Venture capital (VC) has long offered excellent growth potential to investors who are prepared to manage the higher risks that are associated with companies that are still in the early stages of their journey.
Not only are these entrepreneurial ventures essential engines of growth, but their disruptive business propositions provide healthy competition to the more established players in their industries, to the benefit of all the customers they serve.
Now more than ever, the South African economy needs the dynamism and growth potential these companies have to offer. Airbnb is an excellent example of a company that was born out of the 2008 crisis and completely changed the market for short-term holiday and business accommodation. After coming up with the idea of renting out an air mattress in their San Francisco living room, in 2009 founders Brian Chesky and Joe Gebbia received top-tier VC backing for their new company and went on to experience explosive growth.
The economy is reeling from the impact of the lockdown put in place to prevent the spread of the coronavirus, and it is these potentially fast-growing companies that will help provide the impetus needed to emerge from the crisis.
VC investment – how it’s done
The multi-billion rand Futuregrowth Development Equity Fund (DEF) has been investing in early-stage companies for years and remains committed to finding and investing in high-quality VC companies that show significant growth potential. DEF comprises a diverse range of companies from early-stage businesses that offer higher but less reliable returns, to mature businesses that have already built up successful track records and provide lower but more consistent investment returns. This includes investments in transport, infrastructure, housing, agriculture, development finance, renewable energy, health, education and SMME development, among others.
Futuregrowth’s investment team spends considerable time identifying the companies that offer the most potential for meaningful returns, and making investments where they believe they can propel the company’s growth to new heights and expand their reach beyond their existing footprint. Since DEF was set up in 2006, Futuregrowth has strategically invested in a handful of promising companies, with more in the pipeline.
But how do we go about identifying a potential VC investment that is likely to deliver these types of returns? It takes time and effort. For every 100 potential investments we look at, we only end up investing in two or three.
What are the main factors to consider? In our view, the younger the company, the more important the quality of the people driving the business. Also, success will depend on the size and nature of the company’s market, its revenue potential, the scalability of the business and the barriers to entry.
When analysing a potential VC investment opportunity, these are some of the questions we ask:
- Is there a large addressable market for what the company has to offer?
- Is the company in a high growth market?
- What does the company offer that others don’t?
- Is the business proposition disruptive in its industry? How does it compare to the competitors?
- What is the revenue potential, is the business proposition scalable, and are there barriers to entry?
- Does the business have a great management team? We would prefer to back an A team with a B idea than a B team with an A idea. Ideally, of course, we look to invest in a company run by an A team with an A idea.
- Does the management team have a mix of technical and business skills?
- Has the company gained traction in the market and is there proven demand for what it has to offer?
- Are the company’s forecasts achievable (realistic)?
- What could cause the business to fail?
LifeCheq – ticking all the boxes
One company that met all these criteria is Lifecheq (a digitised holistic personal finance business) and, as a result, we recently invested in the company. What we most liked about the company is that it has taken something like personal finance, which can be complex and then avoided, and used technology to offer their service in an attractive way to a far broader market.
Lifecheq’s differentiator is that it plans to make expert advice accessible to professionals and entrepreneurs who are not served well by the existing financial advice industry. The company can tailor and personalise financial advice to suit different individuals with different risk profiles by using data and algorithms to generate solutions.
The business has two target markets: 1) individuals, for their personal use; and 2) employers, who are interested in offering their employees a financial wellness programme. These potential markets give it diverse sources of revenue and expand the reach of the business across a broad variety of individuals and company employee bases.
Most importantly, the business has an impressive management team, with all the credentials and experience to qualify as an A-team. The four co-founders and members of the executive management team have a diverse range of experience from financial services product design to software engineering.
Abu Addae, co-founder and CEO, rapidly rose through the ranks of Old Mutual, eventually serving on Old Mutual Emerging Market’s executive committee. He has an extensive understanding of all levels of financial services, from product design to customer service. On the operational side, Shen Tian, co-founder and COO, has a computer science and actuarial science background, with a wide range of management experience, from leading highly technical projects to operational planning for a business unit. In charge of the technology side, David Jacka, co-founder and CTO, combines a deep software engineering background with a passion for using technology to simplify people’s lives. Finally, Dylan Flint, co-founder and Head of Advice, has extensive experience in all aspects of modern finance, including capital markets and product design.
Lifecheq more than met our requirements as a disruptor in the financial services industry, with a well-defined, addressable market, providing personal finance technology-based services to mass-affluent and emerging-affluent individuals. We also took comfort from the fact that the business had already built up traction and had proved its credentials to another significant investor that had bought into the business vision and proposition.
Futuregrowth’s recent investment in Lifecheq adds to our other early-stage investments. In late 2018, we invested in Yoco, the innovative technology-driven point-of-sale payments provider. DEF was the first South African institutional investor in the company and, to date, the investment has proved to be a success.
DEF is well-positioned to benefit from the significant growth potential of these entrepreneurial, early-stage investments - while relying on its core established investments to provide the security and consistency of returns needed to balance out the risk-return profile of the Fund.
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