On the 20th April, 2011 this magazine, in conjunction with mobile telecom provider, MTN, organized a breakfast conference to discuss venture capital as a means of financing and boosting business in the country. Speakers at the conference were unanimous in their appreciation of the capacity of this vehicle in transforming startups into growing entities, expanding job creation and by extension, the economy.
The problem is as old as business itself – raising money to convert ideas into tangible products and services that solve problems for customers and make money for the hopeful innovator.
Traditionally, businesses or startups have had to rely on banks, the benevolence of friends and relatives or even the budding entrepreneur’s own resources. There are obvious drawbacks to this. The banks may not be willing or their terms or processes stifling; friends and relatives may not be available, willing or able; and the innovator’s pockets may not be deep enough. Many a brilliant business idea has failed to see the light of day for these very reasons.
An innovative solution that arose initially in the United States of America is that of venture capital. Championed initially by the likes of Georges Doriot, the former Dean of Harvard Business School and known as the “father of venture capitalism”, Ralph Flanders and Karl Compton (former president of MIT), venture capital began initially as a way to encourage private sector investments in businesses run by soldiers who were returning from World War II.
It is commonly noted that the first venture-backed startup was Fairchild Semiconductor (which produced the first commercially practical integrated circuit), funded in 1959 by what would later become Venrock Associates.
In the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical, or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance.
Today, venture capital is also associated with job creation (accounting for twenty one per cent of the United States GDP), the knowledge economy and used as a proxy measure of innovation within an economic sector or geography. Every year there are nearly two million businesses created in the USA, and only six hundred to eight hundred of them get venture capital funding.
According to the National Venture Capital Association, eleven per cent of private sector jobs come from venture-backed companies and twenty one per cent of the United States GDP is accounted for by venture-backed revenue.
Venture capital investment is a form of private equity. As opposed to the stock market, private equity is a far more intimate arrangement where the investor and the recipient company are very well known to each other; unlike the stock market where a company may not know who is trading in their shares and for what purpose.
Ghanaian entrepreneurs have faced similar problems in financing their startups and expanding existing business. As the role of the private sector has come to be properly acknowledged in the twin purposes of economic growth and job creation, stakeholders have been keen to find innovative and workable solutions to the problem of financing businesses.
The Venture Capital Trust Fund, set up under the Venture Capital Trust Fund Act (680), 2004, is one of the solutions.
The fund, which began actual operations in 2006 with an initial seed funding of GH¢22.4million from the Government of Ghana, has since inception, focused on increasing the pool of venture capital funds available to SMEs in Ghana. In partnership with both local and foreign investors, VCTF has created a pool of GH¢83 million for SME investments. In doing so, the Trust Fund has established five venture capital funds and invested the Ghana cedi equivalent of US$17 million. To date, more than one thousand direct jobs have been created by a total of thirty nine portfolio companies.
Money is disbursed via investment vehicles set up in conjunction with other investors. These investors include banks and other financial service companies. Currently, efforts are being made to rope in high value individuals to invest in the fund’s activities.
These funds, known as Venture Capital Financing Companies are incorporated under the Companies code 1963 (179) and are in the business of assisting small and medium enterprises by making equity and quasi-equity investments and providing technical and managerial expertise to these small businesses in which it has made investments.
Some of these funds include Activity Venture Finance, Fidelity Equity Fund, Gold Venture Capital, Bedrock Venture Capital Finance, and Ebankese Venture Fund.
Apart from Ebankese which concentrates on real estate projects, fund managers generally handle proposals from any sector or industry.
Before the government backed intervention of the V.C.T.F, private equity funds such as Aureos, Sagevest and Kingdom Zephyr were already operating with a similar purpose and in generally the same manner. Aureos for instance, is generally associated with the phenomenal growth of local water bottling giant, Voltic.
These companies/funds operate through licensed investment advisory firms known as fund managers. These fund managers are the ones who deal directly with entrepreneurs. Typically, applicants approach the fund managers with their proposals seeking investment. The fund manager then assesses the proposal including the financial projections, the quality of personnel available to the company and the viability of the idea.
Anthony Siaw, Head of Investment at the V.C.T.F explains that taking up venture capital investment is different from a bank loan in the sense that the fund managers take up advisory and supervisory roles in the enterprise. The fund manager’s interest in the success of the venture means that they will offer advice, even direct the sacking of non-performing executives to ensure that the business succeeds.
When approaching a fund manager, an applicant company must be armed with a comprehensive business plan with three-year projections; audited financial reports for the immediate past three years in the case of existing businesses; a tax clearance certificate; and incorporation papers.
The fund manager may request further information or clarification on certain points. If it is satisfied, it then approaches its “board”, which comprises the VCTF and other investors. If the board approves, then a firm offer with terms is presented to the applicant company.
The period of investment runs from three to seven years typically. During the period, the venture capital fund, acting through its manager, retains an interest in the ownership of the company. At a point when the company has gained full viability, the fund will then decide to recoup its investment. The fund can do this by selling its shares in the company to the owners, through a stock flotation or by selling to another company.
The fund manager then returns the initial investment to the fund and retains a portion of the interest accrued.
Since its inception in 2004, the fund has had varying degrees of success.
Projects invested in have ranged from agribusiness, fast moving consumer goods to even the printing business. The fund is however barred by law from investing in import businesses as these do little by way of job creation.
Challenges have arisen from the general lack of knowledge and understanding of how the fund operates. Some applicants have been confused by the processes and the difference between that and a conventional bank loan. Some find the level of involvement intimidating rather than reassuring. However, that is not the case as fund managers, while keen on the survival and growth of their investments, are careful to leave day to day management of the funded firms to the original owners.
Again, there is a worrying lack of expertise in fund management. Officials at the VCTF and the fund managers themselves, share this concern. Charles Adu Boahen at Black Star Capital is particularly concerned about the dearth of training programs available locally and the huge expense of those that are available.
Nevertheless, at the fund, optimism is high. This year, the fund intends to raise in excess of 100 million dollars to enable it better support the small and medium scale enterprises in the country.
This reflects the big plans that are afoot. The leadership of the fund is keenly aware of the great potential they have to shape the future of this economy by supporting innovation and boosting the private sector, particularly the SME sector.
Industry experts reckon that a strong venture capital culture will have a dramatic effect on the SME sector, job creation and the general strength of the economy. This view, shared by all players in the industry, guides them as they seek to increase the pool of resources, the sources of investment and the accessibility of the program to qualified companies.
PROFILE OF VENTURE CAPITAL COMPANIES
BEDROCK VENTURE CAPITAL COMPANY
Bedrock Venture Capital Finance Company (BVCFC) is a limited liability company headed by Fuseini Issah, a former Senior Analyst at SIC-FSL who has also worked with a number of international companies including Higgins Fairbairn & Co.( UK), MTN and KPMG.Bedrock Venture Capital Finance Company was born out of a partnership between SIC Insurance Company Limited, National Investment Bank and the Venture Capital Trust Fund.
Bedrock Venture Capital Finance Company (BVCFC) currently has a fund size of Ten Million Dollars (US$ 10 Million) for disbursement. The Company was set up to provide financial resources for the development and promotion of venture capital financing for small and medium enterprises in priority sectors of the economy like Agriculture, Information Technology, Education, Tourism and Health care. The company seeks to invest its managed funds in start-up or early-stage business enterprises as well as offering services in financing partnership with SME’s, start-ups, expansion, turnaround / restructuring and pre-IPO.Two investee companies on the BVCFC list which have successfully passed both the financial and legal due diligences are Santinos Meat processing company based in Kumasi and Mede Wo Aseda Ka poultry farm in Sunyani both within the Agricultural sector.
ACTIVITY VENTURE FINANCE COMPANY
Activity Venture Finance Company is the first Venture Finance Company (AVFC) to satisfy all the conditions specified under section 16 of the Venture Capital Trust Fund Act 2004 (Act 680) to qualify for funding from the Trust Fund. The Fund is managed by Blackstar Fund Managers under the leadership of Charles Adu Boahen, a former Director and Regional Head of Corporate & Investment Banking for Standard Bank of South Africa.
As Managing Director, he is responsible for establishing and implementing the Fund’s strategy and investment performance. His role also encompasses investor relations and principal contact with investment partners .
AVFC has the sole authorized business of assisting in the development of SMEs by making available for their use, equity and quasi-equity financing and providing them business and management expertise. As the first Venture Capital Financing Company to have been approved by the Venture Capital Trust Fund in Ghana, AVFC’s portfolio contains a variety of SME’s in various sectors of the economy spanning education, Information Technology, Agriculture and Agro processing, financial institutions etc. AVFC also offers services such as the provision of credit and/or equity financing to eligible SME’s; monitoring of activities of SME’s financed by AVFC with the aim of improving their profitability; and coordination and provision of post investment assistance to investee companies especially relating to capacity building.AVFC is owned by the Agricultural Development Bank, the Ghana Commercial Bank and the Venture Capital Trust Fund and managed by Blackstar Fund Managers.
FIDELITY CAPITAL PARTNERS LIMITED
Fidelity Capital Partners Limited (“FCPL”) was established in February 1997 and commenced business in November 1999 as a venture capital and private equity funds management company and corporate finance advisory services provider.FCPL recently entered into a strategic partnership agreement with Jacana Venture Partnership LLC, a group that supports emerging SME private equity firms in Africa.FCPL is headed by Stephen Antwi-Asimeng, the Senior Partner, and Simon Merchant, the Managing Partner. This is part of the strategic partnership between FCPL and Jacana Venture Partnership.Stephen, prior to this appointment was the Managing Director of FCPL and has worked as the General Manager of Fidelity Discount House Limited (now Fidelity Bank Limited) where he was responsible for the corporate finance and lending portfolios of the company. Simon, on his part, is the CEO and a co-founder of Jacana .Simon is an entrepreneur with background in finance, IT and venture capital. Previous roles include heading up Morgan Stanley’s technology M&A business for Europe and co-founding and leading the development of StreamVPN (sold to a US public company in 2005).
FCPL currently manages two dedicated private equity funds (Fidelity Equity Funds I and II) on behalf of a number of investors including SSNIT, the Venture Capital Trust Fund, Oikocredit, Sovec and leading Development Finance Institutions such as FMO (the Netherlands), SIFEM (Switzerland) and Finnfund (Finland).FCPL has a total committed capital of about US$32.0million for its operations and are also the Local Investment Partner (LIP) of AfricInvest Capital Partners Limited, a Pan-African private equity fund management company. As a leading corporate finance advisory firm, FCPL has provided advice to governments, quasi-government institutions and private sector businesses on several transactions in West Africa including privatisations, buy-outs, corporate financial restructuring and loan syndications and have built an extensive network and knowledge in the West Africa sub-region which accords the fund manager the opportunity to offer value- added services to its investors and clients. As a fund manager of generalist SME funds, FCPL’s portfolio companies span across several industries. This allows it to achieve diversification, minimize the impact of industry and/or sector specific risk on the portfolio. FCPL’s private equity/venture capital activities involve investments in unlisted companies. These investments are usually in equity (where it seeks to acquire significant minority stake) and/or quasi-equity instruments such as convertible debt.FCPL is a pioneer member of the African Venture Capital Association (AVCA).
GOLD VENTURE CAPITAL LIMITED
Gold Venture Capital Limited (GVCL) is a limited liability company owned by the Gold Coast Securities Limited and the Venture Capital Trust Fund. GVCL is managed by Boulders Advisors Limited, a licensed investment advisory firm. Boulders is headed by Reginald.N.France, a founder/partner of HRK Associates, Inc. (HRK), a specialized financial consulting firm that provides a full range of advisory services to business entities, government and public sector institutions which has also served as financial advisor in corporate finance and acquisition transactions valued in excess of $2.3 billion.
Gold Venture Capital Limited invests in the following sectors of the economy: Education, Agric and Allied Sector, Tourism, Construction, Services, Pharmaceutical, Manufacturing, ICT, Mining, and Finance.
SAGEVEST
Sagevest is an Investment Holding Company, established to invest shareholders’ and funding partners’ capital in select companies. Sagevest is managed by Kofi Kwakwa, a former Director of Strategic Investments, Joint Ventures & Alliances at Standard Bank Group, the largest banking group in Africa and a leading emerging markets bank. Prior to joining Standard Bank, Kofi had been a senior manager at McKinsey & Company.
Sagevest’s aim is to create a leading group of companies, carefully woven together by identifying and partnering with management teams who are managing compelling businesses. Its preferred style of partnership to take controlling equity stakes in companies. However, in circumstances when this is not possible, the company decides to settle for a significant minority, particularly if there is a clearly defined path to acquiring control in the future. Its objective is thus to strengthen management, by providing systems, methodologies and experienced capacity, in a manner that improves their governance, capital management and allocation, and ability to develop and execute on the right strategy. The company has offices in Mauritius and Ghana.
AUREOS
Aureos is a specialist private equity firm helping to build sustainable small and medium-sized businesses in emerging markets. Its Ghana operations is headed by Jacob Kwame Kholi who is one of three joint Managing Partners of the Aureos Africa Fund (AAF), a US$381m Private Equity Fund investing in Africa with geographical responsibilities for investments in West and North Africa in addition to functional roles across Africa. Jacob brings 15 years of venture capital and private equity experience to Aureos, gained exclusively in West Africa with the CDC Group. Prior to joining The CDC Group, Jacob worked for Shell in Ghana as a Capex/Financial Accountant and later as a Management Accountant.
Aureos targets opportunities in well-established businesses with strong market positioning. Main investment sectors are financial services, general services, construction & engineering, manufacturing, FMCG and TMT (telecoms/media/IT). Aureos recognises the fact that companies require institutional strengthening to graduate from single-country operations into regionally competitive entities, further enhancing shareholder value. Thus Aureos adopts a hands-on approach, actively participating in value addition at the portfolio company level – from improving the IT/ MIS platform to upgrading Environmental, Social and Governance standards to international best practice.
EBANKESE FUND
Ebankese Venture Fund Limited was established in December 2009 and became operational in March 2010 following a first close at US$10 million. The Fund is owned by Venture Capital Trust Fund (VCTF), HFC Bank Ghana Limited, Ghana Union Assurance Company Limited, WDB Investments Limited, and Oasis Capital Ghana Limited. Selection of business proposals and due diligence are undertaken by the fund manager, Oasis Capital.
Oasis Capital is headed by Matthew Boadu Adjei. Matthew is the founder and CEO of Oasis Capital Ghana Limited. He has several years’ investment banking experience, 7 years of which have been spent in private equity and growth capital industry. He leads the team on strategy, negotiations, fund raising, investor relations and support. Matthew was until the establishment of Oasis Capital Ghana, the Country General Manager and a board member of GroFin Ghana Limited. He was also a member of the Investment Committee of GroFin Africa Fund, a Mauritius-based Pan-African SME fund and appraised transactions from several countries across Africa.
Ebankese Fund invests in projects in the minimum amount of US$100,000 and maximum investment is 10% of the fund size with US$2,000,000 as hard cap. Ebankese focus primarily on assisting small and medium scale enterprises engaged in the real estate development sector. The Fund seeks to exit after 4–7 years of investments with preferred exit strategies being through sale to shareholders, local & strategic partners or mid-market players.