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Gauteng Home To Most Tech Start-ups, But Cape Firms Still More Successful

In the 2018 Ventureburn Tech Startup Survey powered by Telkom Futuremakers – which was released today – 55% of the 153 founders surveyed said they operated in Gauteng (see below graph), behind the Western Cape’s 37%.

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The Western Cape may long have been held as the most popular region in South Africa in which to run a tech start-up, but it seems this is no more, reveals a new survey. But despite this, tech start-ups in the Western Cape are still more successful than those in Gauteng.

Among its other key findings, the survey uncovered that:

  • In all, 36% of Western Cape start-ups report turning a profit or generating significant revenue, compared to 22% in Gauteng.
  • The percentage of black tech start-ups has risen from 26% in 2015, to 56% this year.
  • Just seven percent of black tech start-ups turn a profit, versus 15% of their white counterparts.
  • Over a quarter of start-ups plan to raise angel or VC funding, but only eight percent receive such funding.
  • Successful start-up founders are most likely to be white males from the Western Cape.
  • Half of all start-ups surveyed were from three sectors, namely: Software as a Service (SaaS) (19%), fintech and insurtech (18%) and the media, advertising and marketing sector (13%).

The Western Cape may long have been held as the most popular region in South Africa in which to run a tech startup, but it seems this is no more. Gauteng has emerged as the most popular province to run a tech start-up in the 2018 Ventureburn Tech Start-up Survey powered by Telkom Futuremakers.

But going on this year’s findings and those from Ventureburn’s 2017 survey, Western Cape start-ups are still more successful – with a higher percentage reporting having turned a profit or generated significant revenue, than tech start-ups based in Gauteng.

In the survey – which was released today – 55% of the 153 founders quizzed in an online survey run last month (October 2017) said they operated in Gauteng. The percentage is up from 44% in a 2017 Ventureburn survey of 260 founders and 29% in a 2015 Ventureburn survey of 197 founders.

vb-survey-2018-province

This year, 37% of founders said they operated in the Western Cape. This is down from just less than the 47% in last year’s survey and 59% in 2015.

Driving the rise in Gauteng tech startups is the increasing number of tech entrepreneurs who are black (black African, coloured, Indian or Chinese South African) – who now make up 56% or over half of the country’s tech start-ups, up from 46% in 2017 and 26% in 2015.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

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The majority of black start-ups, or 62% (2017: 53%) list Gauteng as their base, while 27% (2017:42%) say the Western Cape is their home. The remainder are based in the country’s seven other provinces.

Of the 153 founders quizzed, 41% list themselves as white (down from 52% in 2017 and 66% in 2015), while four percent again chose not to reveal their race (eight percent in 2015).

Success higher in Western Cape

Yet the Western Cape is still the place to run a start-up if you want to be successful.

A higher percentage of tech start-ups in the Western Cape report making a profit or generating significant revenue than those based in Gauteng. The figure is 23% of Gauteng tech startups (2017: 22%), compared to 36% (2017: 32%) of start-up founders in the Western Cape.

Across all participants that took part in the survey, 27% said they were either profitable or making significant revenue. Just 10% of start-ups said they were making a profit.

The majority were either not making any revenue or were generating a very small revenue. In all, 40% (2017: 45%) said they were not generating any revenue, while 33% (2017: 28%) said they were making an insignificant amount of revenue.

Just 21% (2017: 19%) of those surveyed said their startup was turning over R1-million a year. The remainder of firms, or 27% (2017: 18%), generate between R100 000 and R1-million a year.

SaaS, fintech, insurtech sectors dominate

The majority of those start-ups Ventureburn surveyed are run and founded by males aged between 25 and 50.

In all, 41% of those surveyed have one founder, while 27% have two founders and 22% have three founders. The remaining percent have four or more founders.

Males run 65% of those start-ups surveyed, while 19% have both male and female founders and 16% were founded by females only.

Half of those surveyed operate in just three verticals – Software as a Service (SaaS) (19%), fintech and insurtech (18%) and the media, advertising and marketing sector (13%).

About a third of respondents founded their start-up in the last year. Likely because of this, only a quarter say they operate from offices. The majority work either from home or remotely.

Half of those surveyed own their own product or intellectual property (IP), while 38% are a service-orientated business (such as an agency or software development house). The remainder of startups are e-commerce businesses (8%) or license or use another’s product or IP (3%).

Most of the surveyed founders are aiming to service or are servicing, either the SA market only (40%) or the entire African market (41%). The remainder list the entire world as their market.

In all, 71% of founders (2017: 67%) surveyed said they had been involved in running a start-up before, with most of those having been involved in either running one or two business previously (56% of all founders surveyed).

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Most founders said they founded a start-up to become a pioneer or innovate (15%) or after seeing an opportunity (13%). Only four percent said they started a business to make big money.

Of the founders, 76% (2017: 73%) reported having worked in a corporate previous to starting their business.

In line with Ventureburn’s 2017 survey, over half of start-up founders again listed raising or accessing funds as their biggest challenge (52%), followed by a lack of skilled staff (10%).

Connected to this, most founders said incubation programmes could add the most value in helping them to source funding (28%) and open up market access to participants (26%), rather than assist with commercialisation (21%), business training (17%) or  idea generation (8%).

Related: 21 Steps To Start-Up Success

Black start-ups still struggling

Black start-ups may have grown in number, but they are still struggling.

While 15% of SA tech start-ups founded by white entrepreneurs are turning a profit, a mere seven percent of black owned tech start-ups are making a profit.

In addition, black start-ups are in a worse financial position that their white counterparts. Of white founders, 28% say they have three or fewer months left of funds left to operate on – significantly lower than black founders, where 51% say they will run out of funds in three months’ time.

It’s clear to see why. Over half or 51% of black start-ups surveyed (2017: 61%) generate no revenue at all – because they are still working on their concept or are in the seed stage. Just 20% of white start-ups say they are yet to make money (2017: 30%).

In addition, while 39% of white startups (2017: 29%) bring in a revenue of over R1-million, just 14% of black startups do so (2017: 9%). Almost two-thirds of black start-ups (2017: 75%) generate no revenue at all or less than R100 000 a year — compared to 37% of white start-up founders who make under R100 000.

When it comes to access funding, more white founders (11%) have had angel funding than black start-ups (six percent), while white founders accounted for 50% of all those start-ups that reported having tapped angel (2017: 59%) funding.

It suggests better resourced white start-up founders who often have access to more capital, skills and experience and better networks are able to out-perform black startups.

When asked how they plan to raise funding in the future, 46% of white founders say they will do so by securing a private equity, VC or angel investment, versus 37% of black start-ups.

There are some further clues as to why white start-ups are generating more revenue than their black counterparts

One may be because more white founders say they run a business in which they have developed their own intellectual property (IP).

Added to this, more white startups operate in the more lucrative business to business (B2B) space (over business to consumers or B2C), compared to 46% of black start-ups.

Furthermore, a far higher percentage of white start-ups operate in the money-spinning sectors of fintech and insurtech sector and Software as a Service (SaaS) than do black start-ups.

The experience of age (which often also brings with it more accumulated capital, work experience and more contacts) could also make a difference. White founders are older than their black counterparts – 48% are over the age of 35, compared to 36% of black founders.

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Out of touch in getting angel, VC funding

When it comes to funding, the survey reveals that over a quarter of founders or 29% of SA tech start-ups believe that they will grow their business by securing venture capital (VC) or funding from angel investors – yet the reality is that only about 11% report having been able to secure such funding, the survey reveals.

Are start-up founders then out of touch with reality?

South Africa has seen an explosion in venture capital (VC) deals – with a recent Southern African Venture Capital Association (Savca) report finding that funds had invested over R1-billion in start-ups and early-stage companies last year (with the number of reported VC deals having risen rose from 114 deals in 2016 to 159 last year).

In addition, angel investors invested approximately R73-million, compared to R44-million invested in 2016.

Yet such funding still remains beyond the reach of most local tech startups. Ventureburn’s survey confirms this (see the below graphs).

The majority of SA tech start-ups or 38%, use their own cash to fund the business (2017: 40%), followed by loans and grants from friends and family at 22% (2017: 23%).

vb-survey-2018-funding-how-will-raise-2

When they are able to get funding, most start-ups tap very little. Only 20% (2017: 16%) received R1-million or more (the value at which angel investors and VC funding usually starts at).

In all, 37% (2017: 42%) of start-ups reported getting less than R50 000. The remainder 43% (2017: 42%) received between R50 000 and R1-million.

vb-survey-2018-funding-total-received-2

Over a quarter or 27% of founders said they aim to raise between R1-million and R5-million over the next three years (2017: 30%), while 42% (2017: 31%) want to raise funding of over R5-million and 18% want to access less than R1-million (2017: 21%). A further 14% (2017: 17%) are not looking to raise any funding.

vb-survey-2018-funding-total-needed

Related: Watch List: 20 SA Tech Entrepreneurs Making It Big In The Industry

White founders in the Western Cape most successful

So, who then run the most successful start-ups (defined as those that make a profit and are growing)?

Interestingly the survey reveals that a higher percent of startups founded by both male and female founders (41%) report turning a profit or generating significant revenue, than start-ups run only by males (25%) or only by females (20%).

And more white founders than black founders report being successful – in all, 59% of startups that report turning a profit or generating significant revenue are run white-owned firms (2017: 65%).

Taken by race group – 40% (2017: 36%) of white founders report being successful, compared to just 19% of black startups (2017: 13%) (and just 13% of black-African founders, however this is up from 10% in 2017).

About 36% (2017: 32%) of start-up founders in the Western Cape say they are successful – compared to 23% (2017: 22%) who are in Gauteng who list themselves as successful.

Most are over the age of 40 or between 30 and 35 years old – 38% of start-up founders in these ages groups say they are successful (2017:36%). And most of those who say they are successful, run a fintech or insurtech or a SaaS start-up.

Those that are successful are also more likely to have a business partner and a start-up that is already over two years old (55% over two years old say they are successful versus just 11% under two years old).

They will likely also tap the North American or European market instead of only the SA or African market.

And they will likely service other businesses, rather than consumers, as 32% of those running B2B firms say they are successful versus 23% of B2Cs.

Finally – are you more likely to be successful if you have run other start-ups before? In short, not necessarily.

Data from the survey reveals that 28% (2017: 33%) of founders who have run one or more start-ups previously, report being successful with their current business – not overly different from the 25% (2017: 30%) who have never run a business before and say they are successful.

However there appears to be some correlation with the number of start-ups a founder has run as a predictor of success. Fifty percent of those who have run five or more start-ups report that they are successful with their current firm – compared to 29% of those that have run one to four start-ups before.

Gauteng’s rapid rise as the new centre for tech start-ups bodes well for the country’s burgeoning tech startup ecosystem, but more will need to be done to boost black entrepreneurs in the sector.

ventureburn-startup-survey-infographic-01

*Note on the methodology the survey used: In all there were 169 respondents to the survey which was conducted using an online questionnaire, by data analytics firm Qurio. Of this number, 14 respondents were found to be employees of start-ups (rather than founders) and were excluded. The survey therefore sampled 153 start-up founders. To ensure the integrity of the data, PwC will be involved to perform specified procedures, the results of which will be included in a report that will be available for inspection upon request.

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

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Top Sectors For SMEs In 2019

“As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”

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While the South African economy has been underperforming for a number of years, the first positive signs of turnaround started to become visible by the second quarter of 2018, and by the end of the third quarter, data supplied by Statistics South Africa showed that the economy had indeed grown by 2.2 percent, compared to the previous quarter. This uptick is expected to have a positive effect on business confidence in 2019.

This is according to Jeremy Lang, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), who says that certain business sectors have already seen an increase in opportunities for small businesses and start-ups.

“While these sectors will not be without challenges, the following four industries are likely to offer the best opportunities for small and medium enterprise (SME) owners to grow their enterprises in the coming year.”

Tourism

The World Travel and Tourism report 2018, revealed that the direct contribution of the travel and tourism sector to South Africa’s GDP has been projected to rise from R136bn in 2016 to R197.9bn by 2028 – set to make up a total of 3.3 percent of the country’s total GDP, says Lang.

“Although this sector experienced some setbacks in 2018, such as the drought in the Western Cape and stricter visa regulations for children entering the country, both the water restrictions and visa regulations  have been relaxed and the sector is once again poised for growth,” he says.

Related: Government Funding And Grants For Small Businesses

Manufacturing

Statistics South Africa has credited this industry with being the biggest driver of growth in the country’s GDP, having expanded by 7.5 percent in September 2018, says Lang. “To bolster this, Government has made a concerted effort to stimulate small business growth in this area with initiatives such as the Black Industrialist Programme and the SA Automotive Masterplan.”

He adds that businesses in the manufacturing sphere could therefore likely see significant opportunities in the form of outsourcing contracts and new partnerships with large corporates.

Agriculture

“The debate around land expropriation has occupied most of the discussions surrounding the agricultural sector in 2018, with some questioning growth prospects of this sector. However, this industry has a lot of growth ahead of it, as demonstrated by its 6.5 percent growth over the last three months of 2018,” explains Lang.

“Further to this, the industry is also already taking significant advantage of seven climatic regions in South Africa, with the export of a wide variety of high quality fruit and vegetables increasing substantially,” he points out. The recent outbreak of foot and mouth disease that has resulted in the suspension of the country’s FMD-free status will however significantly impact meat exporters.

In terms of opportunities for SMEs, he says that these may most likely be found in the rural and underdeveloped regions, where the need for resources like efficient transport, state-of-the-art cold storage, better irrigation and private power generation will be key to making agriculture projects more productive and competitive in the export market.

Data and information technology

Connectivity and information technology infrastructure are both crucial to business and employment growth in South Africa, says Lang.

“With many municipalities and the Western Cape government committing to providing all of its residents with free data as part of a plan to expand public Wi-Fi network access, it is clear that this is also becoming a high priority on a state level.” 

Related: 9 Ways To Elevate Your Small Business To The Next Level

It has also been reported that South Africa is awaiting the arrival of three international data centres, and large players in the communications sphere, including Vodacom, Telkom and Vumatel, are making huge strides in drastically growing the country’s fibre optic backbone, he adds. “As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”

In conclusion, Lang says that as South Africa’s economic growth has started to turn around, business owners should keep their ears to the ground as 2019 is highly likely to be a year of opportunity.

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Herman Mashaba To Talk On City Of Jo’burg Job Creation Initiative

Herman Mashaba to talk on City of Jo’burg job creation initiative at 2019 Business Day TV SME Summit.

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Mayor of the City of Johannesburg, and one of South Africa’s most successful entrepreneurs, Herman Mashaba, will be one of the presenters at the 2019 Business Day TV SME Summit which will be taking place at The Empire Venue in Parktown on 7 March 2019.
Now in its third year, the Business Day TV SME Summit provides an opportunity for small business owners, entrepreneurs, incubators, franchisors, investors, as well as suppliers to the SME sector to come together and engage with experts in the business, technology, marketing and investment fields.
Having founded the now iconic hair-care brand, Black Like Me, more than thirty years ago during the apartheid era and on the back of a R30,000 loan from a friend, Mashaba’s experience in establishing an entrepreneurial enterprise holds great value for small and medium-sized business owners in South Africa. Mashaba will also be highlighting the City of Johannesburg’s innovative drive to stimulate inner city opportunities and job creation.
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Managing finances and obtaining funding and expansion capital are challenges many entrepreneurial businesses face as they look to grow their footprint in the market. Darren Segal, Personal and Business Banking Innovation executive at Standard Bank – one of the partners of the SME Summit – will present advice on negotiating funding and finance, to ensure effective cash flow management.
Complex tax issues will also be covered by a representative from the office of the Tax Ombudsman.
Taryn Westoby, Head of Tiso Blackstar Events which manages the SME Summit and curates the speaker line-up says: “We work alongside Business Day TV to meet the requirements of those engaged in the SME sector, so that the content of the Summit aligns to some of their most pressing concerns and needs. The line-up of speakers includes experts in the fields of business scaling, marketing strategy, intellectual property (IP) rights, and risk mitigation.”
As such, Graham Mitchell from GROW has been engaged to share insights into the leadership required to scale a winning management team.  Vishen Pillay, partner at Adams & Adams and an authority on copyright, patents, and trademarks, will provide guidance on protecting IP. Therusha Bhagarette of Credit Guarantee Insurance Corporation of Africa Ltd will expound further on the do’s and don’ts of risk management. The full line-up of expert speakers and topics will be published on www.smesummit.co.za.

International perspective

An international perspective to entrepreneurship will also be provided through Business Day TV’s The Big Small Business Show and a pre-recorded session with Uri Levine: renowned serial entrepreneur and founder of Waze.  Levine was recently in South Africa as a guest of Tiso Blackstar to deliver the keynote presentation at the prestigious Sunday Times Top 100 Companies Awards to an audience of CEOs from the top-performing companies on the JSE.

Leading organisations at the SME Summit

Once again, leading organisations have committed their participation at the Business Day TV SME Summit, recognising it as one of the most effective platforms for SMEs to engage professional insights and facilitate knowledge-sharing in support of much needed entrepreneurial development in SA.
This year’s headline partners are Credit Guarantee Insurance Corporation of Africa Limited, SAICA, and Standard Bank. Other partners include BDO, Adams & Adams, Liberty, Payfast, GROW, The Tax Ombudsman, W&R Seta, Telkom, Santam and The Little Green Number.
For sponsorship and exhibition opportunities:  Stephen Horszowski – stephen@tisoblackstar.co.za
Delegates who wish to purchase tickets for the full day event (07h00 – 15h00) at R995:  Lucy Johnson – johnsonl@tisoblackstar.co.za or visit  www.smesummit.co.za

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SME Insurance Checklist For New Year

Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers, advises SMEs to consider the following factors when reviewing their policies.

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Business owners who are planning for the year ahead should not overlook the importance of reviewing their insurance policies to ensure they are adequately covered against insurable risks.

Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers says, every year businesses face unique challenges ranging from credit and market risks, technological disruptions, compliance, operational and regulatory risks, amongst others. As a matter of precaution, insurance policies should at least be reviewed or updated once a year.

He advises SMEs to consider the following factors when reviewing their policies:

  • Employee movements – if there are any employees who have left or joined the company, ensure that your policy is updated accordingly.

This type of cover normally depends on the role and contribution of the employee to the business. For instance, directors may be covered for Key Person Insurance and Directors & Officers Liability insurance.

  • Protest Actions – this year is the national election year and leading up to elections we can expect to see an increase in the frequency and severity of protest actions, riots and strikes. Thus, it is essential to ensure that adequate special risks cover is in place from the South African Special Risks Insurance Association (SASRIA).

SASRIA provides cover to both individuals and businesses against special risks like civil commotion, public disorder, strikes, riots and terrorism at affordable premiums.

  • Cyber risks – it is essential to communicate with your insurer or broker and find out if there are any new risks that your business should be protected against. Cyber incidents continue to be a major risk for businesses especially in the SME sector. Over the last couple of years there has been a major increase in the number of reported cyber incidences.

Related: I would like to start an insurance business. What are the basic guidelines?

More businesses are now facing increased cyber threats due to their increased dependency on technology, relating to their internal and customer data being compromised by fraudsters. It is therefore essential to have some form of cyber risk insurance cover and/or enhancement of data security protocols.

  • Regulatory changes – every year there are a number of regulatory changes that impact businesses directly or indirectly, which may result in fines and penalties for non-compliance.
  • Natural catastrophes – the increase in the frequency and severity of extreme weather conditions, coupled with intensifying natural catastrophes will continue to have a significant impact on businesses.

Businesses should ensure they are adequately protected against these risks to avoid incurring sever financial losses.

  • Business changes – should a business consider moving to a new location, purchasing new premises or venture into new business activities, these types of changes could have a major impact on its risks profile. As a result, the policy needs to be updated accordingly.
  • New and Enhanced products – An innovative culture has taken over the insurance industry and ever so often we see the introduction of new products or the enhancement of existing products. Get in touch with you broker to advise you on any new products that might add value to your existing insurance portfolio.

“Reviewing your policy regularly gives you peace of mind knowing that you can focus on running your business effectively, without worrying about unforeseen risks,” concludes Maupa.

Related: Insurance For Small Businesses: What Should Be Covered?

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