Few techies create massive companies

2014-04-23 14:26
The 88mph incubator is focused on emerging markets. (Duncan Alfreds, News24)

The 88mph incubator is focused on emerging markets. (Duncan Alfreds, News24)

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Cape Town - Internet technology has allowed small teams to create incredible value in companies, an investor has said.

"The key that we try and explain to investors is that you can build quite valuable companies with a few people," Kresten Buch, managing director of 88mph told News24.

The company has a South African office in Cape Town and funds technology start-ups with up to $100 000 in exchange for an equity stake of at least 10%.

The incubator model has proved to be an effective way of growing start-ups and one from the 2013 round of seed funding, Apex Peak, managed to raise an additional $2.4m.

Internationally, WhatsApp recently made headlines when Facebook acquired the messaging firm for $19bn including cash and stock.

Small teams

Instagram was also bought for $1bn, raising fears by some that a new tech bubble was growing.

"If you start mapping out sales prices divided by staff, it's definitely been going up," said Buch, dismissing those fears.

He said the nature of the internet technology means that few people could potentially build big companies.

"That of course means that relatively few brilliant people can create a lot of value and for us at 88, we're all about how can we create something that attracts the best people so we can invest in the best people."

Small teams focus their energies on start-ups aimed at emerging markets at the 88mph incubator. (Duncan Alfreds, News24)

Many of the start-ups at 88mph consist of two to four people who work on identifying ways that technology, and increasingly, mobile technology can be exploited to offer a service.

"I think the value of the smart people is increasing because the businesses are very scalable," said Buch.

Apex Peak began with seed funding at the accelerator, and has moved to Singapore to secure additional funding. The company facilitates trade of invoices so that small businesses can free up capital based on what they are owed.

Billion dollar deals

However, despite the appeal of the business in an emerging economy, Buch warned that it might be too early to consider that Apex Peak is at the level of a firm like Instagram or WhatsApp.

"I can't why Apex Peak can't be a billion dollar company, but it's a bit premature.

"We're not just investing in companies to get that billion dollar start-up - that's not the point. We invest very early so even if these start-ups get sold to $2m, $3m, $5m - it's still a good result for us," he said.

Buch argued that billion dollar deals in technology start-ups were the exceptions and that more money was to be made with companies being sold at far lower prices.

"If you look at the US, everybody always hears about WhatsApp, Facebook, Google - but they are the outliers. A lot of start-ups get sold at $10m to $15m - you don't hear about them but there's a huge group of start-ups being sold there.

"That means that the accelerator model of going in early - you'll still make a return if you get two or three companies sold."

Besides Apex Peak, two other start-ups from 2013 have secured follow-on funding: MyDoorHandle and Zap a Cab.

Buch said that the incubator focused on SA, and despite some success, the market was too small to justify huge valuations.

"We have start-ups that are focused on the South African market and the market just isn't big enough to justify a billion dollar valuation."

- Follow Duncan on Twitter
Read more on:    technology  |  mobile  |  mobile apps

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