Q2 2022 - (released August 2022)
SA's quarterly Private Equity & Venture Capital magazine
Growing unicorns through catalysing co-investment
by Michael Avery
At the end of 2021, Africa saw close to US$5bn invested in tech start-ups. Fintech, especially, has seen one of the largest expansions with $2bn of that investment geared towards the industry. There is not only an abundance of new start-ups, but a keen interest from foreign venture capitalists, large corporates and banks. Africa is finally being put on the global VC map.
Eight South African-founded businesses have received investment from Endeavor Catalyst Fund – globally, one of the top three best performing early-stage venture funds in the emerging and underserved markets (i.e. outside of the US, China and India). Endeavor Catalyst is the rules-based co-investment fund of Endeavor Global – the largest global community of, by and for high-growth entrepreneurs, with presence in 40 markets.
Endeavor announced the final closing of Endeavor Catalyst Fund IV, a $292m venture capital fund, through which it plans to continue to invest in the companies led by Endeavor Entrepreneurs globally. The closing of Endeavor Catalyst Fund IV represents Endeavor’s largest fund to date, surpassing the fund’s initial $200m to $250m target. The community of Limited Partners (LPs) behind Endeavor Catalyst IV includes iconic founders like Reid Hoffman (LinkedIn), Marcin Zukowski (Snowflake) and Kevin Ryan (DoubleClick, MongooDB), as well as more than 100+ of Endeavor’s own entrepreneurs.
Africa is one of the fastest growing VC markets globally, and it's growing by 200% annually. But South Africa's share is still only 0.15% of the global venture capital market for entrepreneurs.
South Africa, Nigeria, Egypt and Kenya are leading the way in Africa.
Alison Collier, Endeavor South Africa’s MD, says that the growth rate in VC in South Africa over the past year was 300%, while Nigeria was 350%, almost 50% more than the average global growth rate. And the international market is starting to see the opportunities that exist in Africa, but there's still a significant amount of upside.
For Collier, the difference between VC ecosystems in Latin America and Asia boils down to proximity and maturity of the entrepreneurial ecosystem.
“LatAm is probably 10 years ahead of Africa when it comes to VC,” says Collier. “And, in some ways, that makes it easier for us in South Africa and Africa because one can learn from Latin America. We can learn from what we're seeing in India.
The entrepreneurs and the tech enabled entrepreneurs – who really are the high growth entrepreneurs – are starting to emerge and mature in South Africa, Nigeria, and a number of the other markets in Africa. And the international markets are seeing the commercial opportunity that these investments offer and are starting to allocate capital in these markets.”
A combination of factors unique to the local market helps South African entrepreneurs over and above the demographic drivers of the African continent, which will have the most consumers and the youngest population by 2050, providing an enormous spending power and consumption base.
“The macroeconomic timing is very exciting for the entrepreneurial businesses that are being built,” explains Collier, “but South Africa is very fortunate in that we have very strong corporates. We see a large amount of SaaS businesses that are being built in South Africa, and these entrepreneurial SaaS businesses are typically very easily transferable [and able] to sell their solutions to more developed markets, where there's a very long runway and significant incremental sales opportunities. South Africa forms an amazing first market launchpad where one can build a product and test it with local corporates that are very similar to the international corporates that one will sell to at a later stage.
“The costs of setting up a business here in South Africa are significantly lower than the costs of setting up a business in a developed market like the US or the UK, because the talent here in South Africa represents incredible value for money,” says Collier.
The South African-founded businesses that count Endeavor Catalyst as their LP are all stand-outs in their categories. Aerobotics, Clickatell, Entersekt, Go1, MFS Africa, Ozow, SweepSouth and TymeBank – with more than half of these investments made in the past 12 months. To be eligible for investment from the Catalyst Fund – a cheque size of up to $2m or 10% of the round – they require the entrepreneur to be raising an equity round of +$5m from a qualified lead investor, and must have passed an Endeavor International Panel Selection.
“[These businesses] need to work through Endeavor’s selection process. You get selected locally and then internationally, which is very similar to an Investment Committee process for a VC. And then once you've been selected internationally as an entrepreneur or business to join Endeavor, you become an Endeavor entrepreneur, and what's interesting about that selection process is we tailor the IC’s to suit the particular business.”
That Endeavor process is quite different from a traditional VC, which has a standard IC who reviews all the businesses that they work with. Rather, what Endeavor does is shift the different mentors or panellists, as they call them, around to ensure that they have got the right experience – both geographically to industry, as well as the level of their career – to match with what they are looking to review. And Endeavor does this across its global mentor network, which is 5,000 people strong.
“It's a wonderful set of ex business experts and really successful entrepreneurs that are selecting these businesses that we then invest in,” says Collier.
And then the second piece, as Collier tells it, is that as Endeavor, the fund is looking to drive the growth of these high-growth businesses to stimulate the economies and the emerging markets in which they operate.
“In addition to that, we're looking to support the VC ecosystems, so we don't lead any of these rounds,” says Collier. “We always stay on the same side of the table as the entrepreneur, and part of the work or service that we do towards that end for the entrepreneurs is to work with them to find the right lead that will be the best lead to grow their business strategically in whichever market they're looking to move into.”
It’s a model that has proven to be incredibly effective at finding and scaling unicorns so far, and looks set to expand South Africa’s presence as a VC-backed, technology-driven scale-up hub into Africa for years to come.
This is an extract from an interview first published by Business Talk