Updated, 7th December 2022.
Early-stage investment has long offered excellent growth potential to investors who are prepared to manage the higher risks associated with companies in the early stages of their journey. Not only are these entrepreneurial ventures essential engines of growth, but their disruptive business propositions provide healthy competition to the more established players in their industries - to the benefit of all the customers they serve.
Now more than ever, the South African economy needs the dynamism these companies have to offer. Numerous studies have shown that job creation and higher incomes are associated with investing in early-stage businesses. On average, these businesses spend over half of their budgets on their staff contingent. In addition, over a 10-year horizon these types of businesses will see a 5x increase in their employee base, which bodes well for job creation in South Africa.
The country still faces fundamental challenges, in particular unemployment, which currently sits at 34.5%. It is these types of fast-growing companies that will help provide the impetus needed to emerge from this unemployment crisis.
Early-stage investment – how it’s done
Futuregrowth’s Private Equity & Venture Capital team spends considerable time and effort identifying suitable companies and making investments where we believe we can propel the company’s growth to new heights and expand its reach beyond its existing footprint. For every 100 potential investments we look at, we only end up investing in two or three. Futuregrowth has strategically invested in a number of promising early-stage companies, via the Futuregrowth Development Equity Fund (DEF portfolio), with more in the pipeline. In late 2018, for example, Futuregrowth was the first South African institutional investor in Yoco, and, to date, the investment has proved to be a success.
When analysing a potential early-stage investment opportunity, these are some of the questions we ask:
Is there a large addressable market for what the company has to offer?
What is the developmental impact of the business?
Is the company in a high growth market?
What does the company offer that others don’t? What is the durability of the company’s competitive advantage?
Is the business proposition groundbreaking and an agent of change in its industry? How does it compare to its competitors?
What is the revenue potential, is the business proposition scalable, and are there barriers to entry?
Does the business have a great management team?
Does the management team have a balanced mix of technical and business skills?
Has the company gained traction in the market and is there proven demand for what it has to offer?
Are the company’s forecasts achievable (realistic)?
What could cause the business to fail?
Continued high-impact investing
Our early-stage investments add an entirely new dimension to the pool of assets within the DEF portfolio. They are also in line with Futuregrowth’s commitment to improving South Africans' lives by striving to identify opportunities that yield optimal financial returns for our clients and make tangible contributions to society. These include investments in transport, infrastructure, housing, agriculture, development finance, renewable energy, health, education and SMME development, among others, and early-stage investments are complemented by a variety of maturing and established companies in the developmental space.
Dedicated early-stage investment fund
Following on from our nine years’ experience in early-stage investing, the decision has been made to launch a separate dedicated early-stage investment fund. The Futuregrowth High Growth Development Equity Fund (HGDEF) will form part of our developmental suite of funds within the unlisted equity stable. The HGDEF aims to invest in developmental, innovative early-stage businesses in growth markets. The HGDEF will have a warm start, with an existing pipeline and team. Click here for more information.