Legendary entrepreneur, angel investor, Dragon’s Den South Africa judge and all-round nice guy Vinny Lingham is in South Africa this week and Stuff magazine’s editor Toby Shapshak got a chance to sit down with him and talk about the startup scene in South Africa, what local entrepreneurs get wrong (and right) and how good investing is more like bookmaking than gambling.
Shapshak’s previous interviewed Lingham for the Mail & Guardian’s annual 200 Young South Africans list, calling him “a man as irrepressibly optimistic as he is irrepressible”. He also cornered him in Austin, Texas at 2013’s SXSW conference for an impromptu street interview where he got his name wrong. Thankfully, this time Shapshak got his name right, which made for a good start.
“With Dragon’s Den we see 80 pitches in 10 days, which is pretty gruelling,” Lingham says. “The short form you see on TV is pretty heavily edited, with discussions that can take two hours edited down to 15 minutes.” Lingham says despite the range of pitches he and the other Dragon’s Den judges have seen, on the whole there’s a “very poor spectrum of entrepreneurs coming out of the show,” but adds that this is “typical of a first season”.
“The initial challenge is getting people to understand the principals of startups,” Lingham says. “More sophisticated entrepreneurs tend to show up in further seasons once they have a better idea of what’s expected.”
Nonetheless, Lingham says he invested in ten businesses that pitched during the show. Lingham has invested in startups since the early days of his own career in the tech sector, and says one of the advantages of this is that people now tend to take him seriously when asked for advice. He’s not only built successful businesses like online web-design company Yola and loyalty and gift card service Gyft, but he’s invested in myriad businesses over the years, “some of which have done well and some of which have failed”.
One of the startups Lingham is most excited about is South Africa’s SweepSouth, an online service that allows users to book cleaners for their homes and that was recently one of only two companies accepted into 500 Startups, a Silicon Valley-based venture capital fund and startup accelerator.
“SweepSouth’s founders are amazing entrepreneurs,” Lingham says. “They sold their houses to make this business work, they’re heavily focused on customer engagement and they’re metrics-driven. It’s clear they care so much about the business. All they needed was some seed capital.”
Lingham says he’s learnt “the hard way” that it’s more prudent to make lots of small investments than it is to make a handful of big ones. “You spread your bets,” he says, adding that he particularly likes working in investment syndicates like Silicon Cape’s 4Di Capital, because this spreading of bets “gives more businesses a chance” and means only one needs to pay off.
“If you invest an equal amount in 10 businesses only one of them needs to give a 10x return for you to break even, and then anything the other nine make you is gravy,” he says.
The approach to investing in South African companies is different to that of investing in US-based ones, Lingham says, because the failure rate here at home is so much higher, making it impossible to give companies “the sort of valuation they’d like”.
Lingham says too many South African entrepreneurs are too reluctant to give up equity when looking for funding. He suggests startup entrepreneurs “go out, give a low valuation, get the five best CEO’s they can find to invest R100 000 each for a combined stake of, say, 20% equity, and that way, if [the business] works the entrepreneur has enough money for their next venture, and if not, someone else has paid their school fees”.
This notion of “school fees” is something Lingham touches on often. “You need to learn how to build a company, and that might mean having a few unsuccessful ones before you get it right. If you can get someone else to pay for that it’s immensely valuable.”
Risk averseness, he says, often stymies South African entrepreneurs. “I’ve started three companies now, and every time I’ve had to put my entire financial life on the line,” Lingham says. “Sometimes you have to scupper and recover when it doesn’t pay off. And sure, some people don’t want to be serial entrepreneurs, they don’t want to give away equity but instead they want to be career businessmen and focus on building one business.
“There’s nothing wrong with that, but so many entrepreneurs come on [Dragon’s Den] with a half-baked idea and then don’t want to give up equity. If someone’s taking a risk on you, you need to get investors on board.”
Owning the biggest stake in a business isn’t the be all and end all when it comes to entrepreneurship, though. “Aaron Levie from Box only owns 4% of the company,” Lingham says. “Mark Zuckerberg only own 20% of Facebook. Why? Because he had to give up equity to get investors on board so that he could build the business. It’s not about equity, it’s about the value you can create. I’ve never owned more than 50% of my companies by the time I got to the exit point.”
Lingham’s advice for local entrepreneurs is to optimise their businesses “for success not percentage”.
“You don’t want to hold 90% of something that goes nowhere,” he explains. “I’d far rather have 20% of a rocket-ship.”
Asked whether his brand of spread betting is like gambling, Lingham says he thinks of it more like bookmaking, “and bookies always win”.
