MITCHAN ADAMS: Are venture builders SA’s new venture capitalists?

We don’t need more venture capitalists to grow the country’s small business sector; we need venture builders — lots of them.

What’s the difference? Where venture capitalists generally only provide funding to established small businesses, venture builders are prepared to put in the hard yards of both financing and mentoring start-ups to the point that they can stand on their own.

This is critical in the SA context. There are two main reasons start-up companies fail: a lack of mentorship and a lack of funding. Venture capitalists give funding, but no mentorship. Incubators give mentorship, but no funding.

Venture builders bridge the gap by getting hands-on and dirty with the businesses they invest in, which gives the start-ups a far greater chance of succeeding. That’s exactly what SA needs right now as we look to build the economy and grow employment.

As venture builders we provide the seed funding the start-ups need, and then work closely with the founders to transform them into a market-ready offering that can scale rapidly and employ more people themselves.

That’s not to say there’s no space for venture capitalists. They still play an important role in growing the broader SME sector, but they are risk averse by nature. To ensure they get a return on their investments, they demand evidence of certain revenue levels, or a track record of having been in business for a certain period, usually at least three years.

The problem is that through their own stringent criteria venture capitalists have in effect dried up the “validity watering hole” in SA. There’s a huge gap between early-stage start-ups and the more established start-ups they’re generally prepared to invest in. And because about half of start-ups fail within the first two years, many potential candidates that could have succeeded with the right funding and guidance have already fallen by the wayside.

As a result, the pipeline for venture capitalists is drying up, because they’re all fighting for the same shrinking pool of candidates. If venture capitalists and venture builders were to build stronger partnerships, they could become an incredible force for good in building businesses in SA. As it is, venture builders are in effect building a pipeline for venture capitalists by creating scalable, sustainable businesses that are ready for venture capitalist funding.

On top of that, venture builders do much of the groundwork that’s involved in your typical due diligence process. Due diligence is the bane of many venture capitalists’ lives: it’s not unheard of for due diligence processes to take up to six months, often with external parties performing the due diligence at significant cost — only for the parties to walk away from the deal.

When venture builders are involved they have in effect done the due diligence already by assessing the gaps in the start-up processes and business models, and putting it in a position where it can take on venture capitalist funding.

There are three key areas where venture builders are transforming the start-up model. First, they’re helping the start-ups refine their product offerings to meet the specific needs of their markets. Lack of product-market fit is a major reason many start-ups fail. Venture builders work with the founders to stress-test their products, determine whether the concept meets the target market needs, and if there is a large enough market for it to be a viable business in the long term. This is key to ensuring both sustainability and scalability.

Second, they’re increasing speed to market by putting the resources in place to create successful operations. For some start-ups this could be as basic as moving them out of the founder’s garage to bigger premises with the right equipment.

Third — and critically — they’re exposing the start-ups they invest in to a world of expertise and collaboration. By exposing the start-ups to a range of experts from designers and software developers to strategic coaches and experienced founders, venture builders are providing the experience new companies need to grow their ventures to the point where they’re ready to fly the nest, as it were.

Ultimately, it’s all about managing risk. Where venture capitalists mitigate their risks by putting tough criteria in place, we as venture builders manage risk by getting involved in the day to day running of the business to ensure it is successful before we can exit. We then plough those profits into building the next generation of businesses.

It’s a different mindset, but we believe there is space for both. If they work together, venture capitalists and venture builders can go a long way towards solving SA’s socioeconomic challenges.

• Adams is CEO and founder of venture builder Aions Creative Technology.