Wednesday, December 2, 2009

Angel Finance Initiative from the IDC

Great new for entrepreneurs and small business owners is the announcement that the Industrial Development Corporation or IDC as its more commonly known as in South Africa is in the process of  creating and a R250-millon business finance resource. The venture capital fund that will focus on providing start-up and even seed capital to companies or individuals seeking to commercialise or prove high-technology innovations is aimed at supporting innovation, entrepreneurship and other business initiatives in the country. The small business sector in South Africa is much relied on for creaing much needed job opportuinities for both educated and skilled and semi-skilled people in the country and the news will come as a welcome boost to those with ambitions to start and grow their business ideas.

CEO Geoffrey Qhena says that its board approved the funding, which is likely to be invested over the next five years, with full appreciation of the risks associated with such activities, and with a view to playing its role in addressing the current gap in this area of the South African finance structure.

At present, South Africa has a real dearth of financial institutions willing to take on venture-capital-type risks, with few, if any, so-called ‘angel investors’ in the marketplace. Indeed, those who have attempted to play such a role have reportedly found it tough going, with even IT billionaire Mark Shuttleworth’s HBD deciding to pursue more “mature opportunities” with its recently launched R150-million ‘HBD Fund2’. The first fund had focused on start-up-type opportunities.

Qhena reports that the capital approved is over and above the more than R400-million that the group has advanced on a wholesale basis for venture capital through other commercial-funding organisations. “We realise that we could lose the whole R250-million, but are optimistic that we will recoup the investment and even make a good return,” Qhena says.

Venture capital head Hugo Swift tells Engi-neering News that his unit – currently comprising four professionals, but which is likely to be extended to ten over the next few months – will hone in on technology-focused companies or individuals and will focus exclusively on extending start-up or seed funding, leaving expansionary-capital opportunities to other units within the IDC.

He expects that it will complete its first deal in the next few months and hopes that more than three deals will be clinched before the end of the group’s current financial year, which ends on March 31.

The majority of the unit’s efforts are likely to be directed towards telecoms and information technology innovations, such as software and ecommerce applications, but it will also be looking to support specialist high-technology products and services in the automotive, financial services, mining, chemicals and biotechnology areas.

The fund has a minimum invest- ment requirement of R1-million and has set its single-transaction ceiling at R30-million. But Swift says it is likely to cap its first-round funding allocation at about R15-million to create capacity for second-, or even third-round investments should an innovation or a company require such support.

The IDC aims to take significant minority stakes in the businesses or technologies being backed, but hopes to remains below the 50% holding level wherever possible.

A key value proposition of the new fund lies in the fact that it is open-ended, which allows the IDC to continue participation even in instances where the development horizon is extensive. This has been a lesson from the group’s involvement in a biotechnology fund, where it was found that the commercialisation period could be protracted, given that, beyond the research and development cycle, time had to be allowed for certification and, in some instances, even clinical trial periods.

“In principle, we will always want to exit at some point, but we are under no time pressure to do so, which I think is a huge advantage,” Swift argues.

The fund is currently being marketed to prospective clients and there have already been a number of approaches made. However, Swift says thorough due diligences will be required before any deals are concluded. The IDC has significant capacity in-house to conduct such exercises, but will call on consultants in those instances where the technology under review is highly specialised.

The unit is also keeping close tabs on some of the innovations currently being supported under the Support Programme for Industrial Innovation government incentive, which is administered by the IDC on behalf of the Department of Trade and Industry. However, Swift stresses that it will also be interrogating various other opportunities.

Edited by: Martin Zhuwakinyu

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