Ian Lessem and Grant Rock, founding partners of a Cape-Town based venture capital and advisory firm Havaic, told a Gibs forum that South African tech start-ups are attracting the attention of local and international venture capitalists.
Rock explained that venture capital is a subset of private equity in that it looks for young companies with growth potential and high returns. However, private equity typically invests in businesses in mature markets with existing market share and often uses gearing to optimise and enhance returns. These investors offer capital on very favourable terms. Rock said angel investors can be difficult to find locally and are often sourced from within the entrepreneur’s personal network.Lessem said venture capital is a well-established asset class in more mature markets such as the United States, where the market is equivalent to South Africa’s entire gross domestic product.
Venture capital returns on a dollar basis average between 10% and 14% in the United States and between 3% and 10% in Europe. However, in the rest of the world, including Asia and Africa, this rises to between 12% and 17%. There is a role for the individual venture capital investor in the domestic market, Lessem argued, as “a little money goes a long way to starting a business in South Africa and costs can be kept low”. Furthermore, technologies built locally and exported into other markets can give investors foreign exchange exposure and offer portfolio diversification.
Lessem added: “Investing in this game is all about the exit, and it doesn’t happen by luck. You have to have potential exit partners in your line of sight and have a joint working strategy as to whether the ultimate aim is to list in an initial public offering, sell to a private equity investor or to a trade buyer.”
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