On a continent where exits are few and far between, to see a portfolio company acquired is quite a validation for any African VC firm. For South Africa’s Knife Capital, it is evidence its core focus on scale-ups rather than startups is working.
Disrupt Africa reported in January iKubu, a Stellenbosch-based startup that designs computer vision and radar systems for the cycling market, had been acquired by GPS navigation and wireless device company Garmin for an undisclosed amount.
It is one of the highlights of a busy year so far for Knife Capital, founded in 2010 by Eben van Heerden and Keet van Zyl, which has also seen the company run its second Grindstone accelerator programme and launch web-based due diligence service YueDiligence. And according to partner Andrea Böhmert, this latest exit – Knife Capital has been involved in a number in the past – is evidence of the validity of the company’s focus.
Though Knife Capital’s partners are involved with a number of startup initiatives and try to assist as much as possible through a range of interventions, the firm’s core focus is scale-ups. Speaking to Disrupt Africa, Böhmert describes scale-ups as companies that have traction and have proved their worth, while not necessarily being profitable.
“They have market validation and are now at a point where they have to make strategic choices that will significantly impact future success,” she said. “We get very involved, especially in the first 12 to 18 months after the investment. It is all about getting the company’s fundamentals ready to scale. Once this is done, we can ease off a bit.”
Böhmert says working with companies is the “fun bit” of what Knife Capital does, and to keep this the case the company looks for entrepreneurial teams that are coachable and “nice”.
“We don’t like to work with people we don’t like, even if the potential investment returns appear very promising,” she said.
“The business needs to fascinate us, significant market potential, traction where it counts and an exit path for us as investors that makes us confident that we can generate significant financial returns.”
For Böhmert, the road to Knife Capital began 20 years ago, when she arrived in South Africa from Germany on a three-month internship. She then took a job at Siemens in Johannesburg, with the intention of returning home after two years. After a number of postponements, five years later she was ready to leave, but was offered a position by Dimension Data in Cape Town and stayed.
It was after this succession of corporate jobs that her entrepreneurial journey began, with the launch of Cape Venture Partners. Böhmert says she worked with some great entrepreneurs and was very involved with the Bandwidth Barn, but could not solve the problem caused by the lack of access to venture capital.
“This was 2007 and the only VC fund around was Mark Shuttleworth’s HBD. So we needed to raise a fund. Naively we went to the large financial institutions as well as government, only to be told that VC was “out of mandate”,” she said.
It was at this point that Böhmert again contemplated leaving South Africa, but she managed to raise a EUR25 million (US$28 million) fund from Hasso Plattner, co-founder of SAP.
“And so I stayed. Launching Hasso Plattner Ventures Africa and making the first few investments was definitely one of the professional highlights of my life and I will forever be grateful to Professor Plattner for this opportunity,” she said.
“But sometimes, all good things have to come to an end and so I left the fund in 2011, again considering that it might be time for me to leave. That’s when I got the phone call from Eben and Keet from Knife Capital, then PoweredbyVC, and that was the start of the next exciting journey.”
Knife Capital was born after van Heerden and van secured a fund management agreement with HBD, with the company continuing to manage HBD’s portfolio to this day. The HBD fund had an initial size of ZAR150million (US$11.2 million) and made a total of seven investments. The number of portfolio companies has, however, consistently decreased over the last few years following exits to the likes of Visa, General Electric and, most recently, Garmin.
Aside from the cash, Böhmert says one of the company’s most significant investments is time.
“While some entrepreneurs might not consider this to be an investment, for us it certainly is as we only have a limited amount of it,” she said.
“After all these years in the investment space we have learned, and sometimes the hard way, that people invest in people and the better you know who you are dealing with before you make any financial investment, the lower the risk of getting it wrong.”
The Grindstone programme – which this year includes the likes of online payments company Payfast, e-commerce platform builder Shopstar, digital tax assistant TaxTim, and transport payment solution for cities WhereIsMyTransport – is central to this. Each programme sees the Knife Capital team work with the selected companies for close to 12 months.
“This initiative is a significant investment from our side but the effort has been worth it,” Böhmert says.
Knife Capital’s investment sweet spot, she says, is between ZAR10 (US$750,000) and ZAR30 million (US$2.25 million), but Böhmert says sometimes it has found it can help a company address their funding needs in different ways, which has resulted in a smaller initial investment amount being required.
Sourcing quality deal flow depends on the networks on van Heerden, van Zyl and Böhmert, all of whom have been involved in the industry for a long time.
“One of us is normally involved in any major ecosystem initiative. So we do have a network and as we do most investments through network referrals, we are in a good place,” Böhmert says.
“Naturally, this is something that as an investor you can never stop working on. And personal integrity is a significant part of building this network. That’s why we at Knife Capital believe in being “long-term” greedy versus hunting for short-term gains.”
She said this meant sifting different types of entrepreneurs that have different definitions of success.
“The lifestyle entrepreneur might just not want to employ more than four people and is happy with the income he or she generates. The success we as investors are looking for, will force entrepreneurs to get out of their comfort zones,” Böhmert says.
“It is hard and full of risks and sometimes taking the corporate job is simply the easier way out. There is also often a lack of knowledge of the options available, and I am not just referring to funding options. Entrepreneurs are often not prepared for the real success, so when opportunity finally knocks, they are not able to take full advantage of it.”
She said it is examples like these that hurt “ecosystem activists” like herself the most, because they are looking for success stories.
“And then you hear about this company who had this amazing opportunity, be it funding, partnership, acquisition – and they couldn’t get it done because they were not able to pass the “due diligence”. But we are working on it, one scale-up at a time,” she said.
For the moment Knife Capital is solely focused on South Africa, not because it doesn’t believe in opportunities elsewhere but because there is sufficient investment potential in South Africa and because its hands-on approach requires portfolio companies to be within easy reach.
“So, should we invest in a non-South African based company, we will only do this with trusted partners who are geographically close to the business,” Böhmert says.
“Once we have gone through the initial 12 months of getting to know each other post-investment, we have no problem when the company is no longer close to us but in the beginning we believe it to be vital.”