Grovest, a venture capital company (VCC) launched a fundraising initiative for its fund, Grotech, targeted at investors with an appetite for higher risk to invest in high-growth, disruptive tech companies.
SME South Africa sat down with Clive Butkow, chief investment officer of Grotech to find out who they are targeting to invest in the fund and why they believe there are extraordinary businesses awaiting investment.
Here is what you need to know about the new fund.
Who is the fund targeted at?
Grotech hopes to attract high net worth individuals with a minimum investment of R200 000. Butkow says they are incentivising investors by offering: “Forty-one percent tax relief for individuals and trusts, assuming they are at their marginal tax rate, and 28% for corporates.”
Investors are also entitled to deduct the full amount of their investment from their taxable income in the tax year ending 28 February 2016, he adds.
The returns are in line with the typical venture capital asset class, but significantly higher than other more conservative investment alternatives, says Butkow.
“We are also looking at asset/wealth managers to see Grotech as an alternative asset class for their investor base,” he says.
How much do they hope to raise?
The initial aim is to raise between R50 – R200 million by 15 February 2016.
Butkow says they believe it is all in the timing and what they are seeing in the market today. He says rather than investing in innovation and risk disrupting their own products and services, many corporates would rather buy innovation.
“Many of these small technology companies are disrupting the value chains of established corporates and disintermediating their revenue channels. This disruption has resulted in many corporates making large budgets available to buy the innovative companies that are disrupting them. This creates opportunities for Grotech to buy, build and exit these businesses to the corporate giants,” he says.
Who will they be investing in?
Grotech will invest minority stakes in established high-growth technology-driven startups, says Butkow.
Early stage businesses with a revenue and profitability track record which require growth capital will, according to Butkow, form a large percentage of the overall portfolio while early stage businesses with revenue but are not yet profitable will constitute a small percentage of the overall portfolio.
Butkow says they believe that there are more than enough of those types of companies in South Africa, and even Africa, to be selective and choose the most likely to succeed. He says, “We know there are extraordinary businesses awaiting investment.”
The question of risk
“The board of Grotech is committing R7 million of their own funds – the board will be actively involved post investment to reduce risk,” Butkow says.
Startups will be chosen according to a stringent investment criteria, which includes strong management teams, highly competitive positioning, scaleable business models with revenues and high growth potential, says Butkow.
“Grotech is not in the business of taking risk but rather reducing risk,” says Butkow, adding that they do this with risk mitigation strategies that include a credible board that has invested their own funds to ensure success, detailed investment criteria, tax deductibility of the amount invested in the tax year of investment, structuring and managing investments, stringent investment criteria applied by the investment committee, post investment management and monitoring by the manager as well as diversification of the portfolio of investments.
Butkow says Grotech’s detailed investment criteria will include a strong management team with the required execution intelligence and a clearly defined exit strategy.
He says they will also be looking at businesses which have already gained traction with a referenced client base, businesses with a scalable business model where profits increase faster than revenue, high growth potential market opportunity with cross-border growth prospects and export potential, high gross margin and high potential for recurring revenue as well as high revenue and profit growth potential.
Taking advantage of Section 12J
“Yes, there are now 27 registered section 12 J VCCs in South Africa however not all of them are trading entities,” says Butkow. He also says that they are seeing tremendous interest due to the significant tax advantages. “Venture Capital Companies are very successful overseas, particularly in Britain, with their similar Venture Capital Trusts.”
Non-financial support offered
Butkow explains that non-financial support for the startups will be built around sound post-investment management strategies. These will include strategy development which will help search for a repeatable and scalable business model.
Business development is another post investment strategy to assist companies in identifying strategic partners and distribution channels and networks to help scale their businesses.
Grotech will assist with identifying, monitoring and continuously evaluating the partner universe for networks, corporate governance through supplementing the board with external experts as well as financial reporting in line with best practices.
Butkow says they will also be involved in hiring human capital, sales, marketing strategy and legal compliance with IP and other legal requirements