With a planned listing in 2023, investment firm Silvertree Internet Holdings has announced its intent to grow its annual revenues to over R4bn in the next five years. That is 10x current revenues, which stand at some R560m. Manuel Koser, Silvertree Investments founder and managing director, answers big questions about entrepreneurs and online retail.
Why are entrepreneurs important to the growth of online retail in South Africa?
From a macro perspective, it’s about scale. If you compare South Africa globally, the South African economy is the size of the state of Michigan. It might be quite deceiving if you look at population numbers in SA or Nigeria — they look big but, if you look under the hood, the market is quite small in terms of spending power. So, you don’t have this massive scale that an Amazon or Alibaba is built on and, with that you have to have a very different approach, which is a different approach from how venture capital works In Silicon Valley or in China.
From a micro perspective, culturally, economically, structure-wise, infrastructure-wise, SA is unique. So, you need people on the ground as entrepreneurs to manoeuvre and manage how you capitalise the business. In SA, offline retail is far developed and very strong. I think SA has the second-highest mall density in the world after Dubai. You have formal retailers across the spectrum, from Woolies at the top to Shoprite at the bottom, that are incredibly good retailers.
As an online retailer, to be competitive you need to build a product that is significantly better than any other alternatives. You can’t see it in isolation; you can’t say “I’m the best online store” when there are stores within 2km of the economically active population, with great pricing, and brands people trust. The question, then, is how do you convince people to shop on your site? That’s where you need SA contacts with entrepreneurial skills who have manoeuvred in that space themselves and understand the space.
Why didn’t you set up an investment shop in Germany or South America?
Quite simply, we are not an investment shop; we are entrepreneurs who partner with entrepreneurs; we are not the funders, to begin with. The business model we run in SA we couldn’t run in in Germany or we couldn’t run somewhere else. It’s very much geared towards the SA-specific environment.
The SA ecosystem is a very interesting market: consumers are moving from offline to online, but currently there is not enough funding across the funding value chain — there are not enough mentors; there is not enough knowledge. In the absence of a general entrepreneurial environment and ecosystem, we can fill in all the gaps. We have a 25-person team that can support retail entrepreneurs from A to Z. We have in-house accounting controlling; we have experts in the different fields, from finance to HR. We have an in-house dev team, in-house marketing, recruitment. We have scale across the portfolio, plus we give you capital from seed, to gross, to buy out. It’s an all-in-one solution for entrepreneurs to build a sustainable business. But you couldn’t do this in London or Germany, because you have a different level of scale.
And then, secondly, in order to build a business, you need to have a long-term view. And you need to be passionate about what you do. You can only take a long-term view if you’re happy where you live. The size of the opportunity is higher in Mumbai or in Shenzhen, for sure, but I wouldn’t appreciate living there.
Thirdly, it’s very hard to stick out, because there are 100 other people doing 100 different things, meaning you have to work a lot harder to achieve the same thing. It always takes longer: if you grow something very quickly, normally it doesn’t pan out.
In SA, only some 1% of total retail is online. What needs to be done to grow this number?
The big picture? The cost of data is still incredibly high in SA. In terms of mobile data, it’s one of the most expensive in the world. There is fibre, but it is still very expensive. The real shifts in behaviour come when you start to see the internet as a commodity, like water or electricity.
Then the other big issue is the mall culture. Culturally, mall-going is seen as an experience. It’s a destination to go for lunch, the cinema, or entertainment; it is not just shopping. Shopping is part of our entertainment culture. This creates a structure where offline retailers are very strong in what they do. If you look at South African retailers like Woolworths and Truworths, when it comes to pricing and logistics, they’re just very good at what they do. A consumer looks at the whole competitive set and chooses what is significantly better for them from all the alternatives.
Because most customer problems have been catered for, growth will come from innovation. I’ll give you a very good example of this in the food space. There’s a business we’ve backed called UCook. They went after the food market but with a very innovative approach. In a world that’s switched on to gourmet, UCook sources only the best in local, organic and fresh ingredients, and packages these with accessible, easy-to-follow recipes from top chefs. This way, anyone can become a gourmet chef in their own home. This is significantly different in that it solves a problem in a way that Woolies or Checkers can’t.
Scale in SA is difficult when you’re trying to sell everything to everyone. Yes, Amazon got big but that’s decades of investment.
What do you look for when partnering with entrepreneurs?
Is the entrepreneur running the business, especially in the early days? You’re not investing in a company; you’re investing in a team or in a person that you believe can turn this vision into reality. So, what we look for is tenacity, passion, and skills. Because it’s a roller-coaster ride — this is going to be really tough — you need entrepreneurs who will push through this. There will be a day where the business is about to be shut down because it doesn’t really work; perhaps it runs out of money. Then it’s up to the entrepreneur, with our help, to make it work. The stats are against you; probably 8 out of 10 startups fail. But entrepreneurs often have what it takes to push through.
Winning in online retail is a constant struggle. You need to be geared for this because it’s not a 9– 5 job. In order to win, and even if you are successful, and you’ve cracked it the first two or three years, the competition will intensify. This [is] because, if you’ve set up a role model that is successful, people will copy this but innovate. Entrepreneurs always push harder.
Is there a real passion behind what you do?
You need the passion because, otherwise, you won’t bear the tenacious stuff you have to get through.