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Knife Capital at the cutting edge of tech venture funding

South Africa’s leading venture capital investor aims to be the funding partner of choice in growth industries

Moneyweb is passionate about supporting high-impact South African entrepreneurs and sharing their stories to inspire others. Over the next few weeks, Moneyweb will be interviewing the finalists in the third round of the Grindstone entrepreneur program driven by Knife Capital.

NASTASSIA ARENDSE: Knife Capital is a leading South African venture capital investor, focusing on technology-enabled ventures for a sustainable impact on innovation, job creation and growth. It aims to be the funding partner of choice in Southern African innovation-driven ventures that have the potential to disrupt high growth industries in the knowledge-based economy, while having a positive social impact. I’m joined on the line from Cape Town by founding partner, Keet van Zyl. Keet, thank you so much for your time and welcome.

KEET VAN ZYL: It’s a pleasure, thanks, it’s nice to be here.

NASTASSIA ARENDSE: So I know you’ve been active in the entrepreneurship space for quite some time, so give us your assessment of the entrepreneurship landscape in South Africa?

KEET VAN ZYL: I think at the moment it’s a very exciting landscape to be in, there is also quite a lot of noise, so one has to pick the winners and figure out who the partners are who are going to add some real value. But ja, on the tip of Africa there is quite a lot happening, African problems, African solutions, a lot to do with mobile, a lot to do with fintech, a lot to do with niche e-commerce solutions and then also the clean energy space. So a lot of these things do have a dual financial impact and internal rate of return growth and exit to shareholders and all the rest of that but at the same time there is an element of social impact with banking the unbanked or solving some energy crisis issues or something like that, which has a dual purpose, which is a very exciting space to be in.

NASTASSIA ARENDSE: The tech space, I’ve spoken to a lot of entrepreneurs and a lot of people who are in the funding side of things, and they say the tech space is very interesting, they love the start-ups there, especially those who are involved in fintech type of things. What’s the ecosystem like for tech start-ups, how do we fare in terms of other counterparts, are we improving?

KEET VAN ZYL: Improving but not on par, I think there is still a lot to be done. Industries and companies like SiMODiSA, there are a lot of corporates coming into this space, a new government SME fund initiative, so there is a lot more support coming this way but in terms of the ecosystem itself it is still very much in silos. So if you ask an entrepreneur do you feel like you’ve got the necessary support in terms of funding or mentorship or anything that you really need to grow, they would probably give you a different answer from whether you ask some on the so-called support providers to say, well, do you think there is enough support for entrepreneurs. So somewhere in the middle there’s a bit of a gap, let’s call it a packaging crisis, where some of the support elements and the players in the ecosystem are not quite gelling yet. But there are a lot of people working quite hard behind the scenes to back sure that the glue between these different ecosystem players come together and it clicks.

NASTASSIA ARENDSE: I know you are involved in this development programme called Grindstone Accelerator, take us back a little bit, how did it all start and come together?

KEET VAN ZYL: Initially Andrea Bohmert, my partner at Knife Capital, and Eben van Heerden and I decided to see if growth can really be engineered. If you take ten companies at once and really look at them for a long period of time, so not a quick in and out programme, to really look at companies that are on the growth path anyway, so so-called scale-ups and then add a whole lot of targeted support elements to that in a year-long programme where the companies get exposure to intellectual property lawyers, to the best marketing brands and so forth in the country, where one can accelerate that growth and really prove the point of engineering growth. So that was about three or four years ago and so we had Grindstone 1, Grindstone 2, we’ve just launched our third cohort of Grindstone companies and it really has been quite successful for us in its own right, the company average revenue growth on each of these two years has been about 61%, the second year was 64% and it’s not off a low base, these companies average around R5 million, it depends which year you take, but the new intake is about R5 million average revenue per company. Some of the ones before have been R8 million or so. So there is a base and adding between R40 million and R60 million over the ten companies to the revenue base, employee growth has been in Grindstone 1, 43, in Grindstone 2 it was 70 new jobs created. So when you add growth and efficiency and all these metrics into a pot, and job creation is a by-product, for those are quite successful metrics. We had one or two really good corporate partnerships, MMI invested in TaxTim at the beginning of the year, which was in our Grindstone programme, and also one of our very nice success stories was Stellenbosch based company called iKubu, which was acquired by Garmin, so that was also directly out of the programme. So the guys have done well and continue to grow.

NASTASSIA ARENDSE: So in terms of the criteria, if someone is listening and they are thinking, well, I think my business fits to participate in the Grindstone programme, what type of criteria are you guys looking out for?

KEET VAN ZYL: Generally it’s innovation-driven companies, so companies where there is some intellectual property, barrier to entry of some sort. It needs to be a so-called scale-up, so we’ll only look at post-revenue companies that already have some element of traction. To give you an idea, the average companies are between six to eight years old already. So it’s not at the idea or concept phase, there are many other good incubators to take those companies in and help them with that area. It’s only once a year that we have an intake, so unfortunately we are just about to announce the next ten companies, so at least for the next year one can cheer us on from the sidelines and get closer to the team and stuff that doesn’t preclude anyone from approaching us for investment. But we’ve got some really exciting companies in the ticketing space, Quicket, we’ve got two companies in the Bitcoin space, we’ve got two companies in the online education space, so we’re looking at an exciting year that’s about to kick off. But I think the main benefit for the companies and I guess for ourselves, it’s a very targeted programme, so we look at certain elements around understanding the whole journey from find, make, grow, realising your strategies and so forth, then we look at culture and strategy, sales and marketing, because that’s generally what we find with innovation-driven technology companies in South Africa, they are very good at the technical aspect, so they are very good at the thing they do but they are not very good at telling their story of the sales element or the positioning, specifically when it comes to the messaging. Intellectual property and technical issues we look at the products themselves and one can’t get away from ESD from when you look at your compliance and your legal structures and your HR structures, specifically because these companies are high job creators. So now it becomes more of an operational business when it grows and ultimately we set them up for being investment-ready or more sustainable but we look at the finance and the valuation, and understanding value and how to position for strategic value and also the exit thing. We’ve got many partners, it’s not just Knife Capital that looks at this, we do have ENS on the legal side, we’ve partnered with FNB, we’ve got our own internal tools, we’ve got M&C Saatchi that looks at the media side and Mike Joubert from BrandsRock, Skybound Capital. So I think from our perspective it really is a team effort and I think what happens in South Africa at the moment, the corporates are really trying to get involved in growth companies and if you can give them curated, clean companies, where there is sand in the sandpit, let’s go and play with that versus here are some guys who don’t really have their messaging and stuff sorted out, it’s easier to add value.

NASTASSIA ARENDSE: I’ve heard of funding always being an issue for entrepreneurs and I wanted to get your sense, in terms of people who are in the venture capital space or the funding space primarily, what are some of the things they are looking for in order for them to say I like your business and I’m willing to put my name and my money behind it?

KEET VAN ZYL: Most funders who really know what they look for and are successful have some sort of a mandate. So first and foremost I think that’s where a lot of the frustration comes in from an entrepreneurial side because they look for funding from companies with the wrong mandate for them. So firstly a funder would look for whether it’s in mandate, so whether that means they only fund businesses above R10 million or between R1 million and R10 million or innovation-driven or only bricks and mortar, there are all sorts of different funders that look at this. So firstly one needs to have a mandate match and that’s where entrepreneurs or the fund-seeker can do a lot of homework in positioning themselves right for the particular funder. But then funders always generally look for different things but when it comes to entrepreneurial finance you do look at the team or the jockey, you really want to feel the passion and this guy or girl is going to die trying and fail for the right reasons, not because of lack of chutzpah or lack of trying to grow this business. Then you look for scalable elements, recurring revenue elements, how big is the market but ultimately the Holy Grail is a very good product or service and a very large market for that product and service and when these two interconnect that’s when the magic happens.

NASTASSIA ARENDSE: There’s this term that I’ve seen a few times in many articles that relate to entrepreneurs and the term is exit-centric business, so when we are talking about that what exactly is an exit-centric business?

KEET VAN ZYL: We as Knife Capital are quite gung-ho about that, a lot of people misunderstand it, saying you guys just want to invest in companies to exit them, to build them, to flip them and that’s not sustainable and all the rest of it, which is not that. The simple premise is this, if you are an SME and you are a high growth business that grows, generally in South Africa you are going to grow through partnership. So if you are in a medical tech business you are going to eventually try and get Discovery Health or MMI or one of these as your partner. If it’s more retail then you’re going to be approaching Pick n Pay or you’re going to be approaching FNB or whoever to help you as a client or as a partner or whatever. Eventually some of these things might turn into acquisitions and so forth. So exit-centric business is basically saying to businesses let’s position you that you are always ready to be acquired or to be partnered with, so you’ve got your data room in order, your SlideDeck, your one-pager, you know what you are worth and you know what you want. So that is the more longer-term strategy, the five-year, six-year strategy and that could be to exit or to just build a high growth lifestyle business or whatever and then working backwards from there. So because of the premise that people would generally partner with you and when they partner with you and it’s a big corporate they are taking an execution risk on you, so they need to be very comfortable that you are going to be around, that you will be sustainable and so forth. So to make a long story short, what we explain always to entrepreneurs is it’s as if you put your house on the market or you don’t actually put it on the market but it’s ready to be put on the market, so you put a new lick of paint on it, you bake some bread in the oven, your grass is mowed, you’ve got some flowers in the vase and if someone rings the doorbell with the right kind of cheque it’s a show house. But you also just basically live in your show house, so you make it ready and then you live in it until the right moment comes. But those windows of opportunity are small sometimes and if the right opportunity comes you need to be ready to pounce.

NASTASSIA ARENDSE: Keet, I remember two years ago, and I can’t remember whether it was a UCT event where you were talking, but essentially what you were trying to allude to was that there are six types of start-ups and it’s important for entrepreneurs to pick one. One that I do remember you talking about was scalable start-ups, start-ups that are small business-like and then ones that are lifestyle start-ups. How important is it for you to pick which one you are?

KEET VAN ZYL: It is highly important. In fact, I’m making it my new mission to teach companies about the different types of start-ups that there are and what different types of support structures and funding is needed. So I think one of the problems with the South African ecosystem at the moment is this word entrepreneurship or innovation and it has become so generic that you don’t quite know whether you talk about a disruptive high growth entrepreneur, whether you talk about a plumber with a one-man shop or whether you are talking about a coffee shop franchise business that’s going to grow or just a little coffee shop on the corner or a social enterprise. So there are many different permutations of a business and each one of these businesses be categorised very well in terms of what type of support systems they need, what kind of loan-to-value funding they can get, should you even approach a venture capitalist or should it rather be someone like Business Partners or Absa Bank. So I think from that perspective it becomes very important to understand what kind of animal you are. My wife is in media and I always find it quite amusing that in the advertising space you can walk into a client’s office and they can say I want to put an ad in the newspaper or on the TV and your question would be, what kind of LSM are you targeting, and they will say LSM 5-6 or 9 -10, and then everyone in the room knows exactly what you are talking about. But in the entrepreneurship game we say we want to fund entrepreneurs and that’s where it ends, and that conversation needs to change.

NASTASSIA ARENDSE: What’s next for Knife Capital, what are your plans for the future?

KEET VAN ZYL: We’ve just launched a new Sars Section 12J fund called KNF Ventures, from our perspective knowledge, networks and funding, we’ve always had the mantra that a high growth business needs those three things to succeed, knowledge from the entrepreneur, they need to be good at their craft, networks when it comes to the funder themselves, they can’t just bring money to the table and yes, sometimes because of a window of opportunity the funding needs to be there. So we are at the moment actively investing in that but I think the broader play we are also looking at how we can have a more international flavour to Knife Capital. We’ve got some strategic options and opportunities to grow the business and to get some funding sources either via our listed parents or via some other sources. So ja, there are some interesting things happening now that one is really actively in the investment side of things it opens up various opportunities. So it becomes, I guess, a function of choice. Exciting times.

NASTASSIA ARENDSE: That’s great, I wish you all the best and thank you so much for your time.

KEET VAN ZYL: Thank you very much, nice to chat.

NASTASSIA ARENDSE: That was founding partner, Keet van Zyl and he’s from Knife Capital.

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