Local companies funded by venture capital can offer investors global returns
Local challenges in SA and the rest of Africa are so pervasive that innovators simply have no choice but to tackle them head-on
SA businesses funded by venture capital are competing on the world’s stage, billing in US dollars and earning investors market-leading returns while granting access to offshore exposure. But can they offer investors global returns?
As a managing partner of a venture capital firm, much of my day is spent assessing local early-stage investment opportunities and I regularly become excited about the SA and African markets’ prospects.
With much focus on technology-based investments, a common question is: how can a Cape Town start-up compete with a start-up in Palo Alto, Singapore, London or Tel Aviv?
There is a mistaken belief that African start-ups cannot compete, given the resources that those businesses have at their disposal. But African businesses compete out of necessity — the mother of invention.
Regarding finding commercial and innovative solutions to local challenges with global relevance, SA entrepreneurs and their African neighbours are paving the way.
In developed economy cities and the tech hubs mentioned above, there is significant supply of available capital for start-ups and entrepreneurs. For example, the SoftBank Vision Fund has $100bn to invest into venture capital in these markets, and with many other multibillion-dollar venture capital funds in Silicon Valley, scarcity of financial resources does not hinder the potential path to success for start-ups. Access to capital doesn’t, however, necessary translate into commercial success.
In Africa there is a shortage of affordable, appropriate and unrestricted capital, which means only a few of the very best businesses and entrepreneurs tend to be funded. Most businesses we assess consequently greatly emphasise being financially viable from an early stage. This arises out of a scarcity of funding and the founders’ need to self-fund or bootstrap for as long as possible. As an investor, I’m pleased to see the priorities and focus of founders in achieving a commercially successful business from the get go.
Intuitively, the most innovative solutions in private and corporate security should result from places most affected by high incidences of crime
On top of being commercially viable, there is the question of global scalability. When HAVAÍC looks at a tech business, we ask: what does this business have that a billion-dollar, US-headquartered, venture capital-funded business does not have? Why would a multinational company contract with a start-up from the bottom tip of Africa?
Once again, necessity becomes the mother of invention.
HAVAÍC invested in a world-first, on-demand private security aggregation platform developed in Johannesburg in 2018. It provides solutions to domestic and international clients. The necessity arises from the fact that crime in SA is far more prevalent than in the US. Thus, South Africans, and particularly the founders we have backed, have innovated, experimented and succeeded in the global security-tech environment. Intuitively, the most innovative solutions in private and corporate security should result from places most affected by high incidences of crime.
This premise applies to many other sectors in SA and Africa, where local challenges are so pervasive that innovators simply have no choice but to tackle them head-on. Other examples where innovative African-founded solutions can arise are in support services for public and private health care, financial services for underbanked communities, delivery and postal services where population growth outstrips infrastructure growth. These solutions create efficiencies, new products and opportunities that can be applied and used in developing and developed markets.
This results in “international” solutions and commercially viable businesses that have been nurtured, tested and grown in Africa.
Amid subdued domestic investment returns, venture capital as an investment class can fulfil the demand of investors and their financial advisers who want to diversify and internationalise portfolios, earning above-market returns.
SA investors have traditionally invested in the JSE and local property, both of which have been quite flat in recent years and geographically susceptible to political uncertainty and currency volatility. Many investors have therefore increased their offshore exposure in markets that typically have lower returns than the investor may be accustomed to.
While venture capital as an asset class is a higher-risk alternative investment, it offers investors the opportunity to diversify their portfolio and gain access to high-yielding investments. It offers investors an asset class that not only has the potential to outperform the local investment market, but potentially international markets as well.
By investing in local start-ups who compete on the world stage, venture capital investors can achieve the goal of having offshore exposure while ensuring global returns.
• Lessem is managing partner at investment adviser HAVAÍC.