To Investors,

Today’s letter features a guest post by Ross Jenvey, a former Partner at Kingson Capital, with eight years of experience as an operator in the South African venture capital industry. As an insider who's seen a fair amount in the South African VC space, I asked Ross to answer four key questions that can help someone trying to understand more about venture capital in South Africa and what it would take for the industry to grow.

1. What makes you most excited about VC in South Africa?

Despite attempts by SARS to fast-track the VC industry in South Africa with tax breaks in the 2010s, it is still a fledgling industry compared to the big brother of Private Equity, which is so large domestically that it includes several companies listed on the JSE. South Africa is a small country in terms of global GDP (~0.6%), and yet its education system continues to produce some quality graduates, a potential pool of educated founders who seem to be increasingly keen on starting their own businesses. The current young generation of graduates seem to be inclined to become their own boss rather than work for big companies, which should add to the list of investible startups in future. This is exacerbated by a thriving Incubator / Accelerator industry in South Africa, which is working hard to boost the number and quality of startups. VC in South Africa is an industry ripe for growth.

The other factor to be excited about is South Africa’s greater integration with the rest of Africa as a VC industry over the last decade. Cross-continent conferences, pitch events and networks have sprung up, and South African VC’s and startups are very much part of that. Therefore, macro trends that predict Africa as one of the world’s fastest-growing economic regions – which should attract more investment – will benefit South Africa as well. Africa’s VC investing is only 0.6% of the global total, and yet Africa contributes 5% of global GDP and 18% of the global population (according to “Africa: The Big Deal”). There is therefore huge potential upside to the VC industry in future years, if the VC asset class can become more mainstream.

2. What frustrates you most about venture capital in South Africa?

It is not a well-known or trusted asset class. South African financial companies have a history of stability and generally avoiding major crises (e.g. bank collapses and pension fund scandals), but the root of that is a conservative lending and investing mindset. Institutional investors (e.g. Asset Managers and Pension Funds) are wary of investing in the more mature Private Equity asset class, so are likely many years away from investing in VC (if at all). This is the key to unlocking the VC industry at scale, and ensuring that there are enough VC Funds to fill all the gaps in the maturity timeline (e.g. Pre-Seed, Seed, Series A & B, and then later stage funds). The current gaps in the funding timeline make it difficult for VC’s to co-invest and even exit to more mature funds as their portfolio companies mature, adding risk to the VC investing process over-and-above the usual risks faced with early-stage investing. Building trust usually [takes] time, but it would be helpful if there was greater assistance from other parts of the financial sector or government to accelerate the process.

3. What will it take for the VC industry in South Africa to double in size (interpret that as you’d like)

Although the South African VC market will have its own nuances, it will likely be swept along with the rest of the African VC market. Some catalysts that will be required for VC on the African continent to double in size include:

* Domestic institutional investors are needed, but as noted above, these are likely still some time away. Therefore, international fund flows become critical, and require more established VC investors from developed economies taking a positive macro view on the African continent, and VC in particular. Any incentives to boost foreign investors could bear huge dividends in the long term.

* Government assistance will also be very helpful. In South Africa, since the demise of the Section 12J tax incentive for VC investing, the industry needs legislation that makes it easier for startups to establish and grow. This can be done via a Startup Act, as has been done in a few other African countries, and a process that has kicked off (see here). This Act would create the legislative framework for startups to thrive, including potential tax breaks, cutting of administrative red tape and other assistance.

* Relaxing of exchange control legislation to allow easier transfer of Intellectual Property (IP). The current legislation makes it difficult for foreign investors to invest and move the IP of South African startups to other jurisdictions for commercial purposes. Relaxing this legislation, even if it is housed as part of the proposed Startup Act and ring-fenced for early-stage companies, could open up pools of foreign capital to invest here.

4. What’s one misconception about VC in general or VC in South Africa (or both) that you want to correct?

VC is a long-term game, where investors should think of it as more like running a marathon than a middle-distance event, but the rewards can be worth it. Many VC funds in South Africa have attracted money from private individuals under the assumption that they would close the fund in 5-7 years. Given the current difficult environment globally for VC exits, the reality in the US is that VC funds are priming investors for a 10-12 year timeframe. In South Africa, with the asset class being largely unknown, this timeframe would likely be a deterrent for many investors, but it should not be. In order to fully maximise the return potential of a VC portfolio in a small economy like South Africa’s, including the constrained exit environment via Initial Public Offerings (IPOs), an investor needs to be patient. Given that investments into alternative [asset] classes (like VC) should make up less than 10% of a portfolio, an investor should be able to afford to be patient for this part of their portfolio in order to reap the longer term benefits that early-stage investing can bring.

Personally, these insights give me an understanding of the higher-level nuances required to begin navigating investing and building in the South African venture capital industry. Ross recently re-launched Lamplight Advisory & Investments – providing financial advisory services to companies, focusing particularly on financial analysis, valuation work, due diligence, and strategic investment advice.

You can reach out to Ross on his LinkedIn page here.

On my journey to becoming a master capital allocator, one lesson down, a billion more to go.

Hope you all have a great day

-Mansa

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