Knife Capital, a Southern African Growth Equity Fund Manager Focused on Technology-Enabled Ventures

Interview with Andrea Bohmert, Managing Partner of Knife Capital

First of all, do you think that South Africa still has a big gap when it comes to risk capital for SMEs?

Yes, it most certainly does, but it depends on the type of SME – access to capital is different depending on the stage of the business. There can never be enough money, but when it comes to the real start-up environment, things have improved significantly. If you look at seed round, pre-seed round, the good companies are able to raise amounts below 1m ZAR. The big gap is in what we call the scale-up risk capital, the 5m ZAR to 30m ZAR. This is where the gap is the biggest by far.

Do you believe that there is a genuine and visible momentum to South African start-up scene now?

Having been here for the last twelve years, one can very clearly see that—particularly in the last five years—a lot of things have been happening. Institutions like Silicon Cape have been able to establish greater credibility, and with that credibility and visibility, greater momentum followed. Statistically, the number of companies, and in the IT sphere more than any other, have increased significantly. The last five years have definitely made a noticeable difference. I think that entrepreneurship is cooler now; it wasn’t in the past.

From what I understand, you have an entrepreneurial leadership program called Grindstone. How vital is the role of incubators and accelerators in providing support?

What’s missing in South Africa is that we don’t have enough serial entrepreneurs, people who have done it two, three, four times. If you start a business the first time around, you need help. You need a sounding board. Being the CEO of a start-up is lonely. You don’t have enough peers. You have to make decisions which are critical for your business, that make or break your business, and you need to talk to somebody. That is one of the roles that good accelerators and incubators can play. In our case, Grindstone, we don’t focus on the incubation phase, the start-up, but rather focus on the scale-up. It’s one thing to start a business with three or four friends who are going to join you. It is something different to run a team with 20 or 30 people. Now you have to go and make totally different decisions and if you have never done this, you need a sounding board, you need somebody that you can discuss your strategies with and get a little bit of feedback, and therefore I think the hand-holding, particularly for first-time entrepreneurs, is critical.

If you have a business, you can definitely test it here, test your assumptions, make sure your customers are happy but in order to scale, you have to start thinking about where your market will be.

Knifecap recently launched a new investment fund called KNF Ventures, with an ambitious target of 100 million ZAR to invest in innovation driven startups. We have also seen companies like Travelstart who secured US$40-million from UK investors, while VC firm Silvertree Internet Holdings committed US$10-million investment to South African and African startups. Is there currently a real mood of confidence for South Africa’s startups?

South Africa is in a very fortunate position as we are living both, in a first world and in a third world environment. We have access to a first-world infrastructure in which we can operate and do business across Africa. The world has become digital. Nothing is stopping us from sitting in Cape Town and doing business in New York, in London, wherever. With more entrepreneurs starting businesses, access to infrastructure and technology allowing us to do business wherever we want to, Cape Town – and all of South Africa, really– has become a prime destination. Wherever there is good business, money follows. The money is here now to invest and take advantage of those opportunities.

KNF Ventures allows investors to write off up to 100% of their investment capital against their taxable income. More generally, can you see the Democratic Alliance being willing to create a tax-incentivized high-tech zone in the Western Cape similar to those in Israel and Taiwan?

If it was up to the Democratic Alliance, I am confident that they would love to go and do it. As I understand it, however, the Western Cape has a problem as certain legislation are national and not provincial, so the big question is whether that is something that the DA can do locally or if that would not require a national directive. We are very, very fortunate. We have a provincial government which is very open to all of these initiatives. They attend our events. They are open for discussion. If this is something the local government can do, they would obviously be open to it. Cape Town is the entrepreneurial city in this country.

There has been very rapid adoption of smart phones and mobile in general in South Africa. Do you believe that Cape Town has the talent of engineers and entrepreneurs to ensure a significant deal flow coming from this region in the years ahead?

We have great diversities. People who want to go to be in the mobile space have the ability to choose wherever they want to live. Why would they not want to live in Cape Town?  Look at the number of companies in the mobile space which are actually based here. We have the talent. There could always be more, but we have the opportunities and we have great success stories. The mobile space has actually been one of the catalysts to go and get more visible entrepreneurship going. If you think about it, mobile is just a platform, whether you are doing mobile education, mobile health, mobile wallets, mobile commerce, and mobile content. You have to have a mobile component nowadays, and we definitely have the skills to do this.

Living in Cape Town is a lifestyle choice. In the past you had to move to Johannesburg if you were planning to deal with all the major businesses head-officed there. This has changed and technology is the major enabler.  I deal with a lot of companies now who don’t even do business in Johannesburg; they do business all over the world from their Cape Town office, and some of them from their Cape Town office with a sea view, and that’s when you can attract amazing talent, because you can say to the guys: “Why don’t you go for a surf in the morning and then you can come in to work?” The combination of having access to cutting-edge technology and skills, a great lifestyle, and access to funding (because most of the funders are actually also here) promises good things here.

As the saying goes, “Africa is not for sissies.” Can you give us some insight into how the start-up scene is different in Africa and what are some unique differentiating factors?

One of the controversial things is that while Africa has millions of people, if you have a B to C business model, if you want to make money from the consumer, then you have to understand that still a large part of your population doesn’t have access to a lot of money. The typical B to C models that work so easily in the United States and Europe do not translate here as easily. It isn’t that if it works there, it works here. Different cultures, different languages—all of these things. Whereas a B to B model you can copy, or try to do something similar, the B to C model is different, and you need to be cognizant of that and adapt your business model accordingly.

Cape Town clearly has a very active start-up community and investment scene now. From your perspective, then, but coming from Knife Cap, what do you think are the critical characteristics and practices today for technology companies which are looking to expand, scale, and grow for global markets, both African and international?

We have a slightly different frame of reference when it comes to those things. If you really were to talk to a Cape Town entrepreneur and compare this person to one who sits in New York, you would see that both think differently, and this difference, especially in the approach to solving problems, is actually to our advantage. That difference needs to be recognized and understood. The fact that we still sometimes have to think about bandwidth, about what can we do around intellectual property, about the fact that there is still somewhat of a skill shortage. You can do something about it, but it needs to be approached slightly differently. Until recently, you really had problems going into foreign currency trades. We had to come up with different solutions, which helps us a hell of a lot because we have actually become more innovative thinkers. In other countries, things are very easy and it’s all there. So dealing with our challenges has to some extent become our competitive advantage.

If you are a South African or Capetonian business, you need to have a very clear grasp of the real size of your market.  South Africa can serve as a fantastic testing ground for products.  Does it work? Do your customers like it? Are they prepared to pay for it? In that way, you can work the problems out, but if you really want to have a high-growth market, the local market is not big enough. You then need to go and find that next market, and that can be the rest of Africa, or it can even be global. I find there are actually very few business models which bank on the local market being sufficient. If you are really ambitious, you need to start thinking right from the start about where to go. I once attended a number of business pitches in San Francisco and it was very interesting to notice that for them, California, their local market, is large enough. They don’t even have to think about how to change their business model in a different territory. That, I think, is the biggest differentiator. For us, if you really want to grow and be successful, you need to think outside of your borders relatively quickly. In other regions, you don’t need to do that.

If you think about it, we have a great banking system, great infrastructure, good aviation, a lot of strong industries: the oil and gas sector, the tourism industry, all of these things. If you have a business, you can definitely test it here, test your assumptions, make sure your customers are happy but in order to scale, you have to start thinking about where your market will be.

So do you think that Cape Town is now poised for really significant growth in technology?

It has been for the last few years and it will definitely continue on that trend. We all have to understand that success doesn’t come overnight. There is a lot of overnight success stories that are 10 years old. There are a lot of businesses which have gotten the right amount of traction over the past three or four years. Other success stories are coming, and they are coming faster and faster. You mentioned Travelstart, for example. Travelstart is not a year-old company. Travelstart is already quite a significant business. Now they are looking to go even further into Africa and move on to other things, but it does take some time. Among the businesses here in Cape Town, we have already had some success stories. At every event I go to, I hear the entrepreneurs talking and there are some very exciting things happening.

So there’s a buoyancy, finally you have had a number of recent successful exits, Fundamo, CSENSE, Click2customers, what’s next in the pipeline and the next chapter in the Knifecap story?

The exits I am not able to speak at the moment, but the launch of our new KNF Ventures fund, which is scheduled for May, will signal our next chapter. We are very mindful of knowledge, network, and funding, so not funding alone, but adding the significance of expertise and the right networks combined with that funding. That’s going to be very exciting. We going to start our next entrepreneurial development program, Grindstone, and we’ve got a few interesting investment prospects, interesting companies, in the pipeline. We’ve been watching that space. We are very optimistic about the next few years, and I think you can count on us adding a few more corks on our champagne trail.

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