Less risky

The South African venture capital sector has received a much-needed shot in the arm with the announcement that international financial services giant Visa has acquired Cape based start-up Fundamo for US$110m. Fundamo is a platform provider of financial services for mobile network operators.

The deal comes hot on the heels of the April announcement that Pretoria-based CSense systems would be acquired by GE Intelligent Platforms and that Horizon Equity Partners was able to sell its investment in Peresys to Australian firm IRESS for R375m in January.

Fundamo, whose shareholders include the likes of Sanlam, Remgro and HBD Capital, negates the argument that major technology businesses with worldwide appeal can’t be built in SA. Fundamo has more than 50 active mobile financial services deployments in more than 40 countries, with 27 of those in Africa, Asia and the Middle East. It has a base of more than 5m registered subscribers and can reach as many as 180m subscribers across the board.

Such success stories are relevant for South African investors because, after the recent changes to Regulation 28, professional asset managers and pension funds can begin to take a serious look at non-traditional asset classes, such as socially responsible investing, private equity and venture capital as potential avenues to deploy capital.

With equity markets choppy and transactions such as Peresys generating a 14 times return on cost, there are many reasons for professional investors to try to get their heads around the risk and return trade-offs of venture capital in SA.

Finweek put it to Keet van Zyl, of PoweredByVC, the management company that handles the Mark Shuttleworth-owned HBD Venture Capital’s SA portfolio of investments, that venture capital was finally turning the corner.

Van Zyl says: “The typical venture capital investment cycle in SA is four to seven years, so some successful unrealised investments in VC portfolios should become exit ready now. The formal market in SA is also starting to mature, with various direct and indirect factors assisting the positive momentum in the industry.”

Van Zyl added there was a range of private and Government initiatives bringing together different stakeholders in support of entrepreneurship. That meant overseas investors are looking towards diversifying into emerging markets and the angel investment space in SA is more active than most people would expect.

JP Fourie, CE of the South African Venture Capital and Private Equity Association, wouldn’t go so far as to herald a new era in venture capital investing but did see some positives. “These transactions provide some buoyancy for the market.” However, Fourie says while Regulation 28 changes – coupled with some tax incentives – should boost the market, the sector itself isn’t seeing significant moves from the traditional asset gatherers into the sector. “In international markets there’s still a far closer relationship between stakeholders and we need to work harder to close that gap.”

One positive that came out of the Fundamo transaction was the ease with which it was concluded. With the Massmart/Walmart deal having to jump through legal loopholes, it was an obvious question for Visa. “We didn’t have any problems doing the deal. In fact, the transaction was concluded in just 90 days,” says Bill Gajda, head of global mobile product for Visa.

Leading South African entrepreneur Rob Stokes, of Quirk Marketing, says the Fundamo deal vindicates the establishment of the Silicon Cape initiative, which has sought to develop a culture of bringing the same entrepreneurial spirit of Silicon Valley in the United States to SA.

Says Stokes: “The acquisition of Fundamo by Visa is a real boost for the profile of Silicon Cape and gives credence to the work we’re doing to put Africa on the map as a genuine hub of global tech IP. Fundamo has been one of our success stories for a while now and it’s thrilling to see its hard work and vision vindicated by this deal.”

While the Fundamo and CSense deals are steps in the right direction, there’s still much work to be done to make venture capital in SA a viable asset class.

Eric Edelstein, founder of local tech start-ups Springleap.com and Evly.com, says his recent experiences in San Francisco highlight the difference between the US and domestic venture capital markets.

Edelstein says while there are plenty of investments in SA there are still some fundamental weaknesses in the industry. “There’s not a mix of different levels of investment, with venture capital businesses investing in early stage companies versus Series A type investments.” He says most venture capital investors in SA want to come in with the same level of risk as private equity investors, by entering into deals later than their overseas peers, but want the rewards offered by international venture capital benchmarks.

An example he uses is that the $11bn fund NEA Ventures was prepared to consider a $1m round of funding for start-up GrubWithUs. The fund saw an investment opportunity for earlier stage capital and had a flexible enough mandate to do something with it.

Another area where Edelstein believes South Africans can be more innovative is by learning what US companies are doing with regard to legal expenses from early stage businesses. “All the major law firms are happy to give $25 000 to $60 000 of credit to approved tech start-ups, which is only paid when they raise Series A – not seed – and they take a small percentage of the start-up, usually 1%,” he says.

An observation Van Zyl makes is investments need to be built with an overseas audience and buyer in mind. “Local ventures need to be internationally focused from the outset, as strategic investors will most likely look at how they can use the platform that’s been established as a springboard for further growth.”

Start-ups to watch

FireID: It’s been touch-and-go for Cape Town-based FireID. Despite winning the 2010 World New Product Innovation Award by Frost & Sullivan, plus showing good revenue prospects, the company lost its key funder in January when Johann Rupert’s Reinet Investments decided to pull the plug on funding.

It seemed FireID would have to shut down but it was saved at the 11th hour by Alan Knott-Craig junior and his investment company, World of Avatar. Knott-Craig believes in FireID’s business model and says it has good management. FireID develops a mobile password authentication system that secures transactions for financial institutions. It’s picked up banking customers worldwide and has solid prospects.

Motribe: The brainchild of Vincent Maher and Nic Haralambous, who previously worked for Vodacom dreaming up mobile social networking solutions for the group. Now out on their own, they have developed a mobile social networking platform allowing people to create their own mobile social community. Motribe has had massive growth in subscriber numbers since launching late last year and recently celebrated hitting the million-user mark with a party in Cape Town. Motribe has a decent revenue model and is building a massive following, riding the wave of growth in mobile broadband.
 
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