Thaheer Mullins serves as a partner at Savant Venture Fund 1, South Africa's primary deep-tech, science & engineering venture fund. Intrigued by the distinctive approach of Savant’s investment strategy, I contacted Thaheer to learn more about it.
Our conversation delved into the pros and cons of specialising in hardware tech venture capital, explored common pitching errors made by entrepreneurs, and brainstormed solutions for addressing the technical talent gap in Africa.
How did you and your team arrive at your current investment thesis? How has it evolved, and what factors influence its development?
The origin of our focus on supply science and engineering as a theme, stems from the experiences of our founders, Nick and Kate. In 2004, they established Savant, with Nick bringing a civil engineering background and an MBA, and Kate holding a PhD in bioscience and an MBA.
Working at a life sciences incubator, they recognized the need for a broader perspective to identify high-quality companies to support. This led them to adopt a more agnostic approach, expanding beyond life sciences to include engineering and industrial sectors, aligning with their core skills in science and engineering.
For about two decades, we operated as an incubator, supporting businesses within this theme. When we launched our fund four or five years ago, it was a natural progression for us to transition into a VC firm, building on our experience and expertise. The evolution over the years has been influenced significantly by technology, shifting our focus from purely physical advancements to the integration of software and hardware. This shift is evident in our portfolio, which now includes investments in an IoT-focused manufacturing company, showcasing the importance of the combination of software and hardware in gaining a competitive edge.
While our core remains deep tech, we've expanded to include certain software investments. However, our focus on software is strategic, emphasizing infrastructure rather than consumer applications. We aim to support innovations by providing the foundational elements that empower future software developments. For example, we invest in technologies that serve as the backbone for marketplaces and applications, ensuring more efficient and effective functionality.
Can you share a success story of a Savant portfolio company in the hardware tech space and the key factors that contributed to its growth?
Sensor Networks is a success story that comes to mind. Currently, they are performing exceptionally well due to their unique approach. They address pain points for both institutions and end-users, attracting two distinct customer groups. Some customers directly approach them, while others come through institutions that eventually acquire them. This dual-customer strategy has proven to be effective, and their scaling efforts are gaining momentum.
A key factor contributing to their success is the senior entrepreneur leading the company, who has exited three ventures before. With a proven track record, this founder, Mark Allewell, possesses a remarkable ability to adhere to business strategies, build successful enterprises, and maintain a cohesive team. The efficiency and camaraderie from a previous business have seamlessly transitioned into this venture, further enhancing their growth prospects.
Beyond the people aspect, another crucial element of their success lies in their customer-centric approach. Before developing their solution, they engaged with potential customers who provided insights into their specific needs. Initially, they presented a solution to a perceived problem in the market, but customer feedback redirected their focus. By listening to customers and adapting to their requirements, they gained a clear understanding of what the market truly demanded.
Their strategy of building with the customer in mind, incorporating the parameters and solutions desired by their target audience, has been a key driver of success. Customers effectively guided the development process by specifying the conditions under which they would make purchasing decisions. This approach not only allowed them to align closely with the needs of their initial customer but also positioned them favourably against competitors, leading to the development of a scalable product and a thriving business.
What are the key advantages and disadvantages of being a dedicated deep tech, science & engineering VC firm compared to broader-focused funds?
It's accurate to say that our approach has both advantages and disadvantages. Let me begin by highlighting a couple of drawbacks. To start with, our focus is quite specific, meaning some opportunities might appear promising but fall outside our scope. We either can't explore them or, if we do, we might have to decline due to misalignment with our core interests. Although these opportunities can be enticing, we are constrained by the boundaries of our chosen niche.
Another challenge is that it's not always easy to find co-investors. Unlike sectors like fintech, where numerous venture capitalists often collaborate on rounds, our niche might not attract as many co-investors at any given time. This requires additional effort on our part to bring others on board. However, it's worth noting that most deals in our fund involve co-investments, showcasing our ability to navigate this challenge, particularly in the early stages.
Now, let's explore the advantages. With over 20 years of experience in our specific vertical, we have gained valuable insights into trends within the science and engineering domains. This familiarity enables us to identify potential red flags and nuances that may not be apparent to others. We often serve as a resource for individuals evaluating companies outside their expertise, providing a unique perspective that can lead to investment opportunities.
Furthermore, our niche focus benefits the African market, which is evolving as a developing and emerging economy. Being a prominent player within our niche positions us as a key authority, allowing us to capitalize on the growth within this specialized domain. While there are challenges, overall, having a well-defined niche like ours proves advantageous in navigating the complexities of the investment landscape.
Why did Savant choose to focus on post-revenue startups with the Build Programme? How does this align with your overall mission?
As a fund, it's essential to build a robust pipeline, ideally a proprietary one and our Build program plays a crucial role in this. The key criterion for investing is identifying product-market fit or market validation. When a company shows tangible sales and proves that customers are willing to pay for its product or service, it indicates viability.
This initial validation allows us to conduct further assessments. We evaluate factors such as scalability, profitability, margin analysis, and the company's growth prospects. We delve into the industry landscape to identify critical gaps in strategy or thinking. As part of the Build program, we actively contribute to evolving and developing these perspectives. The goal is to guide companies through addressing these gaps and becoming fundable.
By the end of the Build program, companies are expected to have resolved key issues, making them attractive for commercial funding. This process enables us to justify investments to our investors by demonstrating that these early-stage companies have a viable path to success. Even if we aren’t able to invest in certain companies by the end of the programme, these ventures will still be better positioned for success with other investors.
The overarching objective is to create a pipeline of investable startups. Our first Build Programme has shown success, particularly among companies that have undergone validation, gone through trials, and have customers willing to pay for the innovations they're bringing to the market. This approach ensures that the startups in our pipeline have a solid foundation, increasing their chances of success both with our investment and in the broader investment landscape.
When evaluating hardware tech startups for the Build Programme, what are the most critical aspects you focus on beyond the typical financial parameters?
Regarding the Build program, the key determinants for selection are not solely financial parameters but primarily non-financial ones. In the early stages, the composition of the team is crucial. A lack of a well-rounded team can hinder a startup from getting started. Ideally, we prefer to see at least two team members—one with commercial expertise and another with technical proficiency. This combination enhances the overall prospects of success.
Coachability is another critical factor, applicable throughout various stages of development, from seed funding to Series A. Effective communication and information sharing form a two-way street between us and entrepreneurs. A willingness to share information and apply feedback is indicative of coachability. We have observed that companies unwilling to engage in this dynamic tend to face challenges and are less likely to succeed.
A balanced team, combining commercial and technical skills, contributes to the success of startups. Additionally, we value "skin in the game"—founders making sacrifices, whether financial or non-financial, to ensure the success of their companies. This aligns their interests with those of investors, demonstrating a commitment to success.
The concept of "skin in the game" is particularly significant given the challenges associated with building startups in this market. The inherent difficulties, including microeconomic factors, regulatory hurdles, and talent issues, make entrepreneurship a formidable task.
Demonstrating commitment through personal sacrifice becomes a crucial criterion for consideration in the Build programme, acknowledging the resilience required to navigate the complexities of the startup journey.
What are the biggest challenges for early-stage hardware startups in Africa? What solutions can stakeholders implement to address these?
The initial sale of hardware, unlike software or services, often involves convincing someone to make a purchasing decision rather than opting for an immediate subscription or rental model. This may require a blend of selling devices and subscription services. The challenge lies in persuading the first customer to make that initial purchase, as the perceived value is only realized through the utilization of the product or service. Some founders address this hurdle by offering free trials, allowing users to experience the value before transitioning to a paid model for expanded use cases.
Overcoming the challenge of finding the first customer typically requires presenting an immensely superior value proposition. This is crucial, especially when introducing technologies that involve replacing or installing new systems. The value added must be significant, leading to a substantial improvement in efficiencies within the value chain.
Once the hurdle of acquiring the first customer is overcome, it becomes a golden opportunity. The initial customer tends to adopt more solutions, relying on the technology, and the business becomes entrenched. Competitors would face difficulties unseating the established provider, as doing so would require an even more superior value proposition and a price point compelling enough to prompt a rip-and-replace scenario.
While securing the first customer presents a challenge, it also results in a significantly more resilient business case. Beyond the initial sale, the visibility gained from the success with the first customer attracts interest from the broader industry. This attention often leads to more opportunities as others in the industry take notice and express interest.
What are some common mistakes you see entrepreneurs make when pitching to VC firms?
Entrepreneurs often make certain mistakes when pitching to VC firms, and one of the common ones I observe is when they come seeking funding without clearly stating their company's valuation. To me, this omission signals potential gamesmanship and raises concerns about transparency. If you believe your company holds a certain value, state it outright. However, it's crucial to research the investor and avoid overinflating the valuation, as some investors may immediately disengage if they perceive it to be beyond their comfort zone.
Gamesmanship and transparency are particularly significant for me. I view it as a signal of the entrepreneur's willingness to be open and forthright throughout our partnership, which may span five to ten years. I prefer not to spend that extended period guessing about the company's status or intentions.
Another mistake involves entrepreneurs presenting projections labelled as conservative, arguing that they don't account for growth opportunities that they have not yet engaged with directly. While it's acceptable to present a conservative estimate, there will still be scepticism from investors. The projections will get discounted, regardless. Instead, it might be more effective to showcase ambition and present the best-case scenario performance.
This approach allows VCs to evaluate the potential success of the venture, and during due diligence, they can investigate further by speaking with customers and prospects. By presenting an ambitious yet realistic projection, entrepreneurs can put their best foot forward, highlighting the company's potential success under optimal conditions.
How do you see the relationship between VCs and entrepreneurs evolving in Africa?
I'm uncertain about the future evolution of the founder-investor relationship, but I hope that VCs will become more professional and understanding. VCs, much like entrepreneurs, go through the process of creating pitch decks and seeking funding. Every fund raised involves a pitch, whether in person or over Zoom calls, to sell the business case and thesis. The current extended period of fundraising is causing VCs to experience delays and challenges, similar to those faced by entrepreneurs.
I hope that this shared experience fosters a greater sense of closeness and a common emotional standpoint between entrepreneurs and VCs. The idea is that through their mutual understanding of the challenges in fundraising, engagements between entrepreneurs and VCs can happen from a perspective of brotherhood and sisterhood.
However, I acknowledge that this may be wishful thinking, and I'm uncertain about the specific direction the relationship between entrepreneurs and VCs will take. It could be influenced by what proves successful for specific firms. If a particular approach to managing relationships works well for a firm, it's likely to continue. At this point, it's too early to predict a definitive trend in how relationships between VCs and startups will evolve.
Talent acquisition can be a major hurdle for hardware startups. What strategies do you recommend for building and retaining strong technical teams?
Talent acquisition is not solely a challenge for hardware startups but extends to all startups, including B2B SaaS, deep tech, and various other sectors. Across the continent, a significant disparity exists where individuals are either doing well or not doing well, leaving a thin in-between space. Consequently, startups face fierce talent competition not just within their niche but also against established entities such as major mining companies and banks.
For startups, retaining talent is crucial, and one effective strategy, particularly during fundraising rounds, is to establish Employee Stock Ownership Plans (ESOPs). Encouraging staff to participate in fundraising rounds by investing their own money in the company fosters a vested interest. Employees become more dedicated to the company's success, often going above and beyond, taking initiatives, and leveraging their networks.
In the early stages, building a balanced founding team is essential. Ensuring that team members are adequately incentivized for the long journey involves setting up equity structures where everyone starts with a particular percentage that vests over time. This approach retains a sense of ownership among the founders and aligns their interests with the company's growth.
By implementing these strategies, startups can navigate talent challenges in the super early stages, where retaining skilled individuals is crucial for scaling the business.
Beyond South Africa, which other African countries and regions do you see holding significant potential for hardware innovation?
Certainly, East Africa, particularly Kenya, has been witnessing some highly interesting developments. This can be attributed to a combination of factors, including increasing access to capital, thriving universities, extensive international travel, and a conducive environment for innovation.
Moving to the West, Ghana has also seen notable advancements in both software and hardware innovation. Additionally, in North Africa, countries like Egypt, Morocco, Tunisia, and even Algeria have shown a considerable presence of science and engineering companies. It's fascinating to note that unexpected places on the continent often harbour interesting developments, and being physically present in these locations is crucial for uncovering such opportunities.
Furthermore, looking at emerging industries, Senegal is anticipated to yield promising results in the super early stages. While these developments may not manifest immediately, there's an expectation of significant progress over the next five to ten years.