GroTech, a fund with an appetite for high growth, disruptive technology companies, is betting on the fact that Goliaths just aren’t that good at innovating. It would rather back the Davids that can do it for them.
“Companies are realising that they are better at buying innovation than they are at building innovation,” says Clive Butkow, GroTech’s joint CEO and chief investment officer.
GroTech’s plan is to “buy, build and flip” a portfolio of innovative digital technology companies with a focus on financial technologies.
“Venture capital investors are looking for businesses that can scale quickly and internationalise. Fintech lends itself to that model, where you can start with fairly limited start-up costs and see a business grow exponentially and deliver solid returns,” says Erika Van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (Savca).
At an average investment size of R5m to R10m, GroTech wants businesses with annuity revenue, big markets and a well-crafted exit strategy. “The exit strategy is key. If they [the entrepreneurs] want to build [their businesses] to last, we’re not interested. We are only investing for an exit,” says Butkow.
In fact, GroTech will first find a potential exit before buying into the company, he adds.
This is not about “lazy capital”, Butkow continues, mentioning GroTech’s “high touch post-investment team”, which will be heavily involved in the business development strategies of the companies it buys.
It’s not investing at the angel or start-up stage, and wants businesses to be post-revenue. It plans to take mostly minority stakes in businesses with a focus on providing “mentorship capital” to help companies grow, Butkow, a former Accenture executive, notes.
One of the businesses that GroTech has invested in, Build, is an e-commerce website building platform led by Craig McLeod, who is GroTech’s joint CEO. Other investments in the pipeline include a mobile events app and a one-touch Know Your Customer (KYC) app, which provides up-to-date and pre-vetted KYC information for the customers of any provider that wants to use it.
Venture capital firm Grovest is behind GroTech and is seeking to raise an initial R50m to R100m by way of the issue of GroTech shares.
Investors will need to subscribe for at least 200 shares at a cost of R1 000 each. The company is targeting an internal rate of return above 30% per annum over a period of five to six years.
Being a section 12J company, any amount invested in GroTech is 100% deductible from your taxable income in the year that the investment is made. For investors being taxed at the maximum marginal rate, this means a 41% tax break. This deduction is not subject to recoupment, but only if the shares are held for at least five years.
Classically viewed as high risk, venture capital’s section 12J tax allowance makes the investment “risk adjusted”, says Grovest CEO Jeff Miller.
The number of VC companies that are 12J compliant is relatively low at this stage, according to Savca’s Van der Merwe, who suggests this is to some degree a reflection of minor amendments that need to be made to the legislation to make it more workable and consistent with the VC model of investing. Savca is engaging with national treasury on these changes, Van der Merwe says.
GroTech will charge a capital raising fee of 3%, a management fee of 2,5% per annum on capital raised and a performance fee whereby for every four ordinary shares issued, the fund manager will be issued with one ordinary share.
The closing date to invest in the fund is 15 February.
GroTech’s parent, Grovest launched in 2013 with R25m from 55 investors. Of the six investments that it has made, two have been impaired in full.
It is also looking to establish a hospitality fund and an alternative energy fund.
- This article was first published on Moneyweb and is used here with permission
