knife Capital, the South African venture capital (VC) firm that backs innovation-driven ventures with proven traction, is extending its almost-fully-deployed ZAR 180 Mn (USD 12.3 Mn) KNF Ventures fund despite recent changes to the Section 12J VC regime.
While seeking out new investors to participate in the extension, and potentially benefit from the success and momentum created, Knife Capital is, in the same breath, announcing the launch of KNF Ventures Fund 2 which is billed to reach a final close mid-2021.
Knife Capital’s largely-deployed ZAR 180 Mn fund, KNF Ventures, is a Section 12J Venture Capital Fund which was launched in 2016 on the back of the Section 12J venture capital company (VCC) regime, which allows investors in approved Section 12J VCCs to deduct the full amount of their investment from taxable income in the tax year.
While this added incentive may have contributed to the success of KNF Ventures, Knife Capital’s Co-founder and Partner, Keet Van Zyl, maintains that there is more to the success than mere tax deductions. Moreso, when that favourable tax regime has been revised to something less favourable.
“Our business model is not solely dependent on Section 12J,” Van Zyl told WeeTracker. “The tax regime is an added incentive for our investors, but we’ve built up a good track record of investor returns and remained focused on what we’ve done for the past 14 years as a team.”
Van Zyl also talked up Knife Capital’s “Find-Make-Grow-Realise” value-chain approach. According to him, the success so far achieved is down to “finding exciting innovation-driven SMEs to invest in, making the investment with fair terms after thorough due diligence, actively growing the businesses through tangible value-adding activities, and realising sustainability and/or exit goals of these investments.”
Last year, concerns were raised by investors after new deduction limits for investors were set under Section 12J of the Income Tax Act.
Under the provisions of the revised document, individuals and trusts are now only permitted to claim a maximum tax deduction of ZAR 2.5 Mn and corporates are allowed a deduction ZAR 5 Mn, per tax year.
There were many complaints that the changes would reduce the amount of funds that VCCs are able to raise. While Van Zyl shares this sentiment, he sees other opportunities and positives despite the apparent bizarre investment slump of 2019 which saw South African startups fall down the pecking order, raising a paltry USD 67.34 Mn — the lowest amount for over 3 years.
“Section 12J VC Funds will likely find it more challenging to raise funds because of new investment limits. But while changes in the 12J tax regime and the slowdown in the SA economy may have a negative effect on the SA VC climate on some level, there is also a lot of positive momentum in the industry,” said Van Zyl.
“The SA SME Fund continues to fuel the SA VC industry after backing some of the more established VCs and are now catalysing some new VC Fund Managers. The new University Technology Fund should result in some interesting investments in commercialising core Intellectual Property.
“A number of VC Funds focused on SA has undeployed capital, so the great entrepreneurs out there are in a good position to get funded in 2020. International investors are increasingly co-investing with local partners and backing those SA businesses that successfully scale internationally,” he added.
Knife Capital is targeting a final close for the extension of KNF Ventures on 31 March 2020, so as to allow new investors to potentially claim tax deductions in two tax periods. New investors in KNF Ventures will be able to participate in the further upside of the portfolio investments already made.
So far, most of the ZAR 180 Mn fund has been deployed in seven startups including PharmaScout, Pura, SkillUp, Snapplify, DataProphet, Quicket, and Cradle Technologies. (Knife Capital typically doesn’t disclose exact transaction sizes of each individual investment).
Van Zyl boasted that Knife Capital’s portfolio companies are growing in excess of 50 percent year-on-year and over and above the financial benefits. He also said KNF Ventures has already created 54 jobs within its 12J portfolio – and counting.
“Because of Knife Capital’s broader activities in the venture capital industry locally and abroad, KNF has access to good quality deal-flow. We partner with entrepreneurs at an early stage through our Grindstone Accelerator Programme, and have invested in some of those cohort companies. KNF also has an amazing investor base of just over 100 private investors and institutions – including the SA SME Fund – that assist with passing on good quality leads through the network,” Van Zyl revealed to WeeTracker.
For its KNF Venture Fund 2, the seasoned funder said Knife Capital is looking to build on the foundations of KNF Ventures.
“KNF Ventures Fund 2 has the same investment mandate as Fund 1 and will continue to build on the success and momentum created. It will predominantly provide follow-on growth funding for the successful businesses that Knife Capital already invested in or has a commercial relationship with. We already have some institutional investment partners committed.“
It is understood that Knife Capital is “working on ways to plug the Series B funding gap that exists in South Africa where there are limited local investors that lead or participate in larger Series B VC investment rounds and actively manage those portfolio investments on home soil.”
According to Van Zyl, KNF Ventures Fund 2 is billed to reach a final close on 30 June 2021 in line with the 12J ’sunset clause’ whereafter investors cannot get further tax deductions when investing at that stage.