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The South African tech scene saw some pretty big exits in 2015, including radar startup iKubu’s January sale to Garmin and WooThemes’ exit to WordPress for an estimated R300-million. And with those exits comes increased investor appetite.
The latest player aiming to get its hands on a slice of the tech pie is Grotech, a newly established fund from VC company Grovest, which is looking to raise as much as R100-million to invest an average of R5-million to R10-million in high-impact South African tech startups.
Headquartered in Johannesburg, the fund includes private equity veteran Maclom Segal, former Accenture COO Clive Butkow, and seasoned business executive Fatima Habib among its board of directors. Heading up the fund is tech veteran Craig McLeod, who has experience working in and founding high impact startups.
More specifically, it’s looking for companies working on:
- Mobility and ecommerce
- Internet of Things and Smart Sensor Enablement technolgies
- Fintech including: Wealth Management, Payments, etc.
- Cloud and SaaS solutions
According to Butkow, the fund will take a “buy, build, and flip” strategy in any companies it invests in, working closely with the company founders to ensure a profitable exit, either to an outside buyer, or through an IPO. When it comes to finding outside buyers, Butkow reckons the fact that the fund’s located in Johannesburg may well work out in its favour. He’s got a point too. As the country’s economic hub, Johannesburg is home to many of the companies most likely to buy a startup Grotech’s invested in.
While Grotech’s approach may seem counter-intuitive to any entrepreneurs trying to emulate Amazon’s Jeff Bezos and build a 10 000-year company, it’s not an approach that’s without merit. For starters, it’s the kind of approach that helps create a class of wealthy entrepreneurs willing to either invest in other startups or start new ventures of their own with greater resources at their disposal.
According to Butkow, the fund hopes to facilitate this model by taking a hands-on approach that will see it assist companies with access to markets, strategy development, corporate governance, and marketing among other things.
The right kind of business
Grotech has also set out its criteria for investment, which include:
- Strong management team
- Clearly defined exit strategy
- Scaleable business model (profits increase faster than revenue) with potential to scale both within South Africa and abroad
- Early-stage businesses with a revenue and profitability track record that require growth capital — a large percentage of the overall portfolio (a small percentage of the portfolio will be post revenue however not yet profitable)
- High-growth potential market opportunity
- High-gross margin and high potential for recurring revenue
- High-revenue and profit growth potential
- Strong competitive position within their targeted sector with owned and differentiated Intellectual Property (IP)
According to Butkow, scaleability is particularly important and is the reason it won’t invest in service-based companies.
“Service-based companies end up selling hours for money and the margins on that just don’t provide the kind of growth we’re looking for,” he says.
Reducing the risk
While people outside the industry tend to view VC as a sophisticated form of gambling, Butkow insists that Grotech’s approach means that while risk can never be eliminated, it is minimised.
“We’re not gamblers,” he told Ventureburn, adding that the fund team always tries to make investment decisions based on their brains rather than gut feel. “Every time we make a quick decision we make a dumb decision, and we don’t want to make dumb decisions”.
It’s also willing to spread the risk by co-investing with other VC and angel funds.
The approach may already be paying off too, with Butkow telling Ventureburn that Grovest already has one high-profile tech exit on the horizon.
Of course, Grotech won’t be able to apply that investment model if it can’t attract investors of its own. Its reduced risk model is part of that, as is the prospect of high returns. Grotech aims to achieve an investment return of five to ten times the risk capital invested with a Targeted IRR of in excess of 30% per annum.
Grotech is also a section 12J company, meaning that investors can obtain a 100% deduction from their taxable income of the amount invested. That could make it potentially attractive to high-income earners. Certainly, your average person on the street probably isn’t going to be able to afford the minimum R200 000 subscription per investor.
The fund hopes to have between R50-million and R100-million raised by February 2016, with the option to be increased to R200 million.
Applications to invest in the fund are currently open online.