One of my favorite pastimes in recent years has been scouring the websites of top US venture capitalist (VC) firms to peak under the hood. Quite surprisingly, most of the top VCs in the world are transparent about their portfolio investments – with the likes of a16z, Craft Ventures and Bessemer sharing investment memos or detailed blog posts as to why they’ve invested in certain businesses.

Bessemer goes as far as to publish their anti-portfolio – the companies they didn’t invest into!

More recently, I’ve focused my radar on local VC portfolios to look for patterns and insights into the state of the VC industry in South Africa.

As I worked through 38 portfolio companies, clear trends started to form – some surprising, some predictable, some valuable and some not.

So, here are my top 3 findings:

  1. Most VC-funded startups are business-to-business (B2B) companies

In other words, they offer products and services aimed at corporates rather than individuals.

Pure B2B companies make up 56% of the local portfolio companies, with the other 44% of companies having either: (i) a direct-to-consumer (D2C) business model; (ii) a business model that is highly dependent on consumer transaction volumes like B2B2C companies; or (iii) two-sided marketplaces with a consumer on one side.

Pure B2C companies (no connection with another business) only represent around 20% of the portfolio I looked at.

  1. A third of VC-funded companies have been able to scale overseas

This isn’t consistent with a generally accepted view that scaling overseas is a prerequisite for raising funding, although it is possible that the other two-thirds are still planning a global expansion and were funded on this long-term basis.

Digging deeper, I was surprised to find that more than 50% of B2B companies have been able to expand globally, whereas only around 10% of B2C companies managed the same feat. B2C is bringing the average down significantly.

  1. South African VCs invest where they eat

Only 13% of local VC investments are portfolio companies that have no South African link or footprint. Good examples of this are Sortd (https://www.sortd.com/) and mmhmm (https://www.mmhmm.app/)

Want funding? Build B2B and scale globally

In my opinion, this is the most clearly observable insight from the data.

George Orwell might not have been a venture capitalist, but he did have some sage advice:

“All animals are equal, but some animals are more equal than others.”

This profound statement seems to ring true in a South African startup context. Not only have B2B companies been more successful in getting funded, but they’ve also had more success in crossing the ocean in search of better (and in this case bigger) markets.

But what makes B2B so appealing for VCs?

  1. Software businesses, and particularly software-as-a-service (SaaS) companies have great business models and unit economics:
  • Annual recurring revenue (ARR) – if you think cancelling your Netflix subscription is a hack, then try cancelling your CRM software (like SalesForce) or in a local context your customer journey and marketing campaign software (Inquba and Mobiz). General market benchmarks are 90% gross retention and 100% net retention (which includes upsells and cross-sells into existing clients).
  • High gross profit margins – the market benchmark is a gross profit margin of around 80%, with the only real cost of sales being hosting and support services.
  1. Opportunity to sell to world-class corporates without getting on a plane:
  • There are numerous world-class companies in South Africa, especially within the mining and finance industries which laid the foundations for modern South Africa, and other established industries like telecommunications (MTN, Vodacom), retail (Woolworths, Shoprite) and manufacturing (like SAB).
  • These corporates provide B2B companies with the perfect breeding ground for a proof of concept and to test product-market fit. If a startup can build a product that these corporates will use, chances are good that it can be scaled to offshore customers in more developed countries.
  • A perfect example of a local startup that has won premier international clients (like NASA and Target!) is Snapt, a technology company that we learnt more about in Episode 4 of The Startup Junto where we had the opportunity to interview co-founder Doug Cherry.
  1. Consumer demographics in SA are unique in a global context:
  • South Africa has a population of around 60 million people, making it only the 6th largest population in Africa, while Nigeria, Ethiopia and Egypt all exceed 100 million people and are attracting foreign investors seeking growth under the “emerging middle class” thesis.
  • With slow economic and population growth, the highest Gini coefficient in the world (a measure of inequality among citizens), 20% of South Africans living below the extreme poverty line of R800 per month and just 25% of taxpayers paying 80% of all personal income tax collected in the country, the South African consumer landscape is unique globally.
  • At the top end of the market, founders would need to compete with international brands that tap into South Africa’s wealthiest people, consumers who are brand conscious and have strong buying power. The death of Edcon and Stuttafords against a competitive onslaught by the likes of H&M and Zara demonstrates how difficult this is.
  • At the other end of the spectrum, tech-enabled businesses are solving problems for poor South Africans, often assisted by government grants or development funding. These social enterprises are regional by design and not able to scale globally.

As with every rule, there are exceptions. Perhaps our best consumer export is Nandos, a wonderful story of a South African brand conquering the world. Veldskoen is achieving exciting things, taking shoes manufactured by a family-owned factory in Durban and marketing them globally, assisted by a celebrity partnership with Ashton Kutcher and Mark Cuban and endorsements by the likes of Prince (?) Harry.

On average though, we can reasonably conclude that B2B startups have a better chance of being funded in South Africa and scaling overseas than their B2C counterparts. As a perfect recent example of what can be built here, Cartrack has moved its listing from the JSE to the Nasdaq and looks set to grow quickly in offshore markets under its new listed name of Karooooo. The name is a clear nod to the company’s country of birth.

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