Having deployed most of its first R250 million Section 12J Venture Capital Fund: KNF Ventures, Knife Capital launched another 12J fund for new investors to participate in this growing and exciting alternative asset class.
KNF Ventures II is the second Section 12J Venture Capital Company launched by Knife Capital. It has the same investment mandate as Fund I and will continue to build on the success and momentum created. By leveraging Knowledge, Networks & Funding, KNF accelerates the growth of South African innovation-driven SMEs to generate enhanced returns for entrepreneurial-minded investors.
The Section 12J venture capital company (VCC) regime was established to facilitate equity investment into higher-risk SMEs, thereby fuelling innovation, job creation and economic growth. Qualifying Investors can compensate for risk and enhance their return on investment by claiming amounts incurred on acquiring VCC shares as a deduction from taxable income.
But in an ever-changing world, the perception of risk is relative. COVID has rapidly increased the adoption rate of digital technologies, putting the spotlight on disruptive startups.
“There is a tangible shift towards embracing new ways of working, learning, interacting and transacting. This can also be felt in the investment space,” said Keet van Zyl, Partner at Knife Capital.
“Certain alternative asset classes like venture capital – where fund managers have been investing in technology companies for years – are experiencing increased interest from institutional and individual investors wanting to diversify.”
Andrea Bӧhmert, Partner at Knife Capital contextualises the effects of COVID on the current KNF I portfolio: “There has been a significant impact on our broader Knife Capital portfolio, but interestingly – not necessarily all negative. The resilience of a long-term investment strategy is being tested and a diversified portfolio is a good thing in times like these.
“The portfolio value keeps growing and some of our companies like educational content marketplace Snapplify and pharmaceutical temperature monitoring solutions company PharmaScout really benefited. Snapplify provided free access to e-textbooks for remote learners during the crisis and while ticketing platform Quicket was hard hit initially, it launched new successful online products in high-load hosted streaming and fundraisers.
“In many ways the portfolio is coming out stronger and we are proud of the entrepreneurs we backed and the way they are navigating through this crisis with solid business models and a positive culture.”
Despite COVID, Knife Capital had an active 2020, co-investing with RMB in customer journey analytics company: inQuba, backing Silicon Valley-based virtual presentation startup: mmhmm and participating in a $6 million (R90 million) funding round for their AI for manufacturing portfolio company: DataProphet. Knife also partnered with the SA SME Fund to enhance its Grindstone Accelerator Programme and launched Grindstone Ventures – a post-seed fund that invests in Grindstone Accelerator cohort companies.
“KNF Ventures II supports our value-chain investment approach by accelerating the growth of top South African SMEs. Some of our current KNF I investments come out of earlier-stage focused Grindstone, and we are also looking at ways to plug the expansion-stage Series-B funding gap that exists in SA. KNF focuses on Series-A growth funding,” explains van Zyl.
The VCC regime is subject to a sunset clause which stipulates that no new Section 12J deductions will be granted after June 2021. Van Zyl said, even amidst this uncertainty on whether the government will extend the lifespan of the Section 12J incentive, money has not stopped flowing into venture capital companies. While currently tax deductions will still be granted until June, he highlights the importance of looking beyond the 12J tax incentive.
“It needs to be about more than the tax break. Sure, 12J is a good incentive as investors start the investment process in a favourable Internal Rate of Return (IRR) position due to the immediate tax benefit. But without a credible venture capital asset class backed by institutional in investors, family offices as well as individuals, access to growth funding by South African SMEs will continue to be a challenge.”