Diversifying capital is essential for effecting change in South Africa
To promote a diversity of views, you need diversity in capital. That means that you need to give money to people who have never had access to capital – says Mr Sakhile Xulu, General Managing Partner at Seed South Capital who has been labelled a serial entrepreneur and a self-taught venture capitalist (VC).
He was addressing an executive leadership audience at the two-day Executive Leadership Workshop (ELW), hosted by Universities South Africa’s Entrepreneurship Development in Higher Education (EDHE) programme in Cape Town, last week. The ELW 2022 theme was Commercialisation of Research.
Speaking to his topic What do venture capitalists look for when considering investment into research commercialisation? Xulu (left) said: “In South Africa, because the same people are investing, the same people are getting the money and we are getting the same views. Nothing is changing.”
Explaining Seed South Capital’s purpose, Xulu said he was not a fund manager but a business builder who has to be a fund manager to get access to money to build businesses. “Business is the only way we can rewrite history and the demographics of South Africa. The sad reality is that as a black person I could not raise money in my own country, but I could, globally. I realised my brothers and sisters elsewhere had the same problem.
“Seed South Capital exists to ensure that money flows to everybody equally. We underestimate the value of diversity in capital; people think they understand other people’s problems,” he said. He told of investing in a predominantly white business where the product had been built for (mostly) white people.
“Once they reached the ceiling we realised they were about to leave the country without exploiting the local market. We are black, we understand black people.
“We suggested ways of tackling the black market; their revenue went up and they didn’t leave,” he said. Diversity matters on the capitalisation table. Without it – and a cohesive plan – the country will stay the same.
Xulu showed universities’ senior leadership a Dubai Future Foundation video that outlines the long-term strategic plan for that country. He said South Africa lacks a clear vision.
Road map needed
“Commercialisation is not economic growth; we need to define what commercialisation is for us. Only then will we have a road map. “Venture Capital does not know how to support universities because we don’t know where you’re going; you don’t know where you’re going and you don’t know how you can assist us. What are our strengths as a country and how do we use them to build industries?” he asked.
Vision creates certainty, which is when money flows, Xulu said, adding that investors hate uncertainty and that clarity around the roles that institutions and VC play is essential. “We have great universities and great research, but until we bring them together, we have nothing.”
Fragmentation, he said, is the death of South Africa because people want to be solo superstars whereas working together led to everyone benefitting. “Market coordination means respect for the SA market and bigger traction. That’s how to get captital into the market. Not by trying to be superstars,” he said.
Seed South Capital
Xulu said his company’s goal was simple: to get innovation out of the laboratory.
“You can’t change South Africa’s socio economic problems if innovation stays in the lab. We realise that VC is not the magic bullet that leaves a lot of money on the table because we have to invest in what is right for us.” Seed South Capital is in the process of establishing (with partners abroad) Innovation 5.0 – to facilitate the Fifth Industrial Revolution for SA.
“How do we help institutions like you take innovations to market without a fund? How do we build skills within your institution without the need for a fund?” He said he had been approached by many international private equity firms who were “not looking for a startup, but who wanted specific IP that they were willing to buy.
“We often cannot find that IP – but that doesn’t mean that it does not exist. We’ve realised VC is not the magic bullet; if we build a licencing firm with the right people, the right credibility with the right skills, outside of a fund, I think we can take everyone with us,” Xulu said.
He insisted that he did not mean that funds were not relevant, but that they are specific by design “which means they leave people behind”.
Unrealised revenue
Xulu quoted a study that found that between 2014 and 2018, South Africa spent R50billion on research and development with only R185-m of that realised.
He said this was not a lack of innovation but a go-to-market problem. “We have some of the best researchers in the world, but universities do not have the skills to take things to market. We (Seed South Capital) are by design a go-to-market strategy company; we’re not in product development; we take businesses to market.”
Missing: a go-to-market fund
Xulu added that there were many funds that could facilitate product development but missing in South Africa was a go-to-market fund. While there was no shortage of resources at universities, there was no coordination to unlock potential. However, Xulu acknowledged the fears that thoughts of coordination raise within universities.
During the ensuing discussion, Professor Nosisi Nellie Feza (left), Deputy Vice Chancellor: Research and Post Graduate Studies at the University of Venda said the presentations had triggered her emotions. Confessing to having been abused and a victim regarding innovation and reward she said: “We professors find solutions, but nobody cares about us. We are accused of using the taxpayers’ money; that our ideas must go to open access. People are making money out of us. When are we going to be humanised? How are we, the professors, to position ourselves — to see if we want to participate or not?”
Xulu responded saying she had hit on what was a university policy flaw towards innovators.
“How much money does the university take to help the innovator get to a certain point? In most cases it’s pre-negotiated,” Xulu said.
Founders need the lion’s share
He added that he had never been in a deal where he had taken more than the founder because it took away their incentive to continue doing the work. That would render the business less successful.
“How does VC help universities structure policy to make it worthwhile for innovators in the long run? That is the fundamental flaw. Finding the right balance between what the innovator and the university deserve. “Universities are working at scale. Is 10% fair for a founder? Outside of IP commercialisation, is 10% fair?”
Private Equity and Venture Capital entrepreneur Daniel Strauss, who sat on the panel with Xulu and who manages the University Technology Fund, chipped in to say that 10% was calculated after dilution. “Remember that the company has (for example) been funded with more than R100million. Dilution often happens but wealth creation happens through that dilution.”
In his presentation, Xulu had spoken of basic legal mechanisms to ensure protection of professors and innovators.
Repositioning South Africa as a young market
He said South Africa needs to reposition itself as a young market aspiring to feed the world. “We’re not yet a market, but if our strategy is that we’re going to be a market feeding the world technology, there’s coordination there.”
“Transformation is important to us at Seed South Capital: we won’t invest if you won’t commit to transformation. We are geared towards creating value and diversity within the economy. “Our investment mandate is that we are a market development fund focusing on going-to-market. That is all that matters at the end of the day.”
Charmain Naidoo is a contract writer for Universities South Africa.
