South Africa has one of the highest startup failure rates in the world.
According to last year’s “Emerging Companies Insights” survey released by PwC, the country’s failure rate stands at 75%.
The report also states that early-stage businesses (those under three years) are the ones that require the most assistance.
In response to this need for support, an increasing number of entrepreneurs are opening incubators and accelerators, in an effort to give startups the skills, resources and opportunities to up their chances of success.
Changing the game
Renowned programmes like US-based Y Combinator, 500 Startups and the UK’s Oxygen Accelerator are largely responsible for bringing incubators and accelerators and the work they do into the forefront globally.
That these accelerators have played a role in runaway startup success stories like Dropbox, Airbnb and Reddit make them even more attractive to entrepreneurs.
Locally, startups such as SweepSouth, PayFast, Humble Till and WhereIsMyTransport who have gone through accelerator programmes further raise the profile of these programmes.
But just what goes into creating a world class startup? And what kind of challenges do incubator and accelerator founders face in making sure they keep ahead of the curve and remain profitable?
SME South Africa speaks to Allon Raiz, CEO of Raizcorp, Lesley Williams, founder and MD of Impact Hub Johannesburg, Paul Smith, co founder of Ignitor and Andrea Böhmert, partner at Grindstone.
They share their thoughts into what exactly goes into creating the next Airbnb and why the character of the entrepreneur is often more important than the business model.
WHY WE DO WHAT WE DO
‘To improve the odds’ – In the last decade a lot of knowledge, theory and best practice has developed on how to start and launch a business that will improve any business’ odds of success.
We have realised that many South African entrepreneurs are not familiar with these ideas. Our goal is to help as many entrepreneurs apply these ideas to their business with the help of an experienced mentor. – Paul Smith
‘Quality control’ – There are many players in the South African startup space, with a plethora of them being the mom-and-pop operations that purport to be helping startup entrepreneurs, and the quality of advice and support that they offer entrepreneurs is deeply concerning to me. Raizcorp is serious about quality control because we play a pivotal role in ensuring and providing the highest quality of business support to the entrepreneurs on our programmes. – Allon Raiz
‘To fill the gaps’ – When we launched Grindstone in June 2013 we saw two gaps. Firstly, while there were an increasing number of incubator initiatives focusing on startups, nobody had a structured program for scale ups – companies that already have a certain amount of market traction and are now faced with the next level of challenges that come with taking your business to the next level.
Secondly, we talked to many other investors who were all complaining about a lack of qualified deal flow. Working with companies for a certain period of time gives you as potential investors a lot of insights into a business and the entrepreneur and therefore significantly reduces risk while providing you with the qualified deal flow. – Andrea Böhmert
“We learn from each other through diversity and make sure we’re creating relevant products and services for the local market”
‘Diversity’ – Right now when you visit different incubators and or hubs in South Africa the first thing is, sadly, there’s always one dominant race group. So we put in extra effort just to make sure that we have diversity within out network. People from all socio-economic, racial, cultural backgrounds. That is very important to us. We learn from each other through diversity and make sure we’re creating relevant products and services for the local market. – Lesley Williams
OUR BUSINESS MODEL
‘Best practice ideas’ – Our business model is simple. We find high potential entrepreneurs and give them great mentoring and exposure to the best practice ideas on how to launch and grow their companies. Our sponsors choose to work with us to either create jobs, support entrepreneurs or grow their customer base. – Paul Smith
‘No single model’ – We don’t operate according to one business model, but rather have multiple models that cater for our various clients’ needs and objectives. – Allon Raiz
“We do not pick entrepreneurs with great businesses. We do not ask to see business plans. Instead, we select according to the character of the entrepreneur themselves”
‘Attracting the best startups’ – Success breeds success. The success of any incubator/accelerator is in direct correlation with the quality of entrepreneurs it attracts. And the quality of entrepreneurs it attracts is in direct correlation with the amount of success stories the program can generate. First time around you can generate hype but then the incubator/accelerator needs to deliver success stories. At Grindstone it’s all about measurement. At the beginning of the program, the companies go through a very stringent selection process where key data across the various organizational areas are captured. – Andrea Böhmert
‘A shifting model’ – In South Africa, for the first five years of operation we had been purely operating as a for-profit model and now we’re busy shifting to a hybrid structure which means that we will have both the for-profit arm as well as the non-profit arm. – Lesley Williams
HOW WE MAKE OUR MONEY
‘Sponsorships and fees’ – We currently make money through sponsorships and ticket fees at some of our paid events, and entrepreneurs paying their own way to access our programme. – Paul Smith
‘A mixed model’ – We have multiple revenue models such as a fee-based model, a project-fee model, and an equity model. I believe that people naturally seek quality. When it’s your business that you are running and investing in, you take it seriously. You look for significant people who can ultimately help you shift your business. This model works because it bucked the system and rather than have a bums-on-seats approach, it went for fewer numbers that are of a higher quality. – Allon Raiz
‘First right to invest’ – Good acceleration services don’t come cheap. Depending on the quality of the service providers/mentors you use the cost per company are significant and something most startups and early stage business cannot afford. One model is to take equity in the participating companies but over and above certain other problems, it unfortunately can take many years before the equity can be converted into cash. Most incubators run out of cash in the process. At Grindstone we don’t take equity but rather a first right to invest subject to certain exemptions. The cost of the program are covered through various sources, one of them being sponsorships by Corporates who believe in what we are doing and want to support us. – Andrea Böhmert
“In the last decade a lot of knowledge, theory and best practice has developed on how to start and launch a business that will improve any businesses odds of success”
‘Accessible but no free lunches’ – We don’t believe in giving free stuff to entrepreneurs. If you want something bad enough you will find resources to pay for it. We charge for our services. We make it as accessible as possible so the fees a low but we charge for it. The entrepreneurs pay for the co-working space and have shared resources to work from. The second revenue stream is around our accelerator program.
The third revenue stream is venue hire – we have physical space and people who align themselves with our values of sustainability and innovation prefer to hire our space instead of going to other places. The fourth revenue stream is impact consulting – we work with corporate, development agencies and even government who want to work on key issues that are linked to impact and profitability. – Lesley Williams
HOW WE STAY SUSTAINABLE
‘We deliver’ – We have been profitable from the first year and we are confident that if we continue to deliver value to both the entrepreneurs and sponsors we believe we will not struggle to find sponsors as we grow. – Paul Smith
‘Careful selection’ – Selection, selection, selection. I can’t stress this step in the process enough. Raizcorp puts a mammoth amount of manpower, effort, and specialist expertise into our world-renowned selection process. We do not pick entrepreneurs with great businesses. We do not ask to see business plans. Instead, we select according to the character of the entrepreneur themselves. – Allon Raiz
“We need to stay relevant in the market to be able to attract the best entrepreneurs.”
’Staying relevant’ – we need to stay relevant in the market to be able to attract the best entrepreneurs. This means that we constantly need to up the game, making sure that we really add value and create the success stories. That’s a lot of pressure. – Andrea Böhmert
‘Market position and innovation’ – For us it means we continuously need to look at how we are positioned in the market and making sure that our message is clear. The other thing is that as the market grows we try to innovate on our own innovation. – Lesley Williams
