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 globally-competitive returns?
As a managing partner of a VC 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 market 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. With necessity being the mother of invention, when it comes to finding commercial and innovative solutions to local challenges with global relevance, local entrepreneurs and their African neighbours are paving the way.
Generally, VC investors place 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 start-ups and entrepreneurs, and thus scarcity of financial resources does not hinder the potential path to success for these start-ups. However, access to capital doesn’t necessarily translate into commercial success.
“In a time of subdued domestic investment returns, and political and economic uncertainty, many investors are increasing their offshore exposure in markets that they typically don’t fully understand and that offer minimal returns.
In Africa, there is a shortage of affordable, appropriate and unrestricted capital, which means only a few of the very best businesses 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.
On top of being commercially viable, there is the question of global scalability. When VC investors look at tech businesses, they tend to ask the following questions: “What does this business have that a US$bn, US-headquartered, VC-funded business does not have? Why would a multinational company contract with a start-up from the bottom tip of Africa?
By way of an example, last year we invested in a Johannesburg-based, world-first, on-demand private security aggregation platform 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 US. Thus, intuitively, the most innovative solutions in private and corporate security should originate from places most impacted by high incidences of crime, such as South Africa.
This premise applies to many other sectors locally and in Africa, where local challenges are so pervasive that innovators simply have no choice but to tackle them head-on. 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, and political and economic uncertainty, many investors are increasing their offshore exposure in markets that they typically don’t fully understand and that offer minimal returns. VC as an investment class, can fulfill the demand of investors who want to diversify and internationalise their portfolios, whilst also earning above-market returns.
Whilst 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. And by investing in local start-ups who compete on the world stage, VC investors can achieve their goal of having offshore exposure with globally competitive returns.
Ian is the Managing Partner at HAVAÍC, an investment and advisory firm that specialises in early-stage, high-growth African technology businesses.