Picture: 123RF/POP NUKOONRAT
Picture: 123RF/POP NUKOONRAT

The announcement earlier this year of the Mineworkers Investment Company’s (MIC’s) commitment to Knife Capital’s African Series B Expansion Fund has spurred interesting conversations about the dynamic between institutional investors and venture capital. Some of the discussions interrogate the path from a viable idea to potential third-party investment, be that through private market capital pools or public capital markets.

An interesting theme is the potential role institutional investors can play to facilitate that path and reduce barriers. But what would that honestly mean for institutional investors given their penchant for understandably more risk-averse, later-stage investing?

Venture capital investment, as practised in the northern hemisphere and developed economies, is not a game of means and averages but one of outliers and exceptions. Venture portfolios are a risky undertaking. The accepted industry norm is that about a third of ventures do well, a third are likely to fail, and the other third may, at best, return invested capital. The data however speaks to a more dire situation: only 4% produce a return of 10 times or more, and 10% five times or more.

The result is that many venture-capital fund managers are looking for the exception, even at a 14% chance of above average returns. These numbers are nominal, based on financing data from US-based Correlation Ventures, from 2004 to 2013. What they miss — and this is crucial — is that venture capital differs from market to market, and in SA and across Africa our own way may be our answer.

To be sure, venture capital is famed for driving innovation and the proliferation of cutting-edge technology. There are enough broad strokes that demonstrate this in American, Asian and European markets. But for markets such as ours the reality implies a different outcome. For starters, the venture-capital trajectory here is different from the global north model. After several successful rounds of funding, a start-up in Tel Aviv or Silicon Valley would be on the path to an initial public offering. If the start-up is a unicorn, the promise of capital is guaranteed.

In SA, capital to build, grow and scale a promising start-up is less available from the JSE than from private equity investors, according to Knife Capital’s co-founder, Keet van Zyl. He says it’s symptomatic of the complex and expensive process of local listing and the gap that typically exists after seed funding; opportunities for further investment and growth prospects diminish greatly.

The irony is that the gap in post-seed funding in Africa exists in a collective of markets that boast a strong entrepreneurial drive. There are many reasons why this is so, including poverty, thriving informal economies and a lack of sound financial instruments. The result is that we end up in a vicious cycle: though entrepreneurship is a proven way out of poverty and towards economic growth, we do not have enough post-seed funding to take ventures to the next level, let alone to seismic IPOs such as those of Facebook and Alibaba.

That’s the gap in our venture value chain — a dearth of early-stage funding for high growth, innovative businesses that can drive economies, cultures and countries. Against the sobering unemployment statistics mentioned in President Cyril Ramaphosa’s 2021 state of the nation address, well-supported entrepreneurship will pack an effective punch.

There have been a few notable case studies of this post-seed funding in SA, such as Tyme Bank and its successful Series B funding round. The digital bank raised $110m, one of the largest funding exercises for a digital bank in Africa. However, it is worth mentioning that the investors are offshore players from the UK and the Philippines.

Another example is Flutterware, the digital payments platform touted as the African unicorn. The business raised $170m in Series C funding and fuelled conversations about Africa leading the “payments as platforms” transition globally, connecting mobile money to legacy financial systems. Again, most of the respondents in Flutterware’s fund raising were offshore investors. These two examples raise the question of whether we will catch up here, and how long this might take.

How does a firm like MIC make sense of this shift? This move is not new in the sector; institutional investors have stepped into venture capital and succeeded in the past. But many more are yet to. For the institutional investor venture capital can be a means to diversify their asset base, both in the variable stages of business growth and maturity, and in the diversity of sectors an institution chooses to make a tactical capital allocation.

This may seem a simplistic way to put it across, but it is an effective route to get institutional investors involved at stages of businesses where capital is required to harness growth potential, such as second or third rounds of fundraising. Notwithstanding the risk question, participating earlier in businesses with high-growth potential also opens an avenue where over and above capital, institutional investors can deploy into venture capital vital knowledge, much-needed experience, skills and capabilities.

In July, the MIC announced the launch of MIC Khulisani Ventures, a R150m early-stage investment vehicle targeting black-owned innovative, high-growth businesses in SA. MIC Khulisani Ventures will invest in such potential companies across all sectors, except for primary agriculture and primary extractive industries. The focus is innovation, namely products or services that disrupt traditional markets, improve efficiencies or respond creatively to existing problems in SA.

More than 700 applications were received, and 141 assessed for shortlisting into the final round for funding (with 10 finalist pitching for funds to a panel of experts). The exercise has proved that the talent is there and requires support from the ecosystem — whether traditional venture capital or institutional venture capital.

As we work towards economic recovery in the face of the havoc caused by Covid-19, high-growth ventures will be pivotal in growing our economy, and beyond that in driving human progress. It can directly augment government efforts, such as the R4bn allocation for the department of small business development, to support township and rural businesses and attract blended finance opportunities. This concerted effort works, and we have seen this happen.

Many researchers agree that the success of the US economy is partly due to its venture-capital industry pooling viable innovative ideas and their owners, giving them a jump start to success through the provision of adequate growth capital and bringing to bear management, systems and mentors who can support this growth. What we know for our context is that the line connecting pre-seed funding and the IPO on the JSE may neither be straight nor get to that listing goal at all. And that is fine, because the opportunity becomes one of evolving a different, market-specific trajectory, making it legitimate here and on the world stage.

The forecast for Sub-Saharan Africa’s economic growth is 3.2% for 2021. The SA economy is expected to grow 3.3% this year, a hopeful forecast given the 7.2% decline in 2020. If the joining of forces of institutional investors and venture-capital firms becomes more commonplace, to plug the follow-on funding gap high-growth ventures experience, we may yet exceed our national and continental growth projections.  

• Khaole is chief investment officer at the Mineworkers Investment Company.

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