VENTURE CAPITAL: We're Holding Better Than The US
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IN the US, venture capital investment is down 61% in the first quarter of 2009, compared with the same period last year. This is a 12-year low for venture capital according to the National Venture Capital Association of America (NVCA).
In South Africa, the venture capital trends mirror the international trends, but it is unique in certain aspects, points out Julia Fourie, CEO of Mark Shuttleworth’s venture capital company Here Be Dragons (HBD), based in Cape Town.
“The biggest similarity is in that the actual performance of the underlying companies is not as good as anticipated as a result of the tough economy. This is likely to result in longer holding periods before selling the companies, in order to deliver the returns required.”
“Where South Africa differs from the US is in that we have a less stable venture capital market, so the number of venture capital players is not expected to diminish in the next year. There are many new entrants that have mostly unused funds that they are still looking to invest.”
“Coupled with this, the crisis in the economy is not as severe in SA. Our banking industry has protected us to some extent and government has also stimulated the economy with new construction projects,” she says.
“The nature of venture capital is to invest in early-stage, rapidly-growing businesses – assisting them to grow and become more profitable – with a view to selling the investment to another partner within a three to five year period,” says Fourie.
According to Fourie, there has also been considerable international slow-down in venture capital funds raised as venture capital companies focus on, firstly, assessing the impact of the economic turmoil on their existing portfolio companies before making any new investments.
“Globally, venture capital exits have also been virtually halted, as companies across the board experience slowdown in growth and increased cutting of expenses. NVCA’s statistics show that companies that used to grow by 50-75% year-on-year are now growing at 10-15%,” says Fourie.
In 2008, the biggest venture capital investment in the US was in biomedical companies, accounting for 34.5% of total funding. This was followed by investment into software companies, accounting for 20.4% of total investment.
“Locally, we expect to see venture capital companies continuing to invest in the year ahead, as funds are available and the slow economy presents a window of opportunity to acquire companies at good value.”
HBD is looking to make at least one more investment of between R10 million and R25 million in local, early-stage businesses this year. The focus will be companies with innovative ideas with the potential to expand internationally.
“If we can partner with quality companies through tough times, there should be substantial rewards to be reaped in later years.”
“As HBD takes a three to five year outlook on the business potential of an investment, we not only focus on this year’s problems but also next year’s opportunities,” says Fourie.
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