Can 12J VC tax incentive create the jobs South Africa badly needs?

Tim Strang wants to provide spaza shops and wholesalers with a better way to order stock, through an app. He’s betting on creating hundreds of jobs for sales agents that deploy the app — thanks to an investment under a venture capital (VC) tax incentive.

His Durban-based company and app, Spazapp is one of a number of firms that venture capital companies (VCCs) have invested in under the incentive, which is administered by the SA Revenue Service (Sars) and falls under Section 12J of the Income Tax Act. It allows investors to get a tax rebate if they invest in a VCC that in turn invests in qualifying SMEs.

Since receiving an investment from Kingson Capital last year, Strang’s startup has created five full-time jobs. His startup also makes use of 12 part-time developers and drivers and has helped create 160 field agents who market the product.

Now Strang is aiming to push this to 400 agents by the end of this month, as adoption of the app gains traction. So far 1500 stores have signed up in Gauteng, Durban and the Eastern Cape.

While he declined to reveal the amount his startup received from Kingson Capital, he said the VCC has taken a 25.1% stake in his business, while also providing his startup with BEE ownership through a community trust structure that the fund uses.

While at least 200 jobs were created from 27 investments, most deals were in existing firms, asset-based solutions

While the incentive has been in place since 1 July 2009, it only took off about three years ago after the SA Revenue Services (Sars) made several changes to make the incentive more attractive to investors. The number of VCCs approved by Sars now stands at 58 — contained in a Sars list (opens as PDF) of approved VCCs.

Yet while the incentive has resulted in the creation of at least 200 jobs from 27 investments so far (which are listed below) — from four fund managers that were willing to share jobs figures with Ventureburn — a large number of investments have gone to existing businesses which should arguably be able to source bank finance, and to asset-based solutions which employ few if any employees.

For example, at least three funds are helping investors to bankroll solar photovoltaic units which will then be paid for by client businesses which will rent the power generated by the units.

One recently approved 12J, Optomise VCC, lists on its website that it invests in “vehicles, equipment, office furniture and fittings” — not exactly the kind of investments one expects will create the jobs or innovation the country badly needs.

Gadi Tal Cohen of Optomise VCC did not respond to telephone or email questions from Ventureburn on how many jobs the investment his fund had backed had created, saying only that he did not have time to respond because he was busy “trying to grow the economy”.

While two firms that Sanari Capital has funded are existing business, the fund’s head Samantha Pokroy said her fund isn’t aimed at businesses that “should have debt funding” from the banks or elsewhere.

“We fund businesses looking to scale but that don’t have the smart capital and market access to support their growth,” she said, adding that the fund doesn’t invest in startups.

She said it was too early to have quantified the number of jobs, but she said as the focus is on aggressive growth and expansion, she expects that the fund will help companies to post “significant” job creation.

‘Over 200 jobs created’

However of the fund managers that were willing to share jobs figures with Ventureburn, four reported that collectively their 27 investments have created at least 200 jobs. These are:

• Westbrooke Capital Management which has two funds — a hospitality and general fund. Since March last year these have created 30 jobs through 14 investments (from early-stage to firms over 10 years old) in hotels, equipment rental companies, alternative energy providers, infrastructure and fibre-optic networks, said the fund’s Richard Asherson. He said more than 400 additional jobs have been created through the creation of additional revenue streams within the businesses the funder has invested alongside. So far the two funds have raised over R865-million from over 300 investors.
• Anuva Investments has created 62 jobs from investing in three companies, said the fund’s founder Neill Hobbs. These include eight jobs in a company retailing cellphones to low-income consumers, 50 jobs in a medical clothing manufacturing firm and three in a business that distributes the medical clothing. The fund has also saved a further 103 jobs in turning around Mastercare, an electronic repair business. In all R40-million of the fund’s R185-million has been deployed.
• Lucid Ventures has created “over 100 jobs” from five investments since the fund was approved in December 2015, said the fund’s Gidon Novik (these include a Jamie’s Italian outlet in Melrose Arch, Tented Adventures, Radisson Cape Town, 16 on Bree Hotel and City Helicopters). Novik said the VCC funded businesses that had the potential to generate over R100-million in revenue within five years and that are driven by “exceptional entrepreneurs”. The fund’s main focus is on the food and hospitality sectors but will expand to other sectors. So far the fund has raised R120-million in capital, mainly from successful entrepreneurs who are involved in the fund.
• Kingson Capital has created eight jobs while supporting a further 52 existing jobs from the five investments it has made to date, said the fund’s Gavin Reardon. These include three startups and two existing businesses. Reardon expects the companies to add another “60 to 75 jobs within the next six to 12 months”. The investments have been in the consumer tech space (Finfind, Spazapp and SMEasy), in the telco and data space (Home Cloud) and in inks and coatings technology (Colorgen). Reardon did not want to disclose the amount of capital the VCC had raised so far. The fund allows investees to become black empowered as a community trust, with black beneficiaries, with a share in the fund.

‘No obligation to report’

In response to questions on the number of jobs created by VCCs, Sars spokesperson Sandile Memela said VCCs are not obligated to report on job creation as it is not a requirement to qualify as a venture company.

“The revenue costs of incentives are published annually in Annexure B of the Budget Review and it is envisaged that the cost of the section 12J incentive will be published in future,” he added.

He said when it came to the type of investments that VCCs make, the rules of the tax incentive for equity investments in venture capital companies are “not prescriptive on the type of businesses that can be conducted”.

However he said impermissible trades and investment income earned by qualifying companies are specifically discouraged. Impermissible trades include certain trades involving immovable property, financial and professional services, gambling, liquor, tobacco, arms or ammunition.

Ventureburn asked Sars whether the incentive should be aimed only at supporting small business, new businesses, black business and innovative technology startup companies rather than a more broad range of investments that qualify as small enterprises. Memela directed Ventureburn to the National Treasury, which could better address questions relating to the rationale of the tax policy.

Featured image: Spazapp CTO Byron Verryne and CEO Tim Strang (Supplied)