of the referrer
as a very important consideration. The reason for this may be that in South Africa, the
deal and network landscape is very small, and consequently the majority of deals
originate though the investors networks, and therefore the investors need to trust the
referrer’s judgment more since they need to maintain a high hit-rate as well since they
are unlikely to get many other deals from other channels. (This deal and network size
is discussed more in the venture capital challenges section of this report)
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These findings illustrate that the interview participants have similar network factor
considerations to international benchmarks Therefore, the investor network decision-
making factor in South Africa is similar to international benchmarks for the
participants interviewed, however, with more emphasis placed on the judgment of the
referrers in South Africa for the participants interviewed.
The investors strategy
In international literature, the investor’s strategy is a decision making factor
considered in terms of if the opportunity aligns with their investment strategy,
mandate or the composition of their portfolio.
In South Africa, for the participants interviewed, this was found to be a decision-
making factor that is considered. It is also an important factor, as opportunities that do
not align with the investor’s strategy will not progress. The following interview
quotes illustrate this finding.
Participant 1: “We look at it at a high level to see whether, a- does it potentially suit
our mandate b- does it have the makings of something that does make sense to us at
we do have specific exclusions.”
Participant 2: “Typically, funds have certain preferences [for types of opportunities].”
Participant 3: “We work with specifically hardware technology [only].”
Participant 5: “We focus on businesses we can turn around and make profitable quite
quickly.”
Participant 6: “We look for lean businesses, where they keep costs at a minimum, with
disruptive business models, things that disrupt existing profitable businesses. I don’t
want something that is going to pioneer. We [also] avoid capital intensive stuff.”
Participant 7: “We will just look at it to see if it fits the mandate.”
Participant 8: “We focus on mobile tech for the African market. The mass market. And
if it can be done here, to take it into Africa. We won’t invest in anything to do with
government or social responsibility.”
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As can be seen from the interview quotes, the investors do consider their investment
strategy. Participant 1 and 7 describe how the opportunity must align with their
mandate, and participants 2, 3 and 5 outline how they have certain preferences.
Furthermore, participant 6 and 8 describe their specific investment strategies in detail.
For all of the participants, the interview quotes shows that the opportunity must align
with their strategy in terms of their focus, mandate, preferences and investment ideals.
These findings illustrate that the investors consider their strategy in their decision-
making. Therefore, the investor’s strategy factor in South Africa is similar to
international benchmarks for the participants interviewed.
The investors control of the business
In international literature, the investor’s control has been identified as a decision-
making factor considered in terms of restrictive covenants as a part of the terms and
conditions of the deal. However, further literature on this decision-making factor is
unclear and limited.
In South Africa, for the participants interviewed, control was found to be decision-
making factor that is considered in terms of restrictive covenants. The majority of the
participants would take a minority equity stake, and therefore not have control; but
identified some form of negative control or minority protection. The following
interview quotes illustrate this finding.
Participant 1: “We take a minority stake… [but] we take minority protection… to
protect our own interests.”
Participant 2: “We always take a minority stake… We don’t want a controlling
interest… We have a form of negative control, where we can prevent [the
entrepreneur] from doing certain things… to protect our interests.”
Participant 3: “What we try do is make sure that there is not too much power
concentrated in anyone’s hands… We won’t take fifty per cent…We define what the
inventor and board can and can’t do [in the legal documents]… it’s a good minority
control.”
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Participant 6: “We look for a significant minority stake. We want the entrepreneur to
always feel like that they are working for themselves. In any case we always put in the
right minority protections, so we don’t need 51% to make sure everything is going to
be okay.”
Participant 7: “There are certain positive and negative controls, which means that it
stops them from being able to do certain things and also allows us to do certain
things… because of the fact that you are taking a minority stake and putting in all the
money, its fair and defendable to have these rights.”
In terms of outright control, only one participant, participant 5, identified the need for
outright control (51% or more equity) as a decision-making factor.
Participant 5: “We take a majority share. As long as you can control and make the
calls on the stuff, you can make it work. We acquire businesses.”
Participant 5 identified the reason for this as the poor quality or ability of
entrepreneurs in South Africa, and therefore that the entrepreneur does not have the
ability to execute the idea, while they believe they have the skills and experience to
execute the concept.
As illustrated by these interview quotes, control in one form or another, whether
outright control or control in the form of restrictive covenants, is a factor that is
considered in South Africa for the participants interviewed. Perhaps the reason for
this is due to the low number of deals and low quality of entrepreneurs in South
Africa (see the venture capital challenges section of this report for more detail on
this), and therefore investors feel that they need to have more protection or control.
In terms of a comparison to international benchmarks, South Africa is similar in terms
of restrictive covenants as a form of control for the participants interviewed, however
further conclusive comparisons cannot be made due to the limited literature around
this factor internationally.
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Summary
Overall, looking at the investor side category of factors, the investors network, the
investor’s strategy, the investor’s experience and control were found to be present in
South Africa for the participants interviewed. The investors network was stressed as a
very important factor by the interview participants, however no relative importance of
these factors was identified and therefore no conclusions can be drawn on which
factors are more important.
In terms of the comparison to international benchmarks, the investor’s side category
of factors was found to be similar to international benchmarks identified in literature.
A slight difference was identified in terms of the importance of the investor’s
judgment of the referrer, which was more prominent in South Africa for the
participants interviewed.
7.3.3 Opportunity factors
The opportunity category of factors involves the areas such as the product, market and
financial characteristics of the opportunity. Each of these is discussed below in terms
of the findings from the interview participants and how they compare to international
benchmarks.
The product characteristics
In international literature, the product characteristics such as the product attributes,
the IP, the patentability, the differentiation and a unique selling proposition are
decision-making factors considered by investors.
In South Africa, for the participants interviewed, these aspects were found to be
decision-making factors that are considered. The following interview quotes illustrate
this finding.
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Participant 1: “We look for ideas or concepts which are highly differentiated… it helps
if they are underpinned by strong intellectual property. [The product must] satisfy a
particular need.”
Participant 2: “[We look at] their specific key differentiation.”
Participant 3: “[We will try] understand what it is trying to do in relation to what is
out there… [And] look at what other IP is in the field.”
Participant 3: “Preferably [we want] formal intellectual property, so patents…. But
not always.”
Participant 5: “[When look at an opportunity, I want to see] how you compete, how
you differentiate yourself.”
Participant 6: “[We want to understand] the need and how the product meets that
need, and what is unique.”
Participant 7: “It needs to be a realistic idea. [In terms of] the IP, it doesn’t need to be
patented, but there needs to be some sort of head start on the rest of the market.”
As can be seen in these quotes, similar characteristics are identified such as the
differentiation, the uniqueness, the patentability, the IP and the actual attributes in
fulfilling a need. Therefore, the product characteristics as a decision-making factor in
South Africa are similar to international benchmarks for the participants interviewed.
The market characteristics
In international literature, the market characteristics such as the market size, growth,
positioning, acceptance as well as the competition, barriers to entry, supply and
distribution, time to bring to market, market research and customer engagement are
decision-making factors considered by investors.
In South Africa, for the participants interviewed, these aspects were found to be
decision-making factors that are considered. The following interview quotes illustrate
this finding.
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Participant 1: “[We look for] high barriers to entry. [We look at the] broad market
size, their competitors, what is the actual proposition, what markets are they going to
operate in [and] how are they going to gain traction.”
Participant 1: “We are looking for businesses that are potentially highly scalable. [We
want to understand if] they already have some market presence?”
Participant 2: “The majority of our time is invested to assessing the actual market
opportunity, what is the size of what they are trying to achieve. We call customers,
[we] look at market research: Gartner, Forrester, [and we look at] what the global
competitive landscape looks like”
Participant 3: “I don’t like competing, [so] I want barriers [to entry].”
Participant 4: “[We] will look at the market and the marketing thereof and if it will go
somewhere in the market”
Participant 4: “[Market growth or scale] is probably the most important thing.”
Participant 6: “[We want to understand] how broad and wide the need is. Who is the
person who is likely to use it? How are you going to reach that need? Who else is
doing this, so the competition, and along with that are the barriers to entry.”
Participant 7: “[We look at] the competitors and see what they up to, hopefully there
aren’t any. [We look at] where that space is going?”
Participant 8: “The most important thing is the market… all you got to do is get out
there and test it in the marketplace.”
Participant 8: “The idea must not be ahead of its time.”
As can be seen in these interview quotes, similar characteristics are identified such as
the barriers to entry, the competition, market size, market growth, market positioning,
market acceptance, time to bring to market and formal market research. Therefore, the
market characteristics as a decision making factor in South Africa are similar to
international benchmarks for the participants interviewed.
A unique difference in terms of the market characteristics in South Africa, compared
to international benchmarks for the participants interviewed, is the ability to scale
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internationally. This is discussed in more detail in unique South African decision-
making factors section of this report.
The financial characteristics
In international literature, the financial characteristics such as the return on
investment, cash flows, margins, growth potential, exit possibilities, risk, equity
percentages and the size of the investment are decision-making factors considered by
investors.
In South Africa, for the participants interviewed, these aspects were found to be
decision-making factors that are considered. The following interview quotes illustrate
this finding.
Participant 1: “ [We want to understand] how they are going to make money, what is
the revenue model.”
Participant 2: “[We] need to understand the growth path… I think a financial model is
important, it gives a deeper insight into what drives the business.”
Participant 4: “[We look at] the valuation and percentage. We wont carry on if its
crazy.”
Participant 4: [We look in detail at] the business plan [and] cash flows.”
Participant 5: “[We look at if] the business model makes sense, is it a profitable model
[and] is the financing structure right [and we look at] the valuation.”
Participant 6: “[We want to understand] how it’s actually going to make money. If
they don’t know how it’s going to make money, we can’t work with them. And the last
aspect is the actual deal, so how much money is required, what do [they] value [their]
business at, and how much equity [are they] expecting to give away”
Participant 6: “I want to make sure that I get as much return out of [my investment],
but at the same time I need to understand how much money we putting in and how far
that is going to get the business. You need to allow for further and further rounds of
dilution.”
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Participant 7: “It must be scalable. The valuation and equity percentage are also
important. We are also concerned about return of investment. Say the company is
valued at R10million, we say to ourselves, can this be worth R100million, 10 times the
size, in 3 or 4 years time?”
Participant 7: “The [salary] is a massive thing [in the financial model]. If a guy comes
along and puts a big salary in for himself, then we start questioning whether he wants
to work in a corporate or be an entrepreneur. It’s a big warning sign.”
Participant 8: “If the valuation is too high, forget it, [we won’t invest].”
As can be seen in these interview quotes, similar characteristics are identified such as
the financial model, the revenue model, the return on investment, cash flows, the
growth potential, equity percentages and the size of the investment. Therefore, the
financial characteristics as a decision making factor in South Africa are similar to
international benchmarks for the participants interviewed.
Summary
Overall, looking at the opportunity category of factors, the product, market and
financial characteristics were found to be present in South Africa for the participants
interviewed. No relative importance of these factors was identified and therefore no
conclusions can be drawn on which factors are more important.
In term of the comparison to international benchmarks, the opportunity category of
factors was found to be similar to international benchmarks identified in literature,
with little variation or differences. The lack of differentiation may be because these
factors are more conventional and are the hard-facts of business, which have become
commonplace internationally whereas the other factors such as the entrepreneur side
and investor side factors are more localised.
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7.3.4 South African unique decision-making factors
The exploration of uniquely South African decision-making factors with interview
participants used the following approach. Firstly, the two factors identified in
literature were discussed with the interview participants to check their relevance and
applicability, and secondly, any other possible South African unique factors were
explored. The findings are outlined below.
In previous studies of uniquely South African decision-making factors, only two
possible factors were identified. The first factor is the BEE aspects of the opportunity
that the investor is evaluating. In the previous study, this was found to be insignificant
(Deventer & Mlambo, 2009), and in this study the same result was found. This is
illustrated by the following quotes from the interview participants.
Participant 2: “For start-ups, BEE is not a requirement… It’s not something we look at”
Participant 3: “BEE doesn’t play a role”
Participant 4: “It’s a nice to have, but its not important”
Participant 7: “BEE is not applicable at all to us”
Participant 8: “We don’t care about BEE. They have a tough enough time just starting.”
The second factor was the ability to internationalise the business opportunity, which
was found to be a significant decision-making factor in a previous study (Jones &
Mlambo, 2013). In this study, the same result was found. This is illustrated by the
following quotes from the interview participants.
Participant 1: “We typically prefer something that would have international
scalability… beyond the borders of South Africa. We certainly looking for that.”
Participant 3: “It has to be scalable.... its got to be global. The market needs to show
that there is big, big scale.”
Participant 6: “You have to go into international markets as early as possible as the
local market is too small.”
Participant 7: “We invest in South African companies that are scalable globally. We
use the South African market as a test market.”
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Participant 8: “Absolutely. They need to scale internationally. But you need big
pockets.”
In terms of other possible uniquely South African decision-making factors that were
explored with the interview participants, two possible unique factors were identified
from the interviews.
First was the quality of the entrepreneurs in South Africa, which the interview
participants considered to be a key factor that leads to deals not being pursued. The
interview participants believed that the quality of entrepreneurs in South African is
generally low. However, this is not a unique factor and is simply related to the
entrepreneur and team factors previously identified and discussed such as their
personality, skills, experience and track record. Therefore, this is not a unique
decision making factor, but rather a significant challenge, which is discussed in detail
in the following section of this report on challenges facing South African venture
capital. However, this finding does once again illustrate the importance that the
investors place on the entrepreneur and their team factors in their decision-making.
The second possibly unique factor identified by interview participants was the need
for South African VCs or Angels to consider the availability of funding in the market
and the needs of the start-up in terms of further rounds of funding, and in addition to
this the fact that the VC or Angel may need to fund these further rounds themselves
due to a general lack of funds in the South African venture capital market. However,
similar to the possible unique factor of the quality of the entrepreneur discussed
above, this is not a unique factor as it would fall into the financial decision-making
factors considered, and therefore is a significant challenge in the South African
market rather than a unique decision-making factor, and is explored in more detail in
that following section of the report.
Therefore, no new uniquely South African decision-making factors were identified in
this study, with the interview participants instead identifying challenges around
existing decision-making factors. These challenges, and other significant challenges,
are discussed in detail in the following section of this report.
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7.4 South African Venture Capital Challenges
In this section, the findings from the exploration of the major challenges facing the
venture capital industry in South Africa are outlined. The findings are presented in
themes that were determined from the analysis of the interview data.
Size of the South African venture capital market
The venture capital market in South Africa is very young, small and has a low number
of deals, and therefore with this immature market comes certain challenges to the
companies and investors in the market.
Firstly is the challenge of the number of deals available, or the deal flow. This is
simply a challenge in terms of the number of investable opportunities that are
available in the market, and consequently the sustainability of their VC businesses.
This challenge is illustrated by the following interview quotes:
Participant 1: “the ecosystem is still very young, it’s not like there are a gazillion deals
doing the rounds… the market is very small”
Participant 2: “It’s not like being based in San Francisco where you got all the big
companies on your front doorstep, [and] A big network.”
Participant 2: “Deal flow [is one] of the biggest factors in this country.”
Secondly is the challenge of specialisation. Since the deal flow is so small, VCs and
Angels are unable to specialise in a specific field of technology and create a niche to
operate within, since the number of available deals would not be sufficient to sustain
them. Therefore, VCs and Angels in South Africa need to be active and proficient in
multiple technology areas, as participant 2 explains:
Participant 2: “Because technology is so vast, in South Africa, you can’t specialise in
anything. So, as a venture capitalist you need to know a little about everything, but
you don’t really know a lot about anything… where a lot of funds in the US actually
have very specialist niches.”
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Thirdly is the challenge of healthy competition within the industry and the market
being immature, as participant 7 simply says: “We need much more competition.” In
other words, since the entrepreneurs don’t have a wide choice of VCs to partner with,
they take what funding they can get, which is often not enough. However, if the VC
market was mature there would be more competition among VCs and the price of
deals would be driven up, and therefore the levels of funding in start-ups would
increase, as participant 3 explains:
Participant 3: “We need a mature investment market that has the ability to clear at the
correct price. At the moment a lot of these things don’t clear at the correct price
because you don’t have competition [amongst VC firms]. So the market isn’t true.”
Finally, is the challenge of the long length of time that deals take to be completed in
South Africa, which is illustrated by participant 3 who simply says, “…funding in
South Africa takes a long time”. The overall process in South Africa is slower and
more time is invested in each evaluation. This is because there are less opportunities
available to investors in South Africa as discussed before, unlike is the USA or the
UK where an investor could invest in many opportunities in a year and is therefore
more likely to succeed with a few of the investments. Therefore, in South Africa
investors need to make sure that their limited numbers of investments are more likely
to succeed, and hence they invest more time and energy in the upfront evaluation
process. This is illustrated in the following interview quotes.
Participant 1: “unlike what tends to be practiced overseas in the USA, where guys
make an offer within 3 days… we do things slightly differently in the sense that we
load up a lot of the work initially… because the circumstances there are quite
different, there is a competition between funders there, they just want to get onto the
deal [so they don’t] miss out, and secondly there is so much to go around… so they
are co-funding, so they spread their risks amongst each other, whereas with us, deals
typically don’t presents themselves as co-funding [opportunities]”
Participant 2: “[VCs in Silicon Valley are] doing many deals a year, [they] don’t
really need to get it right much, you need to get it right every now and again to make
money. [In South Africa], if you doing ten deals, or fifteen deals in the lifecycle of a
fund over a four year period, statistically speaking, your chances of getting it right are
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less than when you are doing two deals a week. [Therefore] you need to be a lot more
certain that you can do a deal that can make a success out of.”
Collaboration and alignment
Another challenge highlighted is the lack of collaboration and alignment between the
VCs and Angel in the industry. By creating alignment and collaboration, the
companies and investors would be able to efficiently work together and create value
in many ways. Firstly is the ability of the VCs and Angels to link up between the
different stages and types of investment, such as seed, series A funding, series B
funding etc. Secondly would be the ability to share skills and co-fund promising
opportunities, which may lead to a higher chance of success for that opportunity, and
consequently lead to a success story within the industry, which is beneficial for the
industry as a whole. These challenges are illustrated by the following interview
quotes:
Participant 3: “there is a lack of alignment and collaboration in the industry. People
don’t know what each other are doing and they are scared to talk to each other”
Participant 4: “Nobody knows what the other is doing or where they can help each
other.”
Participant 4: “Everyone has the same agenda, but they work on their own”
Quality of entrepreneurs
The quality of entrepreneurs is another important challenge highlighted by the
interview participants. In South Africa, there is an overall lack of entrepreneurial
skills and experience, as well as an inability to build strong entrepreneurial teams.
This could be attributed to educational systems as well as the job culture in South
Africa. This is illustrated by the following interview quotes:
Participant 2: “Quality of entrepreneurs [is one] of the biggest factors in this country.
There are not many good entrepreneurs around.”
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Participant 2: “I think it has to do with culture. We don’t raise our kids to be
entrepreneurial.”
Participant 3: “There is in particular a shortage of teams… Inventors here aren’t
entrepreneurs, and I don’t think that’s typically different to elsewhere… [but]
elsewhere people are more adept at building teams that bring those skills on-board.
The business skills are poor [in South Africa]. ”
Participant 6: “Our challenge is finding quality, well packaged opportunities led by
strong entrepreneurs, experienced entrepreneurs.”
Participant 6: “entrepreneurs don’t actually understand what [VCs and Angels] are
looking for.”
Participant 7: “another weakness is the entrepreneurs. [South African entrepreneurs]
are not as good as the international ones [in terms of their experience, skills and track
record]. But that will come with time.”
However, instead of allowing this challenge to hamper the investment in promising
opportunities in South Africa, some participants believe that the industry needs to take
a more proactive approach in terms of overcoming this challenge by becoming more
actively involved with the entrepreneurs and taking more risks. They believe that in
the long run this will be to the benefit of the industry as successful entrepreneurs are
likely to create more successful opportunities in the future. This more proactive view
is illustrated by the following interview quotes:
Participant 3: “I think South African investors need to be more proactive in their
approach. [VCs] moan that there aren’t enough opportunities, [there are enough
opportunities] but there aren’t enough opportunities packaged to their satisfaction.
That is why we get more actively involved.”
Participant 5: “You don’t find opportunities with everything all at once. There is
always something lacking.”
Participant 8: “its very difficult to get money. The VCs will send their suits and most of
the [promising] entrepreneurs are going to fail, as they don’t have the [polish].”
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Availability of venture funding and Angels
A major challenge in the South African VC industry is the availability of funds. While
there is funding available, and the ecosystem is growing, it is still limited, especially
in terms later stage follow on funding. This is illustrated by the following interview
quotes:
Participant 5: “[Entrepreneurs in South Africa] get $20,000 here, $20,000 there, but
where’s that going to take you? [The entrepreneur] needs $200,000.”
Participant 5: “You can’t solve issues with money here [in South Africa], and that’s
what often happens in larger markets.”
Participant 5: “If I’m a young entrepreneur with a great business model, where am I
going to go? If I get the initial funding, who’s going to give the next round of funding?
The ecosystem is not evolved enough”
Participant 6: “You need to be prepared to do your own follow on funding. If you are
going in at a early stage for a business, you need to know if you are going to be able
to invest yourself in the next round and the next round”
Participant 6: “In the US you can be in and out of something in a year. That’s just not
us. There’s not enough follow on funders.”
Participant 7: “In the US, they throw huge amounts of money at it. We need to be a bit
more conservative. We encourage our guys to bootstrap as much as possible, until it is
more proven. Then we do further rounds of investment.”
Participant 7: “[there is] a lack of funding.”
The lack of funding is also especially prevalent in terms of the availability of Angel
investors in South Africa. This is attributed to a lack of conversion of wealthy
individuals from traditional investment to Angel investment, which has both the
benefit of initial funding for entrepreneurs as well as the benefit of experience and a
network. This lack of conversion may be educational, in terms of the understanding of
Angel investing and the mind-set of these wealthy individuals. This is illustrated by
the following interview quotes:
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Participant 1: “A significant barrier relative to elsewhere in the world is that there
doesn’t exist a broad angel investing network…[entrepreneurs] don’t have a first stop
of committed angel investors.”
Participant 3: “[A] lack of active Angel investors is a big issue. There are lots of
potential Angel investors… [But] in order to get somebody who spent their life
working in a corporate who has made lots of money [to become an Angel investor],
you have to teach them to change their mind-set… because it’s a completely different
game.”
Participant 6: “Its very different to traditional investing. People don’t know how to
invest into a start-up.”
Participant 8: “I’m not saying there is no money. There is plenty of money. But this is
a young [persons] environment. The ecosystem for start-ups is very one sided. There
are all these [entrepreneurs], but where’s the rest of the ecosystem? It will come [with
time].
In order to overcome this challenge of a lack of funding and a lack of Angel investors,
the industry needs success stories. With more success stories there will be more
interest in the venture capital market, and consequently more funding and Angels will
join. This is illustrated by the following interview quotes:
Participant 5: “[there needs to be a VC] track record. Why on earth would someone
give money into venture capital? There are no big returns; there are no success
stories. Venture capital doesn’t even outperform the JSE in South Africa [currently]...
We need success stories”
Participant 6: “We need to build up a track record of successful investment, a track
record of profitable exits, so the industry is able to PR properly. If you have more of
the exits, [Angels] will step up, as they will feel like they are missing out.”
Participant 7: “[We need] success stories, and successful entrepreneurs.”
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Government support
In South Africa, the support of the government is a challenge from multiple
perspectives, such as funding, education, red tape and regulation. These challenges
are illustrated by the following interview quotes:
Participant 2: “It’s unsophisticated. Entrepreneurship is not high on government’s
agenda. It’s not something that culturally driven from the bottom up. It’s not
something we teach our kids in school”
Participant 3: “[Government funding organisations] need to be more efficient. There
processes are terrible.”
Participant 3: “[There is the] typical challenge of government red tape. It can take a
year to start a business. It’s a nightmare. FICA is a disaster.”
Participant 7: “Regulation is an issue, especially when you trying to globalise. The
government is very protective of what they have here; so getting it overseas is tough,
or merging with US companies. They think that they are going to lose the IP and lose
the tax income. They don’t understand that there will still be income from South
African shareholders [and] jobs will still be created as it will be developed here
because its cheaper.”
In terms of improving the support of government, two new suggestions were
highlighted from the interviews that differ from the usual suggestions around
education, regulation and red tape reduction.
Firstly, in terms of the government funding organisations, it was suggested that
government should rather use the existing VC industry and infrastructure as a channel
to create investment instead of trying to setup their own independent institutions,
which would allow the capital to be used in the most efficient way without the
bureaucratic overheads. This also allows the VC funds to properly invest significant
amounts of money in promising businesses and consequently increases the chances of
success of the businesses. This suggestion is illustrated by the following interview
quote:
Participant 4: “Collaboration between the [VC industry] and government is lacking.
[Government should] use the existing guys as they know exactly what they doing
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and they have the offices and people, and [government should] fund [the VCs]
properly. They can then invest in the riskier guys that might work.”
Secondly, it was suggested that the government should relook at tax benefits and
incentives in the VC industry and for entrepreneurs. This suggestion is illustrated by
the following interview quote:
Participant 5: “Government needs to support through no tax [for start-ups], [a]
guaranteed first million of funding paid back to [the] venture capitalist [and] tax
credits.”
7.5 Research limitations
The research was limited in scope in terms of the number of interview subjects that
could be found and interviewed. There are few VC firms in South Africa, and access
was therefore limited. In terms of Angels, there are a limited number and their
informal nature presents an additional barrier to discovering them. Also, the research
was predominantly based in Cape Town, which further hindered the availability of
subjects and the geographic applicability. This presents a limitation in terms of if a
representative sample was interviewed to make the research widely applicable to
South Africa.
In addition to this, the research was limited to the technology sector as well as only
early stage investments. This presents a limitation in terms of the applicability of the
research to venture capital investments in other industries as well as the applicability
to later stage investments.
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8 Summary discussion and conclusions
In terms of the investment process, the overall South African investment process was
found to be similar to the international benchmark process identified in literature for
the participants interviewed, in terms of both the process tasks performed as well as
the factors considered and their relative importance at the various stages. Only minor
differences were identified, which are as follows.
Firstly, for the participants interviewed in South Africa the overall process takes
longer than it does internationally, which may be due to the low number of deals in
South Africa and therefore the heightened scrutiny and time invested upfront in order
to increase their hit-rate of investing in successful opportunities.
Secondly, it was found for the participants interviewed that during the origination and
discovery of opportunities, the network is the only significant channel used in South
Africa compared to international benchmarks. The reason for this is because there is
such a low deal flow, and such a small ecosystem of VCs and Angels in South Africa,
the network has become the key channel through which South African VCs find
opportunities, while in overseas markets, even though the network is still the most
important channel, the VCs and Angels can rely on multiple channels for deal
discovery.
Finally, in the screening stage of the process, the evaluation of the opportunity in
terms of its competitive landscape and its defensibility in terms of the IP was found to
be a more important factor for the participants interviewed than has been found in
international literature. This is perhaps is due to the South African investors trying to
minimise the risk of the product being quickly stolen and copied internationally - if
this were to occur they would not be able to easily compete against the resource rich
international competitors.
In terms of the investment factors considered, the overall South African decision-
making factors considered by the participants interviewed were found to be similar to
the international benchmark factors identified in literature. Additionally, a similar
weighting of importance was found for the various categories of factors, with the
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entrepreneurial and team category of factors being identified as the most important
factors evaluated in South Africa for the participants interviewed, which is similar to
international literature. Only minor differences were identified, which are as follows.
Firstly, the chemistry or ability to form a relationship with the investor was the most
frequently mentioned factor in terms of the entrepreneurs personality for the
participants interviewed. This is perhaps because in South Africa the relationship
between entrepreneurs and investors will need to be longer-term when compared to
international investors, due to the lack of funding and investors, which thereby
increases the need for investors to make their own follow up investments in
opportunities and hence remain involved for a longer duration.
Finally, the trust or judgment by an investor of a referrer in their network was
highlighted as being important in South Africa for the participants interviewed. This
is perhaps due to small size of the industry network and the number of deals available,
and additionally because the majority of deals originate through their networks, all of
which results in the elevated importance of the trust and judgment of referrers in their
network.
In terms of uniquely South African factors, the only significant factor is the ability for
an opportunity to scale internationally outside of the borders of South Africa. In terms
of new unique factors, none were identified in this study, with the interview
participants instead identifying challenges around existing decision-making factors.
Continuing with decision-making factors, it was found that for the participants
interviewed the factors considered by investors in South Africa are heightened by the
significant challenges facing the industry. Two examples are discussed below.
First, and most notably is the importance of the entrepreneur and the team in terms of
their skills, track record, qualifications and abilities. The evaluation of this factor is
heightened due to the substantial challenge of the quality of entrepreneurs in South
Africa. Linked to this is the investors experience and ability to add value to the
opportunity, as in South Africa the investor will more likely need to be more involved
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and hands-on than elsewhere in the world, especially in terms of coaching the
entrepreneurs.
Second, in terms of the financial characteristics of the opportunity that the investors
are evaluating, the VC or Angel would need to apply more consideration to the
financial needs of the business in terms of acquiring further funding in the future. This
would be required due to the challenges identified of a general lack of funding in the
market, and furthermore due to the lack of collaboration between VCs and Angels in
the industry which reduces the amount of possible funding available. Therefore VCs
or Angels making an initial early-stage investment would need to consider that they
might need to make further rounds of funding themselves, rather than being able to
get this funding from other VCs in the industry, which is often the case in
international markets.
In summary, the venture capital ecosystem in South Africa is an exciting and growing
industry, however, it faces some significant challenges. As already discussed above,
there is a lack of deals, a lack of funding, a lack of collaboration between industry
players and a general lack of entrepreneurial quality. In addition to this, there is a lack
of government support and in general a lack of entrepreneurial education, a poor
entrepreneurial culture in South Africa and a shortage of Angels. However, all of
these challenges can be overcome with time, growth and with more and more success
stories, all of which are already underway within the industry.
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9 Conclusions
Firstly, in terms of the step-by-step process used by VCs and Angels, the South
African process is similar to the international benchmarks with only slight
differences. These differences are that the overall process takes longer in South Africa
and that the only significant channel of opportunity discovery is via personal
networks, both of which are due to the small ecosystem of venture capital in South
Africa and the low number of possible deals available in the market. Additionally,
another slight difference was identified where the competitive landscape and IP had a
heighted focus in the screening stage compared to international benchmarks.
Secondly, the decision-making factors used by VCs and Angels in their investment
opportunity evaluation, as well as the relative importance given to the factors, are
similar to those identified in international benchmarks with only slight differences.
These differences are that in South Africa the assessment of the relationship forming
potential between the entrepreneur and investor is heightened, possibly because in
South Africa longer-term relationships are needed, and that the trust or judgment by
an investor of a referrer in their network is heightened, which may be due to the small
industry size and since networks are the only significant channel of deal origination.
In terms of uniquely South African decision-making factors, the only significant
factor in the South African environment is the ability of an opportunity to scale to
international markets outside of the borders of South Africa. This is due to the small
size of the local market, which is too small to make meaningful returns for a VC or
Angel.
Finally, the South African venture capital industry is still very small, young and
immature, and faces many significant challenges. These include a low deal flow, an
inability to specialise, a lack of collaboration between industry players, a lack of
funding, a lack of Angel investors, a lack of quality entrepreneurs and a lack of
government support. However, many of these challenges can be overcome as more
and more success stories occur in the industry, since they will increase the awareness
of the market potential and subsequently bring in more funding, investors,
entrepreneurs and deals.
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In conclusion, for the participant interviewed, the South African venture capital
process and decision-making factors used when investing in technology start-ups is
similar to the international benchmarks identified in literature, with only minor
differences. However, the South African industry faces significant challenges, but
with time and success stories in the industry, many of these can be overcome.
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10 Future Research Directions
The investment process and decision-making factors are fairly well established and
are very similar to international benchmarks in South Africa. Also, uniquely South
African decision factors are not significant. Therefore, from a South African
perspective, no future research directions are immediately pressing to be explored
further in terms of the investment process and decision-making factors. The main
areas of future research are around the challenges facing the venture capital industry
in South Africa.
Firstly, further research could be conducted in the Angel investment arena in terms of
the difference of mind-set between potential Angels and active Angels, and how they
made the shift in thinking and what made them join the market. This research could
aid in increasing the number of wealthy individuals who become active Angel
investors, and thereby increase the quality of entrepreneurs (via mentorship), the
number of deals (since more projects can be initiated) and the funding available.
Secondly, further research could be conducted on the various ways that collaboration
and alignment can be fostered in the venture capital ecosystem in South Africa. This
could help the deal flow, the availability of funding and lead to more substantial
companies and success stories.
Finally, the government and education aspects could be explored in terms of how
entrepreneurship can be fostered in South Africa. Additionally, the proposed method
by one of the interview participants of collaboration between the venture capital
industry and government, where government uses the VC industry infrastructure to
efficiently fund start-ups instead of setting up their own institutions, could be
explored. These studies could help with deal flow, the quality of entrepreneurs and the
availability of funding.
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11 Glossary
Angel/s Angel Investor/ Business Angel
VC Venture Capitalist
GEM Global Entrepreneurship Monitor
BEE Black Economic Empowerment
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13 Appendix
13.1 Interview instrument
The following semi-structured questions will be used in the interviews.
Introduction and purpose of the interview.
o Provide an overview and the purpose of the research.
o Explain confidentiality that the data will be anonymous and no names
will be used in the research report.
o Explain that the interview will be recorded, and the recording will not
be distributed and will remain secure.
o Explain that the interview recordings will be transcribed, with names
removed, and will be analysed to find themes.
Investment story. Subject to discuss their investment process from the
beginning to end, describing the various steps taken and the factors considered
at each stage.
o This section will form the majority of the interview
o Explain to the subject that they should keep a recent successful
investment in mind.
o Explain that they should include as much detail as possible in the story,
including what they did, why they did it and what they considered
when assessing an opportunity. Various probing questions will be used
such as:
What happened next,
What attracted them to an idea,
How did they find out about it,
What was important at that stage,
What did they consider at the various stages,
What were they looking for,
What was important,
How did you initially evaluate the idea,
Did you look through the business plan in detail,
Was the entrepreneurs personality important,
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Etc.
Clarification questions will be asked after the process discussion regarding
the various decision-making factors if they did not already arise. These
questions will assess if the investor considered the following areas. “When
assessing an investment, did you consider the…”?
o Entrepreneur’s personality
o Entrepreneur’s commitment
o Entrepreneur’s experience
o Entrepreneur’s ability to instil confidence in the investor
o Entrepreneur’s business plan quality
o Entrepreneur’s presentation quality
o Entrepreneur’s management team capabilities
o Investors own experience relating to the industry sector
o Investors use of their own networks for advice
o If the opportunity suited the investors investment strategy or portfolio
o Product characteristics
o Market characteristics
o Financial characteristics
South Africa unique factors. Additional questions into uniquely South
African considerations if they did not already arise during the investment
story.
o “Are there any other factors that you considered in the investment that
you would think are uniquely South African? For example, BEE, or the
ability to take the product international.”
South Africa venture capital challenges. Additional questions into South
African venture capital challenges if they did not already arise during the
investment story.
o “What do you think are the biggest challenges facing venture capital
investors such as yourself? What are the biggest barriers to the growth
of the venture capital industry in South Africa”
Final thoughts and additions from subject.