Guide to Startup Funding in South Africa

–Listen to this article above, or by visiting Akro’s Podcast at Apple Podcasts or Spotify.-

Raising startup funding in South Africa can be tricky. As a smaller country on the global stage, with few consumers that have any real buying power, investors tend to write smaller cheques less often, and usually only commit at much later stages than is typical of investors in the more developed economies we so often think about when we talk about entrepreneurship (like the infamous Silicon Valley, of course).

That said, locking down venture funding is entirely possible – the investors are out there and you just need to find them.

Here’s a breakdown of where you can start your search to raise capital to start a business in SA.

(Also take a look at this post on applying for business funding)

Traditional sources of startup funding

• Family, friends, and fools

In the very, very early stages of a startup’s life, your best bet is to raise the small amounts of capital you need from family members, friends and whoever else will give it to you (yup, those people we so lovingly call ‘fools’). Usually, startups will allocate a small percentage of the authorised shares in the company and issue the shares to several individual investors, each of whom gives the startup a small amount of money to help get them off the ground.

Having too many people on the cap table can create complexity and problems later down the line, so we recommend limiting the number of investors to quite a small number if possible. If not, these problems can be mitigated by using convertible notes and other strategies.

• Angel investors

Angel investors are usually individuals or small businesses that invest in startups. Angels can be a great source of funding because:

1. They’re usually very quick to write a cheque for a startup they like, as they don’t have any processes and stringent due diligence checks they need to adhere to;
2. Many of them are entrepreneurs themselves, and can give great advice to founders; and
3. They tend to add more value than institutional investors because their benefit is 100% tied to the success of the startup (unlike institutional investors, who get paid just to manage the capital even if their investments don’t work out).

As soon as you take on funding from angel investors, the responsibilities you will have to deliver on your promises increase dramatically. So rather work within your means until you absolutely need to raise money before taking any funding for your startup from angel investors.

That said, South Africa has many angel investors – you just need to find them, and pitch them, and keep pitching them. Here’s a few places you can start your search:

Dazzle Angels – The leading female-focused angel network in the country, probably the continent.

Jozi Angels website – Probably the most well-known, successful network of angel investors in SA, and definitely worth a call.

ExpertHub’s comprehensive list of angel investors – A great place to find some of SA’s more prominent angels – just start making calls and sending emails!

Angel.co’s investor listings – One of the most extensive and maintained investment portals.

• Venture capital

Venture capital is an overly-used term. VC refers to institutional investment funds that invest into startups and small businesses. It’s usually the first institutional money that entrepreneurs take on.

When you start your search for startup funding, you should probably look for angel funding before seeking out venture capital. This is because:

1. VC funds take way longer to make investment decisions than angels, and you’ll be required to go through a lengthy due diligence process (where the investors prod and poke at your business to check how good it really is);
2. Once you’ve taken on institutional money, you are completely obliged to spend every waking moment making that money work productively – it’s somebody else’s money!;
3. VC’s almost always invest in amounts in excess of ZAR5 – 10 million, as they need to deploy a lot of capital. So if you’re just starting out, and can’t quite make a case for needing so much capital (or aren’t ready for it), you’re likely to spend a ton of time working for funding that you’ll never actually close; and
4. The most common reason is that you’re probably not ready for VC money just yet. By the time you raise VC money, you need to have real traction. VC’s don’t usually invest in very early-stage companies (when they say ‘early stage’, what they really mean is ‘you’re not profitable yet, but you’ve got quite a bit of revenue’).

All said and done, if you are in fact ready for venture capital, then take a look at some of the suggested places to start your search below. Remember, venture capitalists see dozens of pitches every day – it’s your job to give them something clear and concise.

Silicon Cape Initiative’s list of VC’s – The Silicon Cape Initiative is a group of awesome people whose job it is to connect entrepreneurs with the right people to help the startup ecosystem grow.

Kingson Capital – One of SA’s biggest private VC funds, with an open mind and deep investment thesis, deploying only to South African startups.

Empowerment Capital – A forward-thinking fund focused on sustainability and social transformation, doing some incredible work in the VC arena.

Non-traditional sources of startup funding

• Crowd-funding

Crowd-funding is a relatively new way of raising capital for your startup. But you have to be sure that your company is ideally suited to crowd-funding. It’s not just a simple case of slapping up a profile on a crowd-funding website and watching the public send you money… It’s a good deal more involved than that.

And what’s more, is that the type of business you are starting should have mass appeal. Business-2-Business startups, and those with a more complex offering, almost never work out on crowd-funding platforms.

But if you have a consumer product or something that looks good in the flashy lights of the public eye, then consider this option amongst the others. Not only can you raise equity financing this way, but you could consider doing some kind of ‘pre-sales’ on a crowd-funding platform, such that you can actually bring in revenue before building your product.

Here are some suggested places to start your search:

Thundafund – With well over 1000 projects funded, Thundafund is SA’s largest crowd-funding platform.

Uprise – SA’s only equity crowd-funding platform, and a thought leader in this space across Africa.

• Self-funding

Ain’t nobody stopping you from being resourceful! If you’re reading this then you’re probably not in a position to fund your business with your own capital (and if you are but you won’t do it, then you should probably rethink this whole startup thing).

So while you may not have the capital to fund your business yourself, there is still a mountain of things you can do to self-fund. The founders of AirBnB initially sold cereal (yes, cereal) to fund their platform, because they didn’t need so much money to get stock of some cereal… Look at your business and see what you might be able to do to help fund your real business.

Startups do require a lot of time and attention, but they don’t have to start that way. There are stories upon stories of people who were moonlighting for months before finally getting their businesses to a stage where they felt ready to raise funding and jump in full time. Consider how much you want this – if the answer is a lot, then you could simply work a day job to pay the bills, and have your ‘second job’ be to build the business.

This may sound like cliche advice, but it’s so underrated. People tend not to truly explore their self-funding options because it feels like you can’t start until you raise money. You probably can. If you’re prepared to work for it.

Types of venture funding deals

So now it comes to doing a deal, and you’re not sure what deal to strike! We’ll touch on 2 broad categories of deals, convertibles, and equity.

• Convertibles

Convertibles are our favorite type of deal for very early-stage companies. Basically, a convertible (such as a ‘note’ or a ‘SAFE agreement’) is an instrument that allows an investor to give you money now, but only get issued their shares later, and only if you raise a round of equity financing. To compensate them for giving you money before you’ve raised an equity financing round, the convertible investors are usually given a discount, such that when you do raise a round of equity funding in the future, they get issued more shares than they otherwise would have.

This is a great option to consider, for a number of reasons, including:

1. For the startup, it is too early to peg the company at a specific valuation for investors to buy in at. Issuing convertibles is a way for them to still take in funding now, but not have to peg down their valuation just yet (i.e. not give away too much equity before the company is an actual thing);
2. For the investor, they will get a discount on their investment when the startup does raise an equity round. Because of this, the founders are incentivized to maximize the valuation of the company using the convertible investors’ money, because they will then have to give away less equity. In the long run, these aligned incentives are good for everybody.

If you can find willing investors, consider getting them to invest in convertible instruments like convertible notes and SAFE agreements (simple agreements for future equity).

• Equity

Equity funding is the de facto choice for most startups, though as above we highly recommend considering convertibles if you are an early-stage startup. In short, equity funding is the issuing of shares in exchange for cash.

This comes down to negotiation on valuation between the investor and the startup. If your startup’s numbers (revenue, revenue, revenue) are looking good, then you’ll have a lot of bargaining power here. If not, selling the dream can sometimes net you some capital, but you’ll almost always end up giving away more equity for less. So we recommend getting by as much as possible before executing around like this.

Fundraising advice

So there’s a summary on how to get your hands on capital to start a business in South Africa. To close off, here’s some advice from founders we’ve worked with at Akro:

Kopano Mere (LinkedIn), Impeelo:

‘Fundraising is and should be a mutually beneficial process, so never feel like a charity case when asking for money. Yes, the investor has the money but you have the investment opportunity. That’s your leverage.’

Jason Basel (LinkedIn), EduConnect:

‘Vet your investors extensively before doing deals with them. It’s so tempting to take the first money that comes your way, but you want to make sure you’re in business with people you think are amazingly good at what they do. Just check out their LinkedIn profiles, Google their names and see what news articles crop up, and definitely have a cup of coffee with them a few times to see what type of people they are.’