“One of the reasons why Silicon Valley, which is the flagship for early-stage venture capital investing, does so well is because they have an environment where people – investors, mentors, advisors and the start-ups – collaborate in a way which is not seen as competitive from an equity standpoint,” U-Start Africa chief executive, Zachariah George told CNBC Africa.
Small to medium-sized enterprises (SMEs) have increasingly contributed to South Africa’s GDP and the sector employs a substantial amount of the country’s labour force as well.
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The country has also put an improved emphasis on the success of SMEs with the establishment of the Ministry of Small Business Development.
“To see more investment into small businesses, start-ups and early stage ventures, you need to have the participation of local venture capital firms, private investors, international investors, looking at Africa as the next big growth story, and local enabling institutions like incubators, accelerators and government, that support the process,” George said.
“One of the things I strongly believe in is a good working relationship amongst all three, that is none competitive, will greatly help improve the ecosystem and get more deal flow within South Africa, and Africa as a continent.”
George however indicated that the quality of mentorship, advice and support to early stage start-ups in South Africa is not as good as what you would see elsewhere.
“In South Africa, unfortunately, if a good tech deal comes around there seems to be a very sticky, cagey investment process around the funders that are looking to fund a deal like that [and] as a result, there is almost a ‘land grab’ for equity,” he said.
“Because the supply of money to early stage risky investments is so little, the ones that do get funded tend to give away large amounts of equity and, sometimes, even majority stakes – that converts entrepreneurs into employees. We like to give entrepreneurs the mentorship and advice to grow without the risk of them losing out on growing their own business through constrained equity stakes.”