- Ian Lessem
Can South African start-ups offer investors global returns?
South African businesses funded by Venture Capital (VC) are competing on the world’s stage, billing in US dollars and earning investors market leading returns, while simultaneously granting access to offshore exposure. The question is: 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 find myself excited about the South African 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. My reply is that African businesses compete out of necessity - the mother of invention.
When it comes to finding commercial and innovative solutions to local challenges with global relevance, South African entrepreneurs, and their African neighbours, are paving the way.
As a VC investor, HAVAÍC places great emphasis on commercial solutions with global relevance.
In both developed economy cities and the tech hubs mentioned above, there is significant supply of available capital for startups and entrepreneurs. For example, the Softbank Vision Funds has $100 billion to invest into VC in these markets, and with many other multibillion-dollar VC funds in Silicon Valley, scarcity of financial resource does not hinder the potential path to success for start-ups. Although access to capital in itself doesn’t necessary translate into commercial success.
However, 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. As a result, most businesses we assess place great emphasis on 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.
On top of being commercially viable, there is the question of global scalability. When HAVAÍC looks at a tech business, we ask the question, ‘What does this business have that a billion dollar, USA-headquartered, VC funded business does not have? Why would a multinational company contract with a startup from the bottom tip of Africa?’ Once again, necessity becomes the mother of invention.
Last year HAVAÍC invested in a world-first, on-demand private security aggregation platform developed in Johannesburg, that provides solutions to both domestic and international clients. The necessity arises from the fact that crime in South Africa is far more prevalent in our environment than it is in the USA. Thus, South Africans, and in particular the founders we have backed, have innovated, experimented and succeeded in the global SecurityTech environment. Intuitively the most innovative solutions in private and corporate security should result from places most impacted 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 healthcare, financial services for underbanked communities, delivery and postal services where population growth outstrips infrastructure growth, to name a few. These solutions create efficiencies, new products and opportunities that can be applied and used in both developing and developed markets.
This results in ‘international’ solutions and commercially viable businesses that have been nurtured, tested and grown in Africa.
In a time of subdued domestic investment returns, VC as an investment class can fulfill the demand of investors and their financial advisors who want to diversify and internationalise their portfolios, earning above market returns.
South African 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. On the back of this, many investors have increased their offshore exposure, in markets that typically have lower returns than the investor may be accustomed to.
HAVAÍC invests in local teams, in businesses that have local expenses, but are either invoicing in foreign currency or which have the potential to attract interest from foreign trade buyers looking to gain new market share and solutions. These businesses are close to home, meaning investors can readily understand and potentially have strategic engagement with management. This allows investors the opportunity fully understand where their investment is going.
One of our most recent investment was in a business productivity technology company that has a Johannesburg-based management team, with 200,000 registered users from all over the world. This investment ticks all the boxes discussed above - a business with the potential to deliver above market returns, dollar revenue with a competitive rand cost base, run by people we know and trust, and which services international markets making an international exit a likely possibility.
While VC 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, VC investors can achieve the goal of having offshore exposure while ensuring global returns.