The venture capital is there: it's the entrepreneurs that are missing

Johannesburg, 23 July 2003 - There is no shortage of private equity or venture capital funding for promising new businesses in South Africa, but the country's stock of potentially successful entrepreneurs is so small that the available money exceeds the viable investment opportunities.

This is the view of Treacle partner Konrad Fleischhauer. Treacle is a specialist venture capital and private equity business focused on the technology sector, which has significant holdings in Datacentrix and ERP.com among others.

Fleischhauer concurs with the view expressed recently in Business Times that new businesses have a low hit rate in securing funding, but disagrees that the contributory causes are a shortage of venture capital and the poor quality of business plans.

The money and its providers are certainly there. There is approximately R8.7 billion available for investment in unlisted businesses of which approximately R1 billion is earmarked for investment in venture capital opportunities according to the annual venture capital and private equity survey conducted by KPMG.

“The problem isn't that would-be entrepreneurs lack the know-how to prepare sophisticated business plans calculated to be irresistibly tempting to capital providers - it's that the vast majority of new businesses have key deficiencies, such as weak underlying business fundamentals, and the lack of an adequate range of business skills. Another major stumbling block to provide funding is the unrealistic pricing expectations of entrepreneurs.

Since Treacle was established in October 2000, it has considered more than 500 applications for finance, but has made only five investments. At present, only some 30% of its available funds is invested; the rest is still awaiting acceptable suitors.

“We never shy away from seeing entrepreneurs without formal business plans,” says Fleischhauer. “In fact, of our five successful applicants so far, only one had a business plan when he approached us. The one thing we do require is a financial statement, including projections. For the rest, we use discussions to assess the quality of the business concept and the ability of the management team to commercialise it successfully.”

Fleischhauer says that if all else is well, price can still be a major stumbling block. Over the past few years, many of the better-quality concepts initially failed to attract venture capital or private equity because the entrepreneurs had unrealistic pricing expectations.

“We like entrepreneurs who value themselves and their businesses highly. It's important for them to understand, however, that early-stage investing is a very high-risk business, and the providers of capital for this purpose will naturally require returns that are commensurate with the risk they are taking,” he says.

In the technology sector, where Treacle is focused, there is a common misconception that great ideas are somehow enough.

“Technology companies need the same basic fundamentals as any other company to build a sustainable business. These include a good product or service for which is there a real demand from customers, and actual differentiation from competitors,” he says.

“Let's face it, South Africa will do well to give birth to 1% of the successful new technology businesses that are developed worldwide over the next 10 years, given that 1% is the general level where we punch in the global economy. This means that it is unlikely that more than 10 new South African technology companies, with their own intellectual property, will make a global mark over the next decade.”

“Only a small handful of the most highly talented entrepreneurs will succeed. It's our job at Treacle to find the promising few, and to nurture them with capital, contacts and strategic advice.”