By Simba Mswaka
ACCORDING to Haislip, who authored the “Essentials of Venture Capital”, “I think of venture capital as investing money into small, private technology companies expecting rapid growth.” The key words here are technology and rapid growth, this is because technology affords companies the ability to scale quickly and using less resources than a brick and mortar business.
I can make the best peanut butter in the world, but getting it to larger markets means setting up a factory and other things, whereas if it is a platform or an app, one can share it on the app store and you are now present in a new market.
One of the key themes behind Venture Capital (VC) is that it is a new method to finance business that is less risk averse than other alternatives such as banks and Private Equity. VCs were created to change the status quo and give financial and technical support to start-ups. Particularly technology start-ups because of the huge potential returns that they can return to their investors.
Venture Capital is a form of specialised financial intermediation that finances companies with the goal of realising a capital gain by bringing them public or having them acquired within a few years. When VCs take these companies public it is usually in the form of an IPO (Initial Public Offering) on the local exchange and sometimes even on a foreign exchange. Israeli start-ups have taken their companies public on the NASDAQ because it is much bigger than their local exchange and it provides a better opportunity to scale their business.
For a Zimbabwean start-up listing on the Johannesburg Stock Exchange (JSE) should be a goal because the JSE is one of the 20 largest exchanges in the world and the largest on the African continent.
Although listing on the exchange provides a sizable profit, there are many procedures that need to be fulfilled before an IPO can take place. Publicly listing a company means that regulators and financial experts will look through all company documents to ascertain if your company is a safe investment for investors. Company acquisitions on the other hand are much easier to facilitate and these require far less scrutiny than an IPO.
The Venture Capital business is considered to be very private by some sectors of the finance world because they do not disclose a lot of information because it is not always in their best interests to be 100% transparent with the market. This is partly because of the substantial risk that is involved in early stage/seed investments.
More start-ups fail than those that succeed, so VCs are more inclined to highlight their successes than failures. If a VC is investing in a disruptive technology it would not be in their best interests to inform the market about its intentions. Informing the market will jeopardise the business because the current market players will find ways to defend their market share and maintain their dominance.
The other side is that institutional investors put money in VCs because of the high potential returns, but given the nature of the business these are risky businesses that could possibly not make a return. An institutional investor with a significant influence will push the VC fund to invest into businesses that are less risky with some sort of proof to concept.
When a start-up is successful and goes on to become a lucrative investment that makes the VC a large return and the fund will want to exhibit this to the market. Institutional investors will gravitate towards the fund that has a great name in the market and this can be argued is the best form of marketing to attract new funding for the next round of capital raising.
Venture capital firms are specialised investors that raise money from pension funds, endowments, and other institutional investors. This occurs through investment vehicles (‘funds’) that make equity investments in innovative companies with high growth potential. To mitigate agency conflicts, venture funds have a finite life, typically ten years. They invest in their early years and then move to reap the fruits of their investments before they are liquidated and return money to investors. Large VCs can run multiple funds at the same time and each fund will be at a different stage of its cycle.
Total VC money invested in Africa in 2021 was almost $5bn and this number will certainly increase in 2022, which means technology and startups are gaining momentum in Africa. Unfortunately, in Zimbabwe there are no real VCs. We have a few Angel Investors but the VC asset class has not been fully explored. VC is also a numbers game and VCs need to find lots of good companies that they can invest in because the risk of failure is very high within this asset class.
I would love to be proven wrong and see many VCs hit my inbox and share their portfolio and assets under management, this would change my mind, but I know this won’t happen. I am currently helping a local startup raise a large amount of money and all the correspondence is for entities outside of Zimbabwe.
Simba is the Programs and Partnerships Manager of Tech Hub Harare, Startup Mentor and Future VC.
He can be reached on firstname.lastname@example.org
+263777628936 and @DrMswagga on Twitter