Interview with Keet van Zyl - Executive Director: PoweredbyVC.

PoweredbyVC (Pty) Ltd is a venture capital fund management and professional advisory business. It was established in 2010 to continue the active management of the investment portfolio of Here Be Dragons (HBD) – a venture capital fund, founded by Mark Shuttleworth in 2000, which is now fully invested.

1. Please give our readers an idea of how venture capital differs from bank loans or other forms of business financing?

Venture Capital (VC) is equity funding provided by outside investors into early stage ventures in return for above-average returns.

VC is a great way to get a capital injection to help your business grow. By definition, it is given to companies with a tried and tested concept and which have the potential to expand exponentially.

VC companies offer different types of funding:

• Seed capital, which is used for the research and development of a concept before the business starts trading;
• Start-up funding to establish new businesses; and
• Early stage funding, which is used for companies that are established and are ready for further development and aggressive growth.

It is different from bank loans or other forms of business financing in that funding is exchanged for shares in the company as opposed to a loan. VC funds provide strategic direction to ultimately grow investments to a profitable exit. This includes experience and insights into international expansion, legal requirements regarding exchange control and intellectual property (IP) protection and an international contact base to open doors for entrepreneurs.

The main advantages of venture capital are:

• More cash on hand for growth as there is no fixed repayment period.
• Investors only realise their investment if the business is doing well.
• If the business fails there is usually no obligation to repay the investment.
• Usually no security necessary.
• Active involvement from an equity partner could increase growth and returns for all stakeholders as the investor has a vested interest in the business success.

2. How big is the venture capital market in South Africa? How many companies provide this kind of financing?

The VC market in South Africa is at an early growth stage and forms a very small part of the broader private equity industry. VC in SA is, however, now becoming a more established form of investment with new VC companies having entered the market or increased funds under management in recent years.

Venture capital typically comes from institutional investors and high-net-worth individuals and is pooled together by dedicated investment firms (fund managers). VC fund managers typically comprise small teams with business training, deep industry experience or those with technology backgrounds (scientists, researchers, etc).

There are only a handful of companies providing this kind of financing in SA and they are mostly captive funds, meaning that there is only one funder or corporate parent.

3. How has the global recession affected the venture capital market?

Great innovations and associated returns have emerged from troubled financial times, so the VC space has been very exciting during the global recession. As the banks and other traditional finance providers became more conservative with their lending policies, entrepreneurs turned to alternative sources of finance, adding to an influx of VC deal-flow. 

During the recession, VC-backed companies have held their ground in terms of performance. VCs have conserved capital by assisting portfolio companies to maintain a low cash burn rate (planning, cost cutting, etc). VCs are also culling portfolio companies they expect not to succeed in order to focus scarce resources on high-impact companies.

VC investing also appears less risky than before compared to other asset classes.

South Africa and the world are coming out of a recession and business sentiment is taking a positive turn. This bodes well for further maturation of the VC industry in SA.

4. What sorts of businesses have you provided venture capital for and what sectors generally attract the most interest from venture capitalists?

HBD provided VC mostly in technology, Internet related, mobile-phone software applications, leisure and entertainment. Generally, VC is synonymous with high-growth sectors. Although VC funding can be technology biased, a business that has unique differentiating factors and has high growth potential can be from any sector.

5. With ventures such as Silicon Cape starting up, do you foresee venture capitalists arriving on our shores from all over the world?

Silicon Cape is a great initiative to bring together different stakeholders in support of entrepreneurship in South Africa – specifically Cape Town. These stakeholders include overseas venture capitalists and potential investors. Over the last few years, new VC funds have started up in South Africa in formalised structures but there have also been an increased number of companies that have obtained funding from overseas angel investors and VC-type investors. I foresee some venture capitalists arriving on our shores but more than that, increased funding commitments from overseas investors in collaboration with existing VC fund management teams.

6. Is the venture capital industry well regulated and is it conducive to international investors?

Yes. In South Africa VC fund managers need to have a Financial Services Board (FSB) license to manage third-party funds. International VC guidelines exist and SAVCA (the South African Venture Cpital and Private Equity Association) is a very active industry body, providing support and guidance.

It is conducive to international investors who require emerging market exposure.

7. How much potential is there, in your opinion, for further growth in the number of small businesses, and particularly those with high growth potential, in South Africa?

As a venture capitalist in South Africa, I know there is an abundance of deal flow. Small businesses are the backbone of most emerging economies as well as developed economies. South Africa’s entrepreneurial culture will continue to ensure growth in the number of small businesses starting up. According to the South Africa Global Entrepreneurship Monitor (GEM) report, around 40% of South Africans between 18 and 64 believe they have the required skills to start a new business but less than 10% of these South Africans are involved in their own businesses. In my opinion, while some of these businesses will be lifestyle companies and micro enterprises, many high growth companies will emerge.

8. Are there any initiatives to provide venture capital-style funding to a broader South African market, in terms of those previously disadvantaged people, who have good business instincts but maybe not the education, resources and confidence to get their ideas off the ground?

Any initiative that combines access to funding with mentoring and support is using venture capital techniques to assist small business. There are many initiatives that assist with business resources in South Africa, like the Department of Trade and Industry’s Small Enterprise Development Agency (SEDA), RED Door small business advice centres and Investec’s 'The Business Place'. But more entities are needed to link the provision of VC style funding – with the mentoring behind it – to small businesses.

9. What advice can you give to would-be entrepreneurs in terms of what it takes to become a successful business-owner?

Focus on the implementation of aggressive growth strategies. What are the key milestones that the business needs to reach in the short, medium and long term and what are the current constraints to reaching those milestones? Access to funding could unlock the potential of the business but any potential funder would like to see exactly how the funding would be applied at every stage of the growth path, to support the growth strategy.

Develop a customer-focused growth strategy. An innovative technical solution in isolation will not guarantee success of the product. Customers also need to be made aware of the product and why the product is superior to other competitive products. Likewise, the business also needs to understand what the customer's needs are in terms of the look and feel of the product, as opposed to only technical functionality.

Ensure that you match the right investment instrument with the growth stage of the investment and funding purpose. It is important to time the injection of VC:

Too early: This is when the entrepreneur’s idea has not been formulated into a workable business idea that can be commercialised. Some ‘sweat equity’ is required and the venture capitalist might view this as a lack of commitment or belief in the product or concept on the part of the entrepreneur. Also, the value of the business or concept increases with each stage and applying for VC too early might mean getting an equity partner on board at a low valuation.

Too late: The venture capitalist might lose interest if they have missed the aggressive growth stage of the business because their potential for high returns is diminished.