Venture capital is not about funding a small business to get big, it is about funding a big business starting small

1 December 2004

At the second Food For Thought dinner round-table, Blue Catalyst and the South African Venture Capital Association (SAVCA) co-hosted guests from the public and private sectors to explore the state of Venture Capital in South Africa. Most concluded that there is indeed a gap in this market, and a market in this gap.

Blue Catalyst CEO Kevin Fleischer said that one of the participants jokingly summed up the industry saying, "Venture Capital is like teenage sex - many are talking about it, most would like to do it; but those that are, are not doing it very well." The intent of the dinner was to develop practical suggestions for industry participants. Out of the lively debate, several themes emerged.

Apply a different mindset

Most investors in the VC industry are from private equity houses, which results in a focus on a later stage of the investment cycle. Funding decisions for them would be based on strong cash flows servicing the required funding.

Venture Capital is not about a company's ability to liquidate debt, but rather to fuel the fires of growth. Venture Capital has to be patient capital, and VC managers have to remain active with their investments for sustained periods. This needs a hands-on approach best suited to experienced managers, engineers and scientists with an understanding of finance. It is these skills should be sought out to manage true Venture Capital investments.

Government has an important role

In spite of the poor record of government-managed Venture Capital initiatives both locally and internationally, it was agreed that government needs to be integrally involved in developing the VC market in SA. However, a few key recommendations were made:

• Government should provide soft money with a stable, long-term investment horizon;
• However, for this purpose, government should employ commercial skills at market rates, but there should also be the appropriate downside risk.
• Avoid giving the government initiatives "schizophrenic" mandates. Funding for development and maximising returns cannot both be absolute goals.
• Do not expect SMME finance to cover the VC industry. Specific funds should continue to be applied by government to the VC market.
• There is no need to subsidise mentors or offer tax incentives to angel investors. They will come into the market naturally once the quality deal-flow improves.

Going international is not easy

It is not essential for a good VC investment to have international potential, but it will often be a key investment consideration. Guests agreed strongly that many SA businesspeople under-estimate the complexity, risk and cost of trying to take a local business into international markets. There were two suggestions;

• Local companies should never attempt this without specific skills or partners in the relevant markets (even if this means giving up equity).
• Investors should be prepared for the relative investment requirements - what requires R5 million in SA could easily require US$5 million in the USA. Local investors should have the ability to co-invest internationally where appropriate.

Incubators need money

It was agreed that incubators are an important part of the industry, and that there should be more. However, the fact that the incubators do not have their own funds to invest was seen as a major flaw. It was suggested that a central seed capital fund for incubators should be established, using the incubators as the primary filter for applicants.

In summary, it was felt that the VC industry in SA is still in an imbalance, with too many poor quality deals chasing too little inexperienced money - not yet a recipe for success. "The government did extensive research into this market in 1999," Fleischer said, "and the comment from the dinner echoes these earlier conclusions. However, the time seems right to revisit these issues, and we hope that the concrete suggestions from the dinner will spark renewed interest in the market."

ENDS

Prepared by: Beachhead Media & Investor Relations
Jennifer Cohen, Ocean Ngobeni, Botshelo Kheletsane
011 214 2400
On behalf of: Blue Catalyst
Further info: Kevin Fleischer - Blue Catalyst

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