If you want the right answers, you need to ask the right questions … and it’s clear that investors are asking far more critical questions about Section12J funds and “Venture Capital” in South Africa.

Last night, I attended the KNF Ventures investor update. For those not familiar with the fund, KNF is run by the highly regarded investment team of Andrea Bohmert and Keet van Zyl. The event was to provide an update on the state of their Section12J fund.

Key takeaways:

• I enjoy the KNF team: Their offering is niche and their focus on Knowledge and Networks being as valuable as (or more valuable than finance) is refreshing.
• The Grindstone Accelerator is a major competitive advantage: Having been involved – to a small extent – in Grindstone, it is clear that it is a major competitive advantage over a number of new funds who still need to build pipelines. KNF has a 24 month first right of investment in any businesses selected for the annual Grindstone Accelerator
• The fund was slightly bigger than expected with R115m banked and this could rise to R175m before the end of the year.
• KNF / Knife are focusing on attracting investors with networks to support some of their underlying investments

Valuation questions are interesting and important for investors to ask

The topics which received a lot of attention last night were around valuations and exits and I think these could be useful questions to ask when contemplating a Section12J “venture” investment. While the answers are likely to vary from investment to investment, these could be useful when interrogating funds:

1. What methodology do you use to value the investments while they are in the fund? A tech investment will typically have a very low book value – how does the manager demonstrate that value is being created in the underlying investment?
2. Who do you plan to exit to? It’s all good and well holding investments, but who do you plan to sell these investments to in the long run? Is it a listing? Private equity? KNF / Knife for instance have a good track record exiting to international firms looking to acquire high-growth businesses in their sector.
3. How are you going to take the “For Sale” assets to market at what multiple? While this will obviously vary from case-to-case, you need to understand what the base-case is for valuation

I touched base with Andy Higgins at the event and I thought his recent post on 12J investing was excellent. You can read it here – http://www.geekfund.io/blog/2018/01/14/investing-in-section12j/

Would love to continue engaging around 12J so feel free to drop me a line on marc@decusatio.co.za