ARTHUR GOLDSTUCK: Small start-ups can show big returns for bold investors
One of the great ironies of venture capital in SA is that the less money a start-up needs, the less likely it is to raise the needed capital. The primary reason is that large funds are looking for big returns, which they are unlikely to get from small investments or early-stage start-ups.
But it doesn't have to be that way. Investors betting on the smaller entities and nurturing them until they "qualify" for big investments are achieving a massive return on their investment.
The relaunch this week of an innovative payment processing start-up symbolises the potential of small investments. Ozow Secure Payment, previously known as i-Pay, is the first local payment processor that does not charge processing fees for automated electronic funds transfers (EFTs) to emerging businesses, nongovernmental organisations and nonprofit organisations.
Like many global start-ups in this era, Ozow is driven both by business objectives and a strong social conscience, says its CEO, Thomas Pays. Aside from a wonderfully appropriate name, he is an entrepreneur on a mission.
"By zero-rating the costs of accepting this form of payment, we are presenting more entrepreneurs the option of establishing their own businesses, which means more opportunity for financial autonomy, job creation, a competitive retail environment, consumer choice and an entrepreneurial, diverse economy," he says.
This mission appealed to one of SA's most active investors in small start-ups, Kalon Venture Partners, a venture capital company set up under section 12J of the Income Tax Act. Intended to encourage investing in small and medium-size enterprises through a 100% tax break, it is mostly used as a tax loophole, and Kalon is a rare example of a company using it to invest in start-ups with high growth potential.
Kalon CEO Clive Butkow disputes the common argument that SA lacks true venture capital, but acknowledges that this capital is only available to "post-revenue companies": those already making money.
"We typically invest in an earlier stage, just before series A - normally the first big round of funding - to help them get to that stage. We understand the problems digital technologies solve, and quickly recognise potential. For example, Ozow is not just an e-commerce play, but works for bricks-and-mortar businesses as well. You don't need a credit card; you just transfer money from your bank account to the merchant account via an app, at the point of sale."
Ozow is one of a number of investments that are paying off for Kalon. However, Ozow encapsulates what is meant by high growth: it has seen double-digit percentage growth every month for the past year. It has 850 clients conducting e-commerce in multiple sectors, from online retail to vehicle financing.
Says Pays: "We processed over R2.9bn in payments last year, from a total of well over 5-million transactions. The Payments Association of SA reports that R9-trillion of EFT credit happened in 2017, with a total of 500-million transaction, so what really excites us is that we've barely scratched the surface of the opportunity."
• Goldstuck is founder of World Wide Worx and editor-in-chief of Gadget.co.za. Follow him on Twitter and Instagram on @art2gee.