By Adam Wakefield

Speaking at NATIVE VML’s Sandton offices on Wednesday, 19 October, Lourens told the packed room that given the intense agenda over the five days, he was only able to visit around four companies a day. The trip may have been truncated, but what Lourens learned and observed far exceeded its physical bounds.

It is common knowledge that Silicon Valley and innovation are synonymous with one another, but Lourens interrogated why this is the case.

To do so, he compared the Valley’s ecosystem to a jet engine, with four distinct parts: Intake, compression, ignition, and exhaust.

“The intake is the ideas. There are people running around the valley to explore ideas that have never been done before. They are compressed into a start up, so the fuel is the money. The result is often growth and the outcome is an exit,” Lourens explained.

“This could mean a public offering or listing like Facebook or it could mean a sale to an existing large technology organisation. The Valley massively accelerates this process.”

One of the companies Lourens visited during his trip was incubation firm Plug and Play Tech Centre, which reviews applications from 6 000 start-ups a year seeking funding. Of those 6 000, the firm only funds 400, with that seed funding sometimes being as low as $25 000.

It was during this visit, followed by others, that Lourens learned what it took to be successful in Silicon Valley. It came down to three factors: The team, the technology, and traction.

The team is first and foremost because venture capital firms look for a person or group of people who have boundless ambition to do something huge. “No one is interested in doing something that is an increment,” Lourens said, with Google talking about the notion of 10x.

Beyond ambition, the team or person’s track record is of the utmost importance. Entrepreneurs start many businesses in their lives, and the track record of a CEO is one such factor.

“If you’ve proven to have overcome adversity, then your likelihood of being funded goes up exponentially,” Lourens said.

A further question asked is whether a start-up can achieve distribution before an incumbent attains innovation, with marketing and a “shiny interface” not a differentiator.

Firms like Plug and Play do not necessarily know what will be successful and what will fail. This is why they use what Lourens called the “theme of volume”. Instead of making 10 big bets on start-ups, they prefer to make 1 000 little bets as to spread their risk.

Returning to his jet engine analogy, once a start-up receives funding, they enter compression, with their funders “not gentle” in the way they deal with start-ups. “Here is the money. See you in a month,” was how Lourens described the dynamic.

Another characteristic that serves start-ups well is resilience. If you are not resilient, Lourens said, you are not going to make it. A case in point, the founders of Airbnb were rejected 68 times before they were funded.

Lourens described failure in Silicon Valley as a mathematical certainty. Of the 6 000 start-up pitches Plug and Play hear a year, only a fraction of the 400 they invest in a year make exits in excess of $100 million.

“89% don’t make the headlines. If your headspace is 89% and is going nowhere, this does change your perception a little bit,” he said.

When it comes to technology, research and empathy are key, so that problems worth solving can be identified, especially as they are often ambiguous.

The sectors being funded are also changing. Five years ago, it was social media platforms and apps. Today, “exponential technologies” such as the Internet of things, big data analytics, financial tech, and health sciences are being targeted.

Regarding traction, metrics are very import, especially as there are no precedents indicating whether a start-up will succeed or not. Venture capital firms look at annual recurring revenue (APR, cash flow, churn/upsell/retention, the magic number (APR for the period versus sales and marketing investment), and CAC ratio/payback (months to recoup the customer acquisition cost) when assessing traction.

There is also luck, often disguised as timing, with Lourens quoting O’Reilly Media founder Tim O’Reilly, who said, “Being too early is often indistinguishable from being wrong.”

So can Silicon Valley be replicated in South Africa? Given the scale, speed, skills, and intellect at which the valley operates, Lourens is not so sure that there are lessons to be learned. Those lessons speak to how South Africa should create an environment that fosters those factors of success: team, technology, and traction.

This includes having an environment that tolerates failure, an aspect Lourens felt South Africa has not embraced. Nor can there just be one idea, there needs to be a portfolio of ideas, driven by a single person or team, and not by a committee.

Quoting founder and chief executive of growth strategy firm Jump Associates, Dev Patnaik, Lourens said, “Leaders get the companies they deserve.”

For more information, connect with Lourens on Twitter.

*Picture courtesy of Nathan Hughes Hamilton under this license