South African entrepreneurs are creating tech businesses that can rival companies on the international stage, says Amrish Narrandes, head of unlisted equity transactions at Futuregrowth.
The company has set aside R280m from its development equity fund to increase its portfolio of tech start-ups, and has more cash, “dry powder”, available for Covid-related opportunities.
“The tech start-up business has come a long way in SA,” says Narrandes. “We’re seeing international investors coming in, so they must be seeing something right here. It has to make sense for international money to flow in.
“What we call the African risk equity premium is attractive for them. They see potential, and so do we.”
He says he’s looking for start-up companies that have been set up to provide solutions to real problems that South Africans have daily.
“We’re looking for start-ups that are solving problems in SA. South African problems. Not problems based in Silicon Valley and Europe and then trying to replicate those sorts of companies here.
“To the extent that they can do it well we’ll happily give them some of our disposable income.”
Last month, the fund invested in SweepSouth, an app that empowers domestic helpers and office cleaners by giving them the opportunity to attract clients and to work on terms and at hours that suit them.
“It formalises an entire sector and creates employment,” Narrandes says. “Most of those using the platform are single mothers.”
Its first investment was in Yoco, in 2018, a payment device for small businesses that need a point of sale. “A guy who sets up a small business at some market can encapsulate an inventory on his phone; he now has point of sale, he has the ability to swipe your card. His business grows quicker because he’s got a better handle on things.”
Also in 2018, it took a stake in Symion, renamed Rubicon, a commercial and industrial technology group which aims to be Africa's foremost platform for intelligent infrastructure in areas like renewable energy and water management.
More recent investments include LifeCheq, a fintech start-up that makes expert advice digitally accessible to entrepreneurs.
We’re looking for start-ups that are solving South African problems.
He says their investments in tech start-ups are long-term. “I talk to these guys for a while before we make the investment. We're looking for start-ups that will be globally competitive.”
They sit on the boards and provide strategic guidance, “but a lot of the guys can run on their own”. In fact, that is a requirement. Narrandes says they’re not there to hold entrepreneurs’ hands.
“We don’t incubate in the traditional way. We’re nurturing in the sense of sharing our expertise and experience.”
They do a thorough due diligence investigation to ensure they’re investing in people with “certain skills”.
“We back jockeys. We might as well back an A management team with a B idea than back a B team with an A idea, because the investment we make for our [pension] clients is predominantly run by the jockey we back.”
Many of them are keen to go into Africa, which is understandable given the size and youthful age of its population and the huge mobile penetration on the continent.
“The guys are looking at avenues and solutions that are mobile-related, and Africa, not SA, is seeing the fastest global growth in smartphone adoption.”
But why not think global?, he asks them.
“People are sitting in Israel and are able to put their technology into all First World countries and developed markets.
“So I’m saying, let’s develop our technology to such an extent that we can go global overnight, launch into other markets. Let’s think bigger than just SA or even Africa. Think global.”
He wants start-ups that provide solutions to South African problems but that can also be globally competitive. “Being able to go offshore and be global obviously makes it more attractive. We can develop here way cheaper than what the resources are costing in Silicon Valley, so we can have our teams sitting here and potentially opening offices for rollout in North America.
What Futuregrowth has set aside from its development equity fund to grow its portfolio of tech start-ups
— R280m
“The premise for me is how do we get dollar revenue and enhance our space and be competitive in that regard?”
Given how much cheaper it is to develop globally competitive tech start-ups locally, SA should be seeing far more action on this front than it is. What’s holding the country back is a lack of technical skills and seed capital, he says.
Schools and universities are not producing enough of these skills, and importing them is too expensive because they're in such high demand globally.
In addition, SA needs to see much more risk capital being invested in start-ups at the seed stage, as happens in the US where entrepreneurs who have made it big and exited have the necessary risk appetite and hard cash to back it.
“There’s no way we can take that kind of risk on because it’s pension fund money we’re investing,” says Narrandes.
His fund comes in at a later stage once the start-up has demonstrated traction, shown that its product works, has a market and is making revenue.
Although only 10% of Futuregrowth's R2.8bn development equity fund has been set aside for early-stage businesses, “this amount could grow as we show pension fund trustees that we can deliver returns; that these start-ups can be a success”.
A chartered accountant from the University of Cape Town, Narrandes, 34, has a track record as an entrepreneur, having started a successful online business in 2015 selling sunglasses direct to consumers.
He says it taught him that timing is key to the success of a business.
Initially the business “washed its face”, he says, but then there was strong growth. “We were too early to market.”
His best training was working in the family's KwaZulu-Natal food business, doing everything from offloading trucks to stock-taking, to packing to “knowing what cash is” and having to address operational needs.
“That experience has made me a better investor, no doubt.”
Married to an Australian medical doctor, he could “happily” be in Melbourne but “I’m here for a reason. I’m really excited about what our country has to offer. It’s up to investors like us putting our money in the right places and nurturing entrepreneurs to ensure we don’t become like Zimbabwe.”
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