Changes to Section 12J VC regime won’t spell doom for all funds says venture capitalist

Experts last year raised concern over new deductions limits for investors under Section 12J of the Income Tax Act, saying it will reduce the amount of funds that venture capital companies (VCCs) can raise. But Knife Capital‘s Keet van Zyl argues some VCCs can still succeed despite the changes.

The VC tax incentive, set up under Section 12J of the Income Tax Act, allows investors who make investments in approved VCCs — that then invest in qualifying small companies — a tax deduction.

The limit, which was contained in the Revised Draft Response Document on the 2019 Tax Bill released late last year, will see individuals and trusts only being permitted to claim a maximum tax deduction of R2.5-million and corporates of R5-million, per year.

Those in the industry have hit out at the changes, saying it will reduce the amount of funds that VCCs are able to raise (see this story and this one).

VCCs that refined their offerings and partnered with the right investors can thrive despite Section 12J changes, says venture capitalist

But Van Zyl (pictured above, far right with partners – from left to right – Eben van Heerden, former Springbok rugby player Bob Skinstad and Andrea Bohmert), a partner at Cape Town based VC Knife Capital, says the changes won’t hit all VCCs.

“While there are challenges facing the industry, those VCCs that refined their offerings and partnered with the right investors created viable sustainable business models,” said Van Zyl.

He said based on the success of Knife Capital’s R180-million Section 12J venture capital (VC) fund KNF Ventures, which is just about fully deployed and where Knife’s portfolio companies are growing in excess of 50% year-on-year, he and his team have taken a decision to extend the fund for further investment.

‘More than just a tax break’

Van Zyl also pointed to the importance of looking beyond the 12J tax incentive.

“For us it is about more than the tax break. Sure, it is a good incentive as investors start the investment process in a favourable Internal Rate of Return (IRR) position due to the immediate tax benefit.

“But our aim is to leverage knowledge, networks and funding to accelerate the growth of South African innovation-driven SMEs and generate enhanced returns for entrepreneurial-minded investors.

“We have an amazing investor base of just over 100 private investors and institutions – including the SA SME Fund – that we are extremely proud of. So, there needs to be a mutual fit on investment philosophy and values”.

He says KNF has so far created 54 jobs within its 12J portfolio.

KNF’s current portfolio includes:

• Quicket – Cloud-based ticketing platform for any size event.
• DataProphet – AI/ Machine Learning for the autonomous manufacturing industry.
• SkillUp – E-Learning platform for tutoring and Code4Kids programme.
• PharmaScout – Internet of Things (IoT) temperature monitoring solutions for the pharmaceutical industry.
• Pura – Carbonated beverage brand with low sugar and natural flavour innovation.
• Cradle Technologies – SaaS Warehouse Management Solutions for SMEs.
• Snapplify – Edtech company enabling digital learning through an educational content marketplace.

Read more: Smaller Section 12J funds will struggle to raise investor capital with new changes [Opinion]
Read more: SMEs, investors to lose out with new threshold and changes to Section 12J [Opinion]
Read more: Is spike in energy deals evidence that Section 12J funds are driving VC boom in SA?
Read more: Experts raise concern over new Section 12J rule that limits deductions for investors

Featured image (from left to right): KNF Ventures co-founders and partners: Keet van Zyl, Eben van Heerden, Bob Skinstad and Andrea Bohmert (Supplied)