For many people, selling a business for $50 million is a win. But for venture capitalists, it’s a poor outcome. VC success is defined as achieving top quartile return status among your peers. In other words, go big or go home.

At the same time, barriers to building software are falling exponentially. Many startups are lost in a sea of commoditization, running on other people’s platforms, integrations, go-to-market channels, and data management technologies. Many don’t have a lot of differentiation because their business is a collection of a whole bunch of other people’s stuff.

How do you go big in a world where the barriers to innovation can be so low? How do you hit a home run when the “how will you win” of your startup isn’t yet worked out?

As a startup founder, you need to understand how you’ll build a sustainable competitive advantage and that everything you do needs to support the creation of that strategy.

That’s strategy — and that’s also how VCs think about strategy. Here are some of the questions venture capitalists will ask you when judging value creation and whether or not to invest.

How is your software generating data that can build a wall around your business?

A proprietary data pool creates value. Your core software shouldn’t just be helping your customers achieve a goal — it should also be generating data.

For example, Rentable (full disclosure: this is a portfolio company) is an apartment listing company that helps apartment companies market their inventory online and enables a digitized buying experience for their customers.

In that process, Rentable is able to capture info on consumer demand and behavior, like when people buy, how they buy, at what prices, and success rates.

That’s a lot of data coming out of the back of their core piece of software, and that’s valuable market-specific information that can build a wall around a business.

Can you build a unique set of analytics or tie more generic analytics to a unique legacy problem?

In my experience, the most valuable analytics come from really understanding customers’ pain points and building analytics into a workflow that is part of the ordinary course of business. When you combine a set of analytics and with a legacy business problem, you have a new opportunity to build best-of-breed capabilities for that particular problem, and “go big” in the process.

Consider, for example, an inventory manager who uses your analytics to do their job better. Having information on how many units are in a marketplace, what units sell for, and at what realized prices is useful analytics?

But if you can automate the inventory manager’s daily workflow by providing, automated daily recommendations on what units to buy, sell and reprice and then provide automated functions that execute those recommendations. You now have an automated workflow powered by analytics.

Can you connect this to a unique piece of hardware, such as an IoT device?

Can you pair your software with a device to create something proprietary? Such a pairing takes you out of the world of commoditized software by adding a unique differentiator.

Let’s say you have software that helps urban planners and real estate developers by providing demographic and population growth information on certain geographies. It’s slick and has analytics, but it’s not a solution.

What if you add a computer vision system that monitors vehicle and pedestrian traffic, analyzes vehicle and consumer behavior, and combine that with the demographic information, all wrapped into an algorithm to predict best use cases for buildings and transport? Then you have a real differentiator.

With the explosion of cheap IoT devices and pervasive connectivity, there is a whole host of hardware devices that could be a real source of differentiation for your startup.

Can you build a two-sided network?

Airbnb and DoorDash are classic examples of two-sided networks: startups that serve both consumers and businesses, and build such large networks that the network itself becomes a competitive barrier to entry. Such businesses are frequently winner-take-all markets, and are highly risky and expensive to create.

Simultaneously convincing both consumers and businesses to participate can be difficult and very expensive, but the rewards can be very large. Given the valuations the public markets have attributed to both Airbnb and DoorDash, they have proven that the risk was worth it for their early investors.

Unlike with hardware, not all businesses are suited to two-sided networks, and they can be very difficult to scale. If yours is, however, the risk may pay off not just in terms of hitting it big, but in creating a unicorn — which all VCs are looking for.

There’s a reason that VCs are searching for “unicorns” and not just your basic “good business idea.” To gain the attention of investors, startups need to find the unique qualities that differentiate them from every other good idea. That focus, differentiation, and competitive advantage will attract capital and, ultimately, will enable your company to survive the competitive threats.

Cape Town hones ambitions to become an African tech hub

The birthplace of tech entrepreneur Elon Musk, and home to several successful tech outfits such as Naspers, South Africa, unsurprisingly, has a flourishing startup ecosystem. Cape Town, where Naspers – one of the world’s top 10 tech investors – is headquartered, hosts a thriving startup community and though nascent, it is showing great promise.

“It is perhaps too easy – and too early – to designate a specific geographic zone as our local ‘Silicon Valley’. What we can say is that between Cape Town and nearby Stellenbosch, there is a good deal of entrepreneurial business action,” says Fabian Whate, head of Naspers Foundry , a startup funding initiative set up by the tech behemoth.

Diverse tech sector

Cape Town is also home to some of South Africa’s largest financial institutions, which explains the emergence of several innovative fintech solutions – but success isn’t confined to this sector. Get Smarter, an edtech company founded in Cape Town, was sold for $103 million to 2U, an American listed company, in October 2017. Takealot, founded in 2011, is Cape Town’s most notable e-commerce success story .

Meanwhile, Aerobotics, a data analytics company using aerial imagery and machine learning to help farmers identify pests and disease, has raised a respectable $10.3 million in six years. The list of successful ventures goes on.

“Generally, the local tech sector has a track record of punching above its weight, developing innovative products that compete on the global stage and which can potentially be scaled internationally,” says Mr Whate.

So why are startups choosing Cape Town rather than other well-known cities such as Johannesburg or Bloemfontein?

Cape Town in numbers

With an internet penetration of 63% and with one of the largest open access fibre networks in Africa, Cape Town is home to the vast majority (almost 60%) of South Africa’s startups , according to figures from Invest Cape Town. The city also has the continent’s highest number of accelerators, with more than 20, and 25-plus co-working spaces, according to a report co-authored by Invest Cape Town.

The Cape Innovation and Technology Initiative (CiTi) is credited with being Africa’s oldest tech incubator and has spun out more than 2,000 businesses and supported more than 3,000 entrepreneurs since its inception in 1999. According to CiTi’s CEO Ian Merrington: “Cape Town’s success can be attributed to a number of factors, starting with an established ecosystem development strategy over the past 20 years that helped stimulate entrepreneurial activity.”

The local tech community is active with several meetups, including DevOps Meetup, Tech Leadership Meetup, and Cape Town Front-End Developers, while lifestyle and cost are also cited as an attraction.

“Cape Town’s cost of living is a lot lower than that of other startup hubs, with the bonus that it’s also a beautiful city to live in,” said Tanaka Mutakwa, vice president of engineering at Names & Faces, a local startup working in the human resources area.

Government support

As with most technology ecosystems, state intervention plays a crucial role in boosting entrepreneurship, and Cape Town is no exception. “There are a number of government initiatives and projects established to promote and encourage the fourth industrial revolution (4IR),” Mr Whate notes.

Examples include the Technology Venture Capital (TVC) fund set up by the Department of Trade, Industry and Competition (DTIC) and managed by the International Development Corporation (DIC), which essentially “provides business support and seed capital for the commercialization of innovative products, processes, and technologies,” according to the government investment incentives website.

These initiatives provide significant support, but more action is needed. “Occasionally, there are some initiatives to support new entrepreneurs. However, the local and national government are mostly focused on solving grassroots problems. Startups do not get as much focus,” says Mr Mutakwa.

Access to talent

The city is home to several world class institutions, including University of Cape Town and Cape Peninsula University of Technology. “These are often great sources of talent for startups,” Mr Mutakwa says.

Furthermore, this talent often comes at a cheaper cost than in other developed countries. At about $30,400 per year, salaries for programmers in Cape Town are higher than in other African tech hubs such as Lagos ($21,864) and Cairo ($14,289). This is on par with tech hubs in eastern Europe and just a fraction of the $100,000 plus in the US, according to figures from fDi Benchmark based on national statistics figures.

When it comes to attracting and retaining talent, competition is tough. “Cape Town startups face a lot of competition from corporates and established companies that have set up offices here. These are usually able to offer higher salary packages as they have an established business with existing revenue,” he adds.

Foreign tech firms have announced 58 FDI projects in Cape Town since 2010, ranking the South African capital second across the whole African continent.

Experience needed

However, lack of experience, particularly in scaling a business, is one issue in the city. “Many of our tech entrepreneurs are new to running or working in a high-growth startup, so they have not acquired the skills and expertise to go about scaling up their fledgling ventures. They are learning on the job,” Mr Whate says.

Mr Mutakwa believes there’s a real need for entrepreneurs to access a network of experienced founders. “They will be able to guide new founders who are trying to start new companies,” he says.

Access to funding is also a key concern. The presence of global investors such as Google, Microsoft, Oracle and SAP is felt, but more cash is needed.

Data obtained by PitchBook depicts a healthy flow of investment into Cape Town’s companies, with deals rising consistently since 2015, despite 2020 showing a potential slowdown, likely due to the coronavirus pandemic. The data shows that 2018 saw the highest amount of expenditure with companies raising $90.98m across 31 different deals, while 2019 saw a record number of deals (34), though total funding fell to $36.06m.

“Raising capital for ventures in the very early stages of development is a challenge, especially if you’re not plugged into angel networks or don’t have friends and family to back you up,” Mr Whate says.

Funding gap

Lara Rosmarin, head of entrepreneurial and enterprise development at CiTi, agrees, and notes a clear funding gap in the seed stage. “True seed funding investment opportunities are limited and investors are looking for less risky plays in the market,” she says. “We know that entrepreneurial ventures are maturing and identifying the need for high impact business development and support, but they are often unaware of the available channels to access such support so the pool appears limited.”

Cape Town’s startup ecosystem has come on leaps and bounds over the past two decades, but as expected, there’s still much work to be done. Access to funding and talent must improve; once it does, Cape Town could find itself in the company of other international superstars.

Before that happens, though, it is important that startups address the challenge of scale, by figuring out how they can expand across Africa and gain access to international markets.

This article first appeared in the August-September edition of fDi Magazine. View a digital edition of the magazine here .

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You need to learn to embrace uncertainty if you strive to be a great innovator

So you’re interested in entrepreneurship? Then join our online event, TNW2020 , where you’ll hear how the most successful founders kickstarted and grew their companies.

Madam C.J. Walker, born Sarah Breedlove, was America’s first female self-made millionaire . She pioneered a line of hair care and beauty products for people of color early in the 20th century, and the recent Netflix series “Self Made” details the story of this talented innovator and the challenges she overcame on the way to her success.

To accomplish her goals, she had to face overwhelming uncertainties. How would she finance her business? Would her partnerships fail? Would her products sell? Would ruthless competition and racism get in her way? Madame Walker’s future was far from certain when she began her journey, but that did not dissuade her.

I am a researcher and professor who studies strategy and entrepreneurship. I am also myself an entrepreneur, angel investor, and board member for startups and innovative firms. Pop culture might have you believe it is a tolerance for or even an obsession with the risk that makes great innovators. But in fact, research has for decades demonstrated that innovators and entrepreneurs are no more risk-taking than the average person . It is tempting to think that innovators are a breed apart or perhaps lucky to be in the right place and time. But research shows this is not the case. So what characteristics do innovators like Madam Walker have that lead them to the seemingly serendipitous moment? What makes for a successful innovator or entrepreneur?

Generally, innovators are much more comfortable making decisions under conditions of uncertainty than the average person. Additionally, innovators tend to have a set of skills that allows them to better navigate this uncertainty. My experience and research has shown that not only are these abilities effective, but they can also be learned and practiced and anyone can improve their innovation skills.

What is risk? What is uncertainty?

Risk is when the factors determining success or failure are out of your control but the odds of success are known – a game of dice, for example. You can’t control whether a 2 or a 12 is rolled, but you know the odds.

Uncertainty is when the factors determining success or failure are not necessarily out of your control, but are simply unknown. It is accepting a challenge to play a game that you do not completely know the rules of. Innovators tend to be more willing to venture into the unknown, and therefore are more likely to engage in ambitious projects even when outcomes and probabilities are a mystery.

Interestingly, risk and uncertainty appear to trigger activity in different parts of the brain . Functional magnetic resonance imaging has allowed researchers to discover that risk analysis is a largely rational and calculation-driven process, but uncertainty triggers the ancient fight-or-flight part of the brain. This research would suggest that experienced innovators are better able to maintain their analytical capabilities in spite of the adrenaline and instinctual response that arises when confronting uncertainty.

Innovators don’t ignore risk; they are just better able to analyze it in uncertain situations.

Skills of innovation can be learned

The chemical response to risk and uncertainty may be hardwired in our brains, but that doesn’t mean you are either born an innovator or not. Innovative capacity can be learned.

Jeff Dyer, Hal Gregersen, and the late Clay Christensen spent years investigating the characteristics of successful innovators and broadly divide the skills of innovation into two categories: delivery skills and discovery skills .

Delivery skills include quantitative analysis, planning, detail-oriented implementation , and disciplined execution. These are certainly essential characteristics for success in many occupations, but for innovation, discovery must come before delivery.

Discovery skills are the ones more involved in developing ideas and managing uncertain situations. The most notable are:

The ability to draw connections between seemingly disparate ideas and contexts.

A tendency to question assumptions and the status quo.

A habit of looking at what is contributing to a problem before rushing to a solution.

The frequent use of systematic experimentation to prove hypotheses about cause and effect.

The ability to network and broaden a set of relationships, even without an intentional purpose.

Like any skills, these can be learned and cultivated through a combination of guidance, practice and experience. By asking the right questions, being observant or mindful, experimenting, and networking with the right supporters, innovators will be more likely to identify opportunities and succeed.

My colleagues’ and my own research and experience are summed up in our book “ The Titanic Effect .” We describe the PEP model of successful entrepreneurs and innovators. It stands for passion, experience and persistence.

Successful innovators are passionate about the problem they are solving and share this passion with friends and family, potential customers, supporters, and other stakeholders.

Innovators also tend to have personal experience with the problem they are solving, and this yields valuable insight and firsthand knowledge.

Finally, innovation takes persistence. As Walker experienced, growing a business – even with proven products – does not happen overnight. It takes someone willing to push the boulder uphill to make it happen, and often, the more disruptive the innovation, the longer society may take to embrace it. Madam Walker amply personifies the PEP model .

Innovation now and in the future

During this pandemic, many people might be inclined to batten down the hatches, tighten their belts and ride things out by sticking to what they already know.

But uncertainty and change create opportunity and a need for innovation . The pandemic has created or exacerbated many problems that are ripe for innovative solutions.

Practices that were until recently on the fringe of acceptance – such as telehealth , food or grocery delivery, e-sports and online education – are now being accepted by mainstream society. As with anything relatively new, there is lots of room for radical improvement.

Now is not the time to put blinders on and close your eyes to uncertainty. If you build your discovery skills, you are more likely to create opportunity and persist through uncertainty. Like Walker, anyone can cultivate the abilities to navigate uncertainty and create positive change. Innovators are not a breed apart.

This article is republished from The Conversation by Todd Saxton , Associate Professor of Strategy and Entrepreneurship, IUPUI under a Creative Commons license. Read the original article .