PREMIUM FREE TRIAL

Knife’s Keet van Zyl: What a successful VC investor looks for in an entrepreneur

LONDON — In a relatively short time, Knife Capital has established a reputation as one of South Africa’s most astute early stage venture capital investors, having shepherded a number of tech startups to sales into multinationals. The firm’s roots go back to unearthing opportunities for the family wealth offices of super entrepreneurs Mark Shuttleworth (Thawte) and Hasso Plattner (SAP). While telling his firm’s story, co-founder Keet van Zyl unpacks the attractions of South Africa’s tax incentivised J12 venture capital scheme, shares some secrets of Knife’s success and explains what entrepreneurial traits attract investors. – Alec Hogg

This special podcast is brought to you by Knife Capital whose co-founder, Keet van Zyl, is with us on the line from CT. That’s an interesting name for a company, where did it come from?

Well, the real story is we had an article coming out in a publication and we were under pressure for a name and we couldn’t come up with one. Most of the ideas were boring and not really screaming our company culture – anything around “grow” or going into that trajectory, or whatever. Anyway, we went to lunch at a restaurant, ordered some crisp Sauvignon Blanc on a summer’s afternoon and said we were not leaving the restaurant until we’ve got a name. That restaurant was Knife Restaurant in Century City.

After how many bottles of wine did you decide that on the restaurant’s name…

It was a few and it was deep into the night. I think Andrea stood up and said, “Man, what is Apple? What is a brand? The brand will be what we make the brand to be in time. Essentially, we can call ourselves Fork, or Knife, whatever.” We were like, hey, Knife – it’s sharp, it’s edgy, it’s us. I did regret it for the first year. But then no one forgets it and now we’re embracing it.

The story about how Knife Capital started was basically, the two initial co-founders, Eben van Heerden and myself, started working together at Mark Shuttleworth’s venture capital fund called Here Be Dragons (HBD) in 2006/2007. So, it’s been a good 10 years of working together now and counting. Essentially, we spun Knife Capital out of HBD. We started in June/July 2010, in the middle of the soccer World Cup. Basically, we just changed our salary slips over for management fees and Mark Shuttleworth being quite an entrepreneurial guy appreciate our chutzpah and said, ‘yes.’ So, we’re still working with HBD portfolio companies.

Andrea joined us about a year later to add a little bit of flair to the emancipated accountants that we are and bring a bit of strategy and marketing skills to the table. She started Hasso Plattner Ventures in South Africa, (he is the founder of SAP) and invested that fund. So, for a while we were competitors in the SA market and then we decided to collaborate.

Those are two very big names, Mark Shuttleworth and Hasso Plattner.

Mark Shuttleworth

Yes, I think if you really unpack the venture space or the risk investment venture capital space, or however you want to define it because it is a matter of definition in SA. It is really built on some high net worth individuals with entrepreneurial culture, the route that Shuttleworth, Anton Rupert, Patrice Motsepe, Jannie Mouton and more recently Michael Jordaan and a couple of other people went. If it wasn’t for them there would really be very little big-ticket risk capital going into early stage investments.

So, yes, we cut our teeth in the so-called family offices of high net worth individuals who gathered their wealth in various ways and then give back by being interested in the entrepreneurial space and understanding the importance of the link between job creation, technology, innovation, and a country’s success.

What part of the entrepreneurial chain do you focus on?

We are in the intersection between later stage venture capital and early stage private equity. It basically just means that we need a bit of more traction than just an idea phase. We always explain to the entrepreneurs that it’s innovation driven so, there needs to be some element of scalability, and innovation, or intellectual property, or some barrier to entry if someone else also thought of that idea last night and is working on it. What kind of protection is there, and secondly, what kind of traction is there? Traction is this momentum.How much traction is always the question? But we generally say, post-revenue. The company needs to at least bring us one client, which is not their mother that bought the minimum viable product.

And the sectors that you focus on?

It is technology but technology these days is very broadly defined. I don’t think there are many sectors which are not touched by technology. In a typical sort of venture capital fashion, we look at some of the sectors which are more prevalent in this space. The Internet of Things, when it comes to software as a service. We’ve had some very good successes with Radar but I think that was more just the way the cookie crumbled. Looking at Fintech (financial technology), telecoms, cleantech and health and those types of things. It has to have some element of innovation and that leans itself to technology.

The reason for that is if you invest a smaller ticket size – we invest up to $5m per investment – and generally, that is still quite small. You can’t really drill a hole in the ground or build a manufacturing facility or do property development with that. But if you put that kind of money behind a technology venture you can actually scale it quite far, internationally.

You’ve had some very big successes. Was that just luck?

I would never discount the role of luck but yes, there was definitely some design in it. We’ve had some good success stories. I think our first big success story was we did a predictive analytics company, Pretoria based guys were called CSense and that we exited to General Electric, which was quite a big win. Then still one of our favourite and one of SA’s recent technology Fintech’s success stories – a mobile financial services company called Fundamo, which we exited to Visa. That was a $110m exit. We had about a 27% stake in the end in our HBD Fund. That is sort of premise of venture capital. You need one or two of those big success stories to make the whole fund pay itself back and then there’s still a few other success stories to come. Some of the other companies we exited via management buy-outs. Then we also have an acceleration program, which about 2 years ago, we had a Radar and computer vision company called iKubu where we assisted the exit to Garmin.

So, yes, I think those things help. Most of the exits or the buy-backs or the success stories are not necessarily that NASDAQ-listed big ticket things that happen, but it does help for credibility and experience. Every time you go through one of these exits you have a few more battle scars and the next time you face some Swiss IP lawyer sitting in front of you, you definitely wish you had some clauses in your contract, which next time is definitely going to be there.

Keet, what do you look for though, given that you’ve had these successes. I remember the Naspers story with Tencent, was they just threw mud at the wall and hoped some of it stuck and my goodness, one piece stuck very well. What kind of approach do you take?

I think we take a more pragmatic approach. It’s definitely not, and that’s the sort of difference, I guess, between building sustainable businesses and backing entrepreneurs who would probably most likely succeed anyway. Versus 1 out of 10 will succeed, and the rest you’ll write-off. It’s not the Silicon Valley model of Moneyball, one-to-many model. It’s more really looking at some entrepreneurs, looking at the culture, looking at the scalabilities, some traction, which de-risks it in some way. Then we really look and ask ourselves some deep questions about what value can we add above money? So, if we can add some quick wins, can really act as a partner? These are all things that any investor would tell a company on what they’re going to bring to the table. But what we do know is the only way to win the entrepreneur’s respect is to bring a client or two. So we aim to do that within the first 12 – 18 months, to really bring some big clients to the table. Then we act as a co-partner.

So, from the Shuttleworth and the Plattner days, with the three of you, you did a deal with African Dawn. What was behind that?

We exited those companies and with the management contract of HBD and under the arm and some big exits we thought well, let’s go and look at the institutional space in SA and any other developed country where VC and growth equity is prevalent – the pension funds, life companies, the asset managers – they have some portion of their allocations towards alternative assets of which this venture gameplays a part in. So, we approached those companies and most of them – and I can understand why, in retrospect but the naivity of youth – said ‘look, this doesn’t really move the needle even if you guys succeed, it doesn’t really help us. We have to have a seat on the Investment Committee. It’s just a lot of trouble and this risk and we believe one in ten will succeed so, we don’t understand the model. One asset manager famously told us that during this meeting I lost or made, and I don’t really know which one it is, your whole fund on the share price of one of my listed companies, in which I’m invested in. So, I don’t care.

So, we basically thought, okay one of the other ways to take that mandate fit out of the equation is to be listed so, we took a lot of advice on being listed. We tried that or we looked it and it was quite expensive. Then on paper thought well, one of the other ways to do it is to do a reverse listing. So, at the time, African Dawn came from an interesting history and they acquired Knife Capital to capacitate the group to help them execute their new vision at that time of investing in innovative entrepreneurial companies. I think there are some reasons why those synergies didn’t really materialise. It was quite a long road to do so and, in the end, we decided to rather do a management buy-back and recently, actually bought ourselves back out of African Dawn. But there are still some ventures we collaborate on.

So, it was a couple of years almost, of pedestrian growth within the business, as you were trying to settle in to African Dawn. Now though, you feel that you’re ready to start taking off again?

Look, we’ve got quite an entrepreneurial spirit so, it wasn’t necessarily pedestrian. We did one or two interesting things with the African Dawn team. And one of the things we also launched last year was a SARS Section 12J venture capital company, which basically is a tax break vehicle where investors in that fund can write-off that whole investment to their taxable income. So we did raise money in an indirect way. We really are very proud of the investors we have in that fund and the minimum investment in our specific 12J is R1m. Some of these entrepreneurs that we helped with their success stories and exits, have backed us, and put that money back into the fund. About 80% of our investors, which is only between 25 – 30 are entrepreneurs that have exited their SA businesses. So we’ve got a very entrepreneurial investor base and we’ve done one or two investments. We’ve done a few exits during that Afdawn period. But yes, our tails are up. We’ve really got some interesting expansion opportunities at the moment at our feet. It’s a good space to be!

That really brings us to the next part of the story, the one that you announced this week. You’ve now moved into the UK, opened a London office, and done a deal with Draper Gain, also through one of your partners, Bob Skinstad, (most people know him from his rugby prowess) but he’s also an entrepreneur and an angel investor. What got you thinking on the globalisation story?

Bob Skinstad

Our 12J fund is called KNF Ventures, which is obviously linked to Knife. But we retrofitted that to our mantra of combining Knowledge; Networks; Funding. We’ve always said that the three things that any high growth business needs to succeed are firstly the knowledge. The entrepreneur needs to be awesome at his or her craft and we need to be very good at what we do, in terms of business building. Then: Networks, at the end of the day, you need a client, or a connection, or the right staff member. If someone can bring those networks together and put the so-called players in the right positions – that is a hell of a skill. Then there’s the funding.

So on the network side, Bob really helped us to launch the 12J company and got involved there as an investor and equity partner but through that all, he started heading up the business development functions for Draper Gain, a UK based family office. He moved his family over there last year and one or two of the bigger deals that they were starting to look at, they needed our skillset and we helped them just doing due diligences and looking at it more closely. That relationship developed to us saying, hang on, why don’t we fully embrace this, this team that comes out of a history of family office management. Establish that on a more permanent basis, become equity partners and with a big investment commitment. We then established a Knife Capital London office, which gives us an interesting value proposition.

Most SA entrepreneurs with scalable businesses want to scale that internationally. I mean, it’s not to say they all need to scale into London – most of our other businesses have scaled into the US or into the emerging market, Latin America, Pakistan, and so forth. But it does create an interesting platform for networks, funding, resources, and so forth at least in a First World Country. Then the flip side is also true. We find ourselves in pitches or in boardrooms on the London side, a lot of the scale ups or the growth companies – they are quite interested because of our other office in Cape Town.

This is a perfect beachhead market to test product to go into because of one of SA’s unique differentiators. We’ve got this unfortunate and fortunate disparity, between First World and Third World, but it does create in a weird way a perfect test market. So, people who want to expand their businesses, test it over here and we use it, as a back door for growth into emerging markets from that side. Our investment mandate has expanded now, where we don’t only invest in SA businesses but also in global businesses that want to expand this way.

Keet, it’s quite interesting when you have a look at what you do and the success of similar types of skillsets from South Africa in Silicon Valley. You obviously know the people better than I do, but top of the head Elon Musk, Roelof Botha, there are many more in that ilk who are just below the radar. Did you ever think about doing what you’re doing in Silicon Valley rather than Cape Town?

Never say never but it’s definitely not necessary to have a nice office in every tech hub in the world. Luckily, one or two things that those ex SA’s in those spaces have in common is they generally like rugby or they get homesick enough to follow that so, it’s quite interesting the actual networks that a guy like Bob has access to. We spend enough time there. Some of our companies have expanded into the US, and we help them. I think from that perspective it’s more the network element and co-investment opportunities and learning from what’s going on in those markets because it still obviously, at the forefront of technology innovation. It’s more learning, copying, taking it all in, and where we can, work together. But I don’t think, at this stage, looking at establishing on the other end of the world, which is not in the same time zone, which is not a quick flight away. Our business is actually still fairly small.

Cape Town
Table Mountain, Cape Town Photo © Jeremy Jowell January 2008

But to reverse that. You’ve got those skillsets sitting in Cape Town as well. Many of the people who’ve done well in Silicon Valley, come from the same universities, from the same backgrounds. As presumably, some of the guys you invest in.

Yes, I think that is, if you look at the similarities between the regions. If you always look at SA, or especially a hub like CT, and Jo’burg is also becoming a formidable tech hub and so is Durban. If you look at the cross-section between lifestyle, advertising agencies, creative souls, entrepreneurs who can choose where they want to live and top universities and research institutions. Then access to angel investors, international and local, and a lot of the international guys that come and live in Cape Town in summer they want something to do or they basically, contact us and say, ‘can we co-invest’ or ‘we’re interested to mentor.’ So, I think from that element there’s a lot of similarities. The skillset is here. It’s definitely from a technology standpoint. We can rattle off a lot of success stories from Willem van Biljon and the guys at, the moment, at Takealot but before that it was Amazon EC2 Cloud and a couple of success stories. Especially when it comes to fintech and radar, and those types of things.

So, I don’t think SA entrepreneurs, and technology and intellectual property and research institutions have to stand back for anyone. From that perspective, we certainly remain very excited about the SA market and I think this move is not a move out of SA, to now go and look for investments in London. It’s more pulling back family office money via London, co-investing with our 12J investors this side and create more, bigger ticket sizes for investment companies. Just that missing middle. That’s where the big gap still lies. If you look at a good scale-up company or start-up and they want R3m or R5m these days, they can find it. But now they start growing and all of a sudden, they need R20m or R30m. Then what do they do? They basically, get on a plane and they go and raise it either in Silicon Valley or in Europe. We’re trying to say, no, wait, we’ve got a better plan.

Is it always an equity investment or do you do loans as well?

For us it’s a significant minority equity investment. Typically we’d want between 20 and 30% stake in investment. But it obviously, ranges. It could be lower if it’s a bigger company, and so forth but for us, we try and go for vanilla equity, have a seat on the board. Try and add value in that way, have some minority protections. We live by the sword and die by the sword. I know there’s very much interesting elements and interesting instruments one can use but for us, it’s well, let’s make our investment smell, and look, and feel like we’re just another partner in the business. We don’t want to take your house. We want to take your mind space and act as a partner and basically, have the equity upside but also have the equity risk, and we manage that risk or mitigate it in various ways.

Warren Buffett

The whole discussion we’ve had today, if you were to get a thread, it’s relationships. The relationships that you have with family offices with the entrepreneurs, with the companies that you invest in, and you talk now as well about serving on the board, adding value. How do you know about the guy on the other side? Warren Buffett says when he does business with someone he does it on a handshake. He said, it’s easier for him to see who he doesn’t want to do business with, than who he does want to do business with but how do you know? What have you learnt in that field, in the relationship field?

Yes, I think we’ve learnt and you obviously have to contract for the down-side but when you have to pull the contract out of the drawer and manage that investment by saying, ‘listen, in terms of clause 12.3, I don’t think you can do this.’ Then you might as well write that investment off. We have a very open culture with our entrepreneurs and if we can’t manage the relationship over a proverbial beer or coffee – just say listen, we think that we didn’t appreciate this or we think we’re going in the wrong direction here, without putting gloves on the whole time. But it is a relationship. It’s a long game – an exit typically is four to seven years. So, if you’re going to partner with someone for that type of time period you might as well have trust. At the end of the day if you can’t establish that early on. Yes, pattern recognition, just that feeling of the people are on the same page as you are. We look very much for cultural elements in the business. We spend a lot of time in our investee companies’ office. Not necessarily bothering them the whole time but we are at least, there fairly often so we can get to know middle-management at the water cooler and those type of things.

Just to say, we’re not just waltzing in here every now and again, and wanting a report, in terms of how it’s going so, we can rap you over the knuckles. It’s more like how can we get involved and act as a partner? But I think that relationship element that you touched on is the only way to manage this kind of investment. If you go further up the ladder towards higher private equity type investments, obviously you pick a management team. And that management team you’d expect to have a FD and a CEO that knows what they’re doing and a COO, and a HR manager and all those people in place. So, that team must just get on with it but in our case a lot of the time, we’re inspirational speakers. Other times we’re corporate governance custodians and sometimes we’re just the shareholder at the ground, type of thing.

Keet, when I listed MoneyWeb, when I brought in an investor, a very famous but very low profile, he doesn’t like anyone to know his name kind of investor, he said to me the biggest risk in making the investment in my company was people change when they get a little bit of money in the bank. Entrepreneurs don’t always remain as passionate. Have you found that that is an issue that you’ve had to deal with?

Look, there is definitely some element of carrot and stick. We generally invest via milestones so, let’s say an investment needs R10m, we would typically not put it all in on day one. There would be a set of agreed, in the due diligence, we would do a gap analysis and say do we all agree that these following gaps, if they are fixed, will make it a better business? Yes, okay, so let’s allocate that money. The first R3m goes towards the most important gaps and then we put in the other R3m and so forth. So, to answer your question, once the last cent has gone in, and somewhere between month 12 and so, then there is sometimes a bit of an attitude change. I think when you get to that stage you better have, as an investor, decided or proved which type of investor you are. Are you a reporting line? Are you there to add value? Are you a partner? Are you just passive?

But something does change because the power shift changes a little bit, it’s just natural human nature. I think mostly so far, so good. I mean there’s been one or two failures in the wake, but on a balance of power I think the advice I need to give to any entrepreneur is to do your due diligence on your funder. Phone their past portfolio companies, they’re all on their websites, and just have a chat to the entrepreneurs. What kind of investor was this and how did they treat you when things went bad because at some point it will go….? These are is entrepreneurial ventures and things don’t always go in a straight line upwards. And how did they act in that situation? So, yes, it is money and it is serious business so, at the end of the day, we are custodians of our investor’s money and we can’t just always be the nice guy.

This relationship with Draper-Gain in London, presumably that also unlocks the potential for more capital?

Yes, That is a very substantial pool of potential capital and relationships that we can tap into. As long as we perform and continue doing good investments, I think from that perspective that relationship will continue growing into value adding to the portfolio companies as well. We’ve also got, via those relationships, interesting angles into different businesses, which could create market access opportunities for the investments that we invest in. From that perspective, we do have a bit of a lens on knowing the family office portfolio businesses and these are bigger investments which they have stakes in, which can then act as conduits for helping these businesses we invest in. So, without giving too much away, there is definitely some overarching strategy and it’s not just random, good investments that we’re looking at.

And another overarching strategy is to arbitrage the low cost, high skilled base of SA with the hard, currency revenues elsewhere in the world…

Yes, the model of VC, and specifically in SA, I know it myself and all of my colleagues that play in the space. It’s a game where we can’t complain too much about the remuneration structures but it is a long-term game so, I think from that perspective, our cost base is low, our offices are small and humble, and our incentive structures are based on, ‘well, if we succeed then we all succeed together.’ We want to make money with each other and with our investors, and I think from that perspective the model intuitively works.

Keet van Zyl is the co-founder of Knife Capital. This special podcast was brought to you by Knife Capital.

For a deeper understanding of the world of money and greater financial control, upgrade to BizNews Premium.