– Written by Ross Jenvey
“Venture Capital is only for investors with a high risk appetite.”
“With the high failure rate in South African startup companies, who would want to put money into a Venture Capital portfolio?”
“Venture Capital only focuses on risky startup and pre-startup companies.”
Do any of these comments ring true to you? If this is what you believe, then please read on, as you might get a pleasant surprise. Let’s unpack some of these myths.
Venture Capital is certainly a higher risk asset class than most, and we certainly wouldn’t advise anybody to invest more than 20% of their investible assets in a VC Fund. However, the tax incentive that SARS has provided (allowing the full investment to be treated as a taxable expense) softens the investment risk. Even listed shares or company bonds cannot guarantee that you will get your marginal tax rate (e.g. 45%) back on the investment in the first tax year! Furthermore, investing in a diversified VC Fund should be a less risky investment than investing in your own business, or a seemingly good business idea that your friend is now managing, because of the benefits of portfolio diversification.
Myths two and three above can be dealt with simultaneously. SARS has mandated that we cannot invest in companies that have an Asset Value of more than R50 million immediately after our capital injection. This sounds restrictive, but in reality, it gives us as VC Fund Managers a good opportunity to balance the risk-return profile of our portfolio.
There are many small and medium companies in South Africa that are stable, profit-generating businesses with an Asset Value of less than R50 million. At Kingson Capital, we believe that our Funds should contain a balance of higher-risk higher-return startup companies with more stable profitable companies, not only investing in startups.
The profitable companies in our portfolio should provide some liquidity into the Fund, as they are usually dividend-payers. They should also provide some underpin to the returns of the portfolio. Remember that the tax incentive will then provide a return kicker at the end of the Fund’s investment period. If Kingson Capital is merely able to return your capital to you at the end of 5 years (and we aim for a lot more!), then an investor in the 45% tax bracket can receive a compound annual return of just short of 8%.
We are not disputing that startups have a high failure rate in South Africa, or that a VC Fund is a riskier asset class than many. But, we believe that a balanced portfolio of startups and more mature companies can produce a healthy risk-return profile for investors. You are welcome to come join us on this journey.