Residents of Cape Town were treated to sights of a robot dog walking through the CBD as Dwyka Mining Services showcased Boston Dynamic’s Spot….
Glasses don’t come cheap – ask anyone who has accidentally sat on a pair or had them munched by their pet dog. It’s something Leon van Vuuren is trying to solve.
His Paarl-based startup Eyecover offers to insure glasses for optometrists by partnering with certified financial services providers. The business launched in March 2015 and today has 10 employees.
In June last year, financiers Business Partners invested R1.8-million in EyeCover in return for a 30% stake in the company. The funding went to expand sales, marketing and distribution.
“Outside of the usual statutory documents and application forms, we had to provide an extensive business plan, financial forecasts, intellectual property and shareholder write-up,” said Van Vuuren (pictured above).
In the first six months following the equity injection the company saw growth of 90% month-to-month, which has slowed to 15% per month since then, said Van Vuuren. He added that the product is currently offered by 200 or eight percent of the country’s registered optometrists.
His startup is one of 19 companies that Business Partners has invested in since the inception of its R400-million VC fund in 2012.
‘We had to provide a business plan, financial forecasts, intellectual property, shareholder write-up’
Jeremy Lang, Business Partners’ regional general manager for Inland West, said the financier looks to make a 25% return on investment over a five to seven-year period and has so far deployed R97.2-million.
Of the 19 investments, the financier has exited from two. These include an IT solution for parking lots which Business Partners exited to a listed property management firm and a manufacturing business specialising in food packaging, where the financier exited to a private-equity firm.
In the first of the two, Lang said Business Partners exited because of a difficult relationship it had with the other shareholders, who he says were “bullying” the financier. The financier, he said, “made some money, but not much” in this investment.
In the second, the business had grown too big for Business Partners to stay invested. In this investment, Business Partners made better returns than from the first, Lang said.
‘Most Cape, Joburg-based’
Delving into the 19 transactions, Lang said nine each have been in Johannesburg and the Cape and one has been made in Durban.
He said the fund typically makes investments of between R3.5-million and R7-million in companies that already have a proof of concept or prototype (it doesn’t fund companies still in the research and development or seed stage). These can be in the pre-revenue or post-revenue stage.
Some of the investments have been startups, while others are existing companies that are looking to introduce new product lines.
About half of the 19 investments are in technology — in things such as a fire detection unit, remote diagnosis for the medical sector, a parking solution, electronics and telecommunications. Lang however conceded that most of these investments have not been in “cutting-edge” or novel solutions.
In addition over half of the funding disbursed so far (R57m) has consisted not of equity finance, but rather of term loans coupled with a royalty the funder takes.
He said in some instances it doesn’t make sense for Business Partners to take equity — for example in cases where there are too many shareholders or where shareholders can’t agree on what equity stake to relinquish, or where there is another institutional equity investor already involved.
‘Can’t be too early-stage’
Applications to the fund have come largely from referrals in Business Partners’ network — a large number from the Council for Scientific and Industrial (CSIR), Technology Innovation Agency (TIA) and business support providers.
Lang says the funder usually rejects applications to the fund when:
- The company is too early-stage.
- The entrepreneur is not the right person to take the company forward because they either lack the necessary technical expertise, have a questionable integrity or lack business acumen.
- The business isn’t likely to be as viable as the entrepreneurs makes it out to be.
He said, depending on the complexity, a due diligence can take up to six months.
While investees and funders often haggle and disagree over a valuation, Lang says Business Partners strives to ascertain a price that is fair for both parties, using discounted future cashflow. The financier does so by basically attempting to estimate future cashflows through monthly projections, and then discounting this back to the present-day value.
Investees can benefit from business support and insight offered by the financier. But as Business Partners doesn’t take a seat on the board of those companies it invests in, but meets only monthly with shareholders, the financier “can plug holes only up to a point”, stressed Lang.
He said Business Partners has not seen in a drop in applications to the VC fund, despite the slowing economy. If anything, he reckoned there may have been an uptick in applications perhaps, he surmised, because awareness of the fund has grown since the offering launched five years ago.
While he said there is no shortage of innovation in South Africa, especially in Cape Town, he couldn’t say how many applications to the fund the financier receives each month.
He said further funding could be raised as the fund is not capped at R400-million, as capital has been raised from the financier’s balance sheet itself.
‘There is no shortage of innovation in our country, especially in Cape Town’
At present there is no overall head of the VC fund. Investments are rather overseen in each of their respective regions by each of the four regional managers, with Lang being one of these.
‘Cleaned up our business’
Among the 19 investments, Business Partners also invested in a Cape Town startup that is developing a locally made fire detection device.
Zyteq Fire founder Mark Mundell said the application process took about six months until Business Partners funding was approved at the end of 2015. He would not disclose the amount in funding, but said the financier took an 18% stake in the business.
Mundell and the company’s three other founders started the company in 2015 after the US company they worked for in Cape Town, that previously made fire detection devices, relocated its factory to China. All Zyteq Fire’s 25 employees previously worked at the US company.
He said bringing Business Partners on board as a partner in the company has helped put some structure in place in the business by getting shareholder agreements signed.
“It cleaned up a lot in our business — that to us was very useful,” he said, adding that the financier is actively helping the business. “They don’t just sit on the outside, they really get involved in your business.”
Mundell said the product is currently undergoing certification in the EU and the company would likely launch it later this year. It would initially be aimed at the South African market, but he added there was already interest from overseas to sell it there.
Van Vuuren advised other business owners looking for an equity partner to ensure that such a partner brings not only funding to the table, but expertise, mentorship and opportunities. “The most important aspect is to ensure that you will be able to walk a long and prosperous road (for both parties) with the possible equity partner.”
Featured image: Eyecover founder Leon van Vuuren (supplied)