What is the right model for bio-entrepreneurship and biotech startup development in South Africa?

Last week, I participated in a workshop, organised by a government funding agency, on entrepreneurship. On Saturday, I spent some time with good old friends who graduated with me from my MBA class in 2013, at the #GSBAlumniReunionWeekend. We had some great lectures, among others about the Cape Town startup ecosystem and edtech innovation in Africa. These activities inspired my new post.

Is there a readiness level for entrepreneurship and startup development?

The agency mentioned above asked for inputs, from a diversity of stakeholders, regarding metrics to use for project due diligence prior to making an investment, as well as for assessing the attainment of milestones. While they are presently using a TRL (Technology Readiness Level) framework, they are planning to enhance this by adding market readiness and business readiness (MRL, BRL) indicators.

If all of this sounds confusing, it’s because it is. It’s an attempt to reduce real-world complexity into an administrative framework. The utility of this is debatable; and a topic for another day. Personally, I see more value in Steve Blank’s Investment Readiness Level (IRL) framework, because it actively promotes the testing of start-up hypotheses and it uses practice-focused tools (such as business model canvases, dashboards, and scorecards) to determine IRL. An important component of Steve Blank’s work is that entrepreneurs are heavily involved, while this is often not the case in alternative technocratic frameworks.

What I missed at the above workshop is solid data that allow a fact-based debate about the utility of TRLs in practice. Here are a but few bits of information I would have liked to see:

1. How many startup applications are received per annum?
2. How many of these are funded?
3. At what TRL are these projects, at the stage of application?
4. Of the startups originally funded, how many are still alive?
5. Can 'fundability' and project success rate be linked to TRL?
6. Where are all the entrepreneurs (successful or not)?

All that said, the main takeaway, for me, was that investors back entrepreneurs (individuals, people, teams), not technologies, or projects. The overarching sentiment was that SA may have good technologies but it doesn’t have the right caliber and volume of entrepreneurial talent. In other words, there may be some ‘nice tech’ but not the ability to bring it to market.

All of this raised a number of questions: Where then are these entrepreneurs meant to come from? More importantly, what constitutes a ‘good quality entrepreneur’? And, what can we do to enhance the status quo?

Startup success & the entrepreneurial talent pool

If we assume that ‘entrepreneurial talent’ is measured by a combination of educational background (a blend of technological and business expertise), practical experience, and an acquired or innate ‘entrepreneurship propensity’, 'technology entrepreneur', as a description, will only apply to a relatively small amount of the population. If we’d consider luck as an extra factor, then the potential pool will decrease dramatically in size.

If we’d then take into consideration that to be considered a successful entrepreneur requires that he/she has been involved in a start-up that, say, has been running for ≥ 5 years, the pool of possible candidates will shrink even further.

These are not some academic considerations, if we work on the premise that (i) state funding agencies are fearful of risk and (ii) VC or private equity firms like to invest into credible entrepreneurs or startup teams.

Let’s look at some startup statistics (generally, not from SA in particular):

• Only a small number of startups are successful. Some estimates suggest that 75 percent of venture-backed startups fail. The failure rate of all U.S. companies after five years may be over 50 percent, and over 70 percent after 10 years.
• Other sources cite that 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10. Only 25% make it to 15 years or more.

In a hypothetical scenario, if we’d assume that we’d start with a pool of 100 startups at a given point in time, the following ‘survival curve’ would emerge (year zero to fifteen):

At this rate of startup success, we’d see the first ‘good quality entrepreneurs’ emerge after 5 years. After 15 years, we’d have a theoretical pool of 550. Assuming a retention rate of 25% (= fraction of entrepreneurs who’d want to stay in the game), we’d have a little over 100 people to work with after 15 years. 

Assuming an average startup investment of 10 M, and a 100-pax cohort every year, the pool of ‘good quality entrepreneurs’ would have cost us R 15 bn. 

All of the above applies if, that is, ‘good quality entrepreneurship’ is defined the way I did it above.

Is this a feasible model?

What’s more, has anyone comprehensively thought about what it will take to drive economic growth, in South Africa, through the development of entrepreneurs, startup development, and investment in SMEs (small and medium enterprises)?

Increasing the entrepreneurial talent pool and startup success rate in biotech in SA

Taking the thoughts above as a point of departure, I think we have a few fundamental problems with entrepreneurship and start-up development in South Africa. In fact, I do believe that the issues and the current solutions are similar to those faced by basic and tertiary education in South Africa, which are both in a crisis mode and, from an entrepreneurial point of view, ripe for disruption.

Here are the two main similarities:

1. As with the overall education system, we don’t produce enough individuals with entrepreneurial qualities. This is akin to the issue we have with STEM-educated learners who come to University, ill prepared for the respective studies.
2. When these students do arrive at University, we expect them to perform well, ignoring the fundamental problems. Universities try to tackle this problem by enrolling students anyway and, to an extent, by lowering entry requirement standards. Investors, on the other hand, don’t invest (mainly on the private side); state agencies delay decision making in the hope that protracted review periods somehow attenuate the underlying problems and mitigate concomitant risks. (Risk, or risk-aversion, by the way, is the common denominator here. What’s hardly ever considered is the risk of not investing at all, and the negative socio-economic consequences this may have.)

The general / tertiary education analogy is also partially ineffective. University education is undergoing fundamental changes, with stronger external pressure on practical skills development, but it is still focused on self-fulfillment and the search for truth. This may generate entrepreneurs, but more accidentally so than by design.

What works much better is an overlay with a vocational training paradigm, as shown in the schematic below.

If we are to increase the volume and quality of biotech entrepreneurs in SA, we ought to do the following:

• Pre-School (A): Expose a large number of aspiring entrepreneurs to relevant concepts, giving them an idea of what working in the filed entails, and other stakeholders a means to identify and/or stratify talent;
• Vocational School (B): Chose a smaller pool of candidates to enroll in a more intensive training, aimed at deepen relevant concepts and test hypotheses (business ideas) under real-world conditions (eg exposure to potential customers);
• Apprenticeship (C): Allow a contingent of successful candidates to continue their training and to incubate (and, ferment) their business ideas in enabling environments;
• Progress to Mastery (D): Support successful entrepreneurs on their journey to success by continuous mentorship and ongoing development (eg through dedicated networking structures).  

What is the right model?

I can answer this question in different ways:

1. There will never be one model. Models evolve and adapt continuously.
2. I think the model CPGR has been shaping, with our partner OneBio, addresses the main elements highlighted above. We are currently piloting a 1-week program, at the University of the Western Cape, which - in my mind - may convert into a scalable pre-school program for a large number of entrepreneurs. The second component (Vocational School) is at the heart of OneBio's approach, and includes lab-based incubation with an intensive entrepreneurship development. The third component (Apprenticeship) is longer-term incubation, as already done by the CPGR. The fourth component will emanate once a sufficient number of startups emerge in a vibrant ecosystem.

For questions or discussions, contact me at [email protected].