Filling the missing middle

What started as a publishing company in the Western Cape in 1915, the Naspers of today is a very different beast. Listed alongside Amazon, Google and Facebook, it’s one of the world’s top 10 international consumer internet companies, based on market capitalisation – in fact, it’s listed twice in that ranking, but we’ll come to that later. While most of its ‘top 10’ peers are known to offer internet-based services under their own brand, such as Netflix and Alibaba, Naspers stands out as being the only true investor.

In recent years, Naspers’ presence on the JSE was so significant, that if it sneezed, most of the stock exchange’s investors got sick. Key to that success, of course, was the $32 million investment in China’s Tencent in 2001. Today, Tencent is ranked fifth of the top 10 consumer internet firms, with a market cap of $400 billion. This stellar investment, along with a number of others, has propelled the holding company in a direction that has resulted in its focus moving from media house, having disposed of $6 billion of non-core assets as well as the $3.5 billion unbundling of MultiChoice in recent months, to becoming a leading global internet investor.

The turnaround has been relatively rapid. In 2007, 89% of Naspers’ revenue mix was in TV and print media, with just 11% exposure from online.

In 2019, the company claims to be a 100% internet company – its holding in Media24’s print assets, says global CEO Bob van Dijk, account for less than 0.5% of revenues. In September 2019, Naspers created Prosus, a new listing on the Amsterdam Stock Exchange, a new home for the Tencent shareholding, and much of Naspers’ internet holdings. It immediately became the seventh largest consumer internet company, with a market cap of $119 billion. Naspers, which retains a 74% stake in Prosus, is now tenth on that global ranking, with a market cap of $67 billion.

Van Dijk reasoned at a recent media conference that the Prosus listing was ‘a capital market-focused transaction’. He says the company had grown too big for the JSE, accounting for a quarter of the exchange’s value.

“That was going to get worse over time as we were growing so fast; organic growth was in excess of 30%, and so we couldn’t raise the next billion of capital on the JSE. Size was the limitation, which is why we listed our international internet assets in Amsterdam. It was a necessary step for the next wave of growth.”

Growing SA

In October 2018, at the South African Investment Conference, President Cyril Ramaphosa called on businesses to show commitment to the country. A key part of Naspers’ response was the creation of its ‘Foundry’, which would devote R1.4 billion over three years to help grow and nurture South African technology companies.

The cynic might say unbundling Prosus and listing it in Amsterdam was a way to move assets off shore, and the announcement of the local investment fund an attempt to provide political cover to do so. Naspers South Africa’s CEO Phuthi Mahanyele-Dabengwa vehemently denies this.

“It’s not true,” she says. “Naspers is hugely committed to South Africa. We’re in constant discussions with Treasury with regards to what’s required from us. There’s significant capital for South Africa from Naspers as well, in taxes, for example.”

Mahanyele-Dabengwa says the R1.4 billion is a jumping-off point for Foundry, and more money will flow into it after the initial three years are up. “This is just the start. While we made the announcement at the President’s investment conference, from a business perspective this makes a lot of sense for us. It would be continuous investment, but we have to ensure we’re investing the capital properly,” she says.

So just how does Mahanyele-Dabengwa expect Foundry to invest capital?

“We’re looking for businesses that are technology-based, but can also make a difference in people’s lives,” she says.

For a large part, it seems the focus will follow Naspers’ broader philosophy – longer-term investments with platform potential and that meet a fundamental societal need, which the company has identified as trade, payments and credit, food, and education. “(These are) things we know are important today, but will be equally important a decade or two from now,” Van Dijk says.

More specifically, Naspers’ investments are segmented into e-commerce, classifieds, payments and fintech, and food delivery. But Foundry’s mandate allows it to look beyond those areas.

It’s understood that investments must have some link to South Africa, be it the business is based here or this is a key market.

Naspers is structured with global segments, run as businesses across the world. With the payments team based in India, for example, any Foundry investments in local payments companies will draw on the team in India’s expertise. But the Foundry team also has to be aligned with the Naspers Ventures team (its Silicon Valley startup investment entity based in San Francisco), and the group’s M&A team.

Currently, says Mahanyele-Dabengwa, the Foundry team consists of five people and most of them have two roles within the wider company. These other roles, however, ensure alignment across the broader group, for example t he group M &A executive and an SA based Ventures employee both sit on the Foundry team. Capabilities such as due diligence, finance and legal are drafted in from across the international group.

“Ventures started as a small team and grew over time,” says Mahanyele- Dabengwa. “And, over time we’ll grow too. But you have to go with the deal flow as you create net asset value in the business, then you can start to scale up. I’m bringing South African people in now specifically focused on Foundry, because it’s important to have the local view on some deals.”

She adds that international investors coming to SA often overlook a local concept or don’t understand the situation.

To date, the number of entrepreneurs who have put their companies forward to be considered for funding is significant. According to research from SAVCA, there were 181 venture capital deals signed in South Africa in 2018. A source close to Foundry told Brainstorm that since the R1.4 billion sum was announced, it has received ‘hundreds’ of submissions. Of course, if you put a honey pot out, you’ll attract flies, and many of those submissions don’t fall within the confines of its prescripts for consideration, particularly in the early stages – now there’s a PowerPoint template that applicants must complete to help weed out inappropriate candidates and focus the minds of more suitable ones. At the time of writing, only one deal had been announced, but a number of deals are in the pipeline, and expected to be announced over the coming months.

All about the people

“What’s common among all the businesses Naspers invests in is that they’re all founder-led. We support founders of businesses, and grow and scale up with them,” says Mahanyele-Dabengwa.

For a corporate, this could be a culture clash. The maverick, entrepreneurial founder being told to attend a weekly 8am meeting, for example. But Mahanyele-Dabengwa says Naspers works hard to foster a more comfortable environment for founders.

“These aren’t people who like to be told how to do things, so you have to engage with them in different ways. You have to let them dream, do their thing; it’s about them. You engage with them as partners. We try to understand what the idea is, we might add in a little input on what we think, they decide if they take that or not. At the end of the day, what we’re looking for is results.”

Foundry isn’t a fund as such, she adds. “It’s not time bound; we take a long-term view and that helps entrepreneurs in terms of the pressure to deliver the results. We’ve got targets that we would like to achieve, but the difference is that we don’t have this push on us for those targets to be achieved. We can review. The important thing is that you’re backing the right founder, someone with the right idea.”

This all sounds lovely. An investment company that’s prepared to give you a chunk of money, and let you get on with it, virtually unhindered, and even lenient on the targets it sets. Is it all too good to be true?

As mentioned earlier, Foundry has, to date, only invested in one company, SweepSouth – think Uber for domestic cleaners, and soon to be a number of other home service professionals and artisans.

The company’s co-founder and CEO Aisha Pandor confirms Foundry’s backing has been a positive experience.

“Naspers made its broader networks available to us, and the team there step back and don’t meddle, letting us do what we were doing prior to their involvement, which is to grow the business. They’re also there if we need support,” she says.

And what of the idea that founders are left to run barefoot through the meadows without much oversight for targets?

Where there will be pressure from Naspers, admits Pandor, is around growth. “For us, growth is closely tied to revenue. Where they’re probably not pushing as hard is around profitability. What they’re looking for is companies like ours to grow, have a lot of market share in SA, but able to expand internationally. I think they’re comfortable with that, at least at the immediate expense of profitability.”

An old hand

Naspers’ own growth and success has been built on its investments, and so its entry into the venture capital space through Foundry is nothing new for the company.

“This move might be branding to make it a more locally accessible offering,” says Stephan J Lambert, an independent researcher for SAVCA (The Southern African Venture Capital and Private Equity Association), who is responsible for compiling its annual reports into the local VC space. “Naspers has been investing for some time and coinvesting with some people who’ve been driving venture capital in South Africa for a while.”

Lambert, Pandor and Mahanyele-Dabengwa all agree that the South African VC space is small and needed some sort of kickstart.

“The SA funding space is limited,” says Mahanyele-Dabengwa. “Entrepreneurs need access to more capital. Unfortunately, our banking environment is very conservative.”

Lambert says he’s seen the VC space grow quite a lot in the past decade, mostly driven by independent investors. SAVCA’s data shows that the reported value of investments made during 2018 was R1 516 million, up from R1 160 million in 2017 and R872 million in 2016.

The introduction of the Section 12J tax scheme has added impetus to the growth, says Clive Butkow, CEO of Kalon Venture Partners. “When we set up Kalon (in late 2015), there were 30 (Section 12J registered VCs), and there are now 165.”

“Over the five and half years since we launched,” says Pandor, “I’ve been encouraged by the change in the number of incubators, accelerators and venture capital across the different stage of investing.”

Despite the indications of growth of the wider VC space, Pandor says she found it challenging to find funding, especially at the stage her company is at. “The ecosystem isn’t mature enough for companies growing quickly to feel that as they go through the various stages, they have the corresponding level of support. Companies trying to raise Series A or Series B funding, and the cheque sizes that involves, the pool of VCs able to fund at that size is still relatively narrow. Some are restricted by mandates, and often restricted by experience, and their own understanding through investment and particular types of business.”

Brainstorm understands that Foundry will typically be looking at deals ranging from $2 million (R30 million) to $10 million (R150 million).

“The missing middle,” says Lambert. “That’s the part where we’re coming short in SA, because the typical yield size (for seed investors) is around R10 million. Private equity is looking at around R200m or at least upwards of R90m. There’s a big gap there and that is traditionally where Naspers has been investing.”

Butkow agrees that South Africa needs more investors that can support SA companies looking to raise up to R150 million. “That focus on later stage, growth capital, not on startups, that’s where we have a big void in SA. We don’t have true Series A capital in SA. We’ve got pre-Series A ($1 million or R15 million), there’s lots of players than can put in that amount. To put in $5m as one cheque, not many players can do that,” he says.

The holy grail is for more South African corporates to get into this stage of venture capital, adds Lambert. He says that some VCs, such as 4Di (although it’s a seed and early stage investor), have been receiving money from insurance companies to act as venture capitalists on their behalf.

“If the likes of Naspers and the insurance guys are putting their money on the table and are getting into VC, not behind the doors in a pseudo M&A basis, then that can only be good.”

Another factor to consider is there need to be business models and performance criteria that a corporate investor can see that the VC model makes money, he says. “We need the numbers, and we need people with performance. And we’ll start to see that, as Naspers is a listed entity, people will start to interrogate those deals to determine if it makes sense, so that’s a good thing.”

Being a big player coming in with so much money to spend, is Foundry likely to rock the boat with other VC players?

Says Lambert: “I don’t think the local guys will be too upset. Essentially what Naspers is building on is the early stage ecosystem opportunities; it had opportunities to go into that space and chose not to. What it’s doing is a huge carrot to the local ecosystem players that do focus on the early stage companies. If it raises an opportunity where there could be synergies and co-investment, or later stage follow-on investments so the local guys can get in on a company earlier and mature it to a stage that there would be a willingness for Naspers, that would be very good for the industry.”

And what does the actual VC think?

“I’d love to work with them,” says Butkow. “They know their stuff. We need more VCs that know their stuff.”

The formation of Foundry seems to have been well received by founders, venture capitalists and industry observers, and looks like it will only help grow the local startup space.