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South Africa’s downgrade to junk status earlier this month by two rating agencies may have depressed Michael Jordaan, one of the country’s most respected venture capital (VC) investors, but he believes the downgrade is “nearly irrelevant” to startups.
“In this tough economic climate it is useful that one of the advantages of startups as opposed to big business is that the macro economics are nearly irrelevant as it is far more important for the startup to first succeed in its narrowly defined micro-market,” said Jordaan in an email to Ventureburn.
However, in a wide-ranging interview, the former head of First National Bank, now the founder of Montegray Capital, bemoaned the present glum economic mood in South Africa.
‘SA could easily grow at five percent if right, albeit tough decisions are taken’
He said the current political situation and the junk rating depressed him, adding that the economy could “easily” grow at 5% if “the right, albeit sometimes tough decisions” were taken.
“We could be creating so many jobs every year if we just followed growth strategies that have worked elsewhere instead of being ideological,” he added.
“For example solar power is growing exponentially elsewhere but in sunny SA we seem intent on doing an unaffordable nuclear deal. And we pour money into a loss-making airline that the private sector could run at a profit.”
Jordaan said though he has had no interaction with the SA SME Fund he found it disappointing that the fund, chaired by Discovery CEO Adrian Core, appears to be taking its time to set up and begin investing.
“Ideally they should have been disbursing funds within 90 days of coming up with the concept, probably by partnering (with) established VCs in the industry who are all seeing more promising deals than they can fund,” he said.
He added that the government’s decision not to participate in the fund is “highly regrettable”, saying startups are crucial to solving SA’s biggest problems, from employment to education.
However he believed the Section 12J venture capital tax incentive launched in 2009 had made a difference and hoped that the “inevitable” teething problems with would be addressed.
Invested in 20 firms
Jordaan said Montegray Capital has invested in 20 businesses, with 19 already listed on the fund’s website. He added that the latest investment would be announced in due course so as not to alert the competition yet.
He declined to disclose the size of his fund or how much he had invested so far, pointing out that he had no third-party investors and was managing his own monies.
He could not disclose the number of directors or jobs created as he did no track these, but added that “the first priority of every startup is just to survive so we focus obsessively on proving the business model, which is tough enough”.
The fund, he said, is not exit-focused and added that he simply wanted to help entrepreneurs to build sustainable businesses. “Some of the companies in which we have invested have raised subsequent funding in higher rounds but without us taking any money off the table. We prefer it that way too,” he said.
However he said all the tech firms that he is involved with are creating jobs and are continually looking for skilled employees.
“The biggest skills shortage is for software developers and I am very proud that one of our initiatives, CodeX is training 40 junior developers in 2017. With more industry support the model can easily scale to 400 or even 4000 in time.
“These are students from underprivileged areas that prove that they have the critical thinking and problem-solving skills required to become great developers and employees, despite a pretty bad primary and secondary education system.”
He said while there had been a growth in black Africans involved in tech startups, this was “sadly off a low base”. “In time CodeX hopes to make a difference here,” he added.
It is sad when our policies have scarcity thinking — that skilled foreigners will take locals’ jobs
In addition he said the country should be more open to letting in foreigners with skills that can grow the economy.
“It is sad when our policies have scarcity thinking — that skilled foreigners will take locals’ jobs — and not abundance — that thriving businesses create many more new jobs,” he said.
‘Add to network’
Cape Town and Johannesburg have been recognised as the country’s top startup centres, but Jordaan said rather than trying to mimic these cities, authorities from other urban centres in the country would benefit more by adding to the network effect that the two cities have already created.
Jordaan is also involved in VC fund Angelhub Ventures and said the team receives and processes up to 10 applications a day.
“There is simply not enough time to have coffee with all the prospective startup founders so we have to follow a slightly more structured process, which is where Angelhub excels,” he said.
Recalling his first two venture deals, which he conducted when he was still employed, Jordaan said these “did not work out”, adding that he’d rather not mention the companies involved.
“It takes quite a bit of (lost) money to educate a venture capitalist. Failure is inherent in startups and in the venture capital industry, so it is very different from banking where a four percent bad debt ratio would set off the alarm bells.
“Venture capitalists expect five out of 10 investments to go bang, three out of 10 to do okay but then have two that shoot the lights out,” he said.
With Jordaan’s former employer FNB this week cutting its economic growth outlook for South Africa to 0.7% in 2017, down from the 1.3% forecast in the Budget in February, he will likely be hoping that the investing outlook won’t prove as gloomy as the country’s deteriorating economy.