A shift in capital allocation? | January 2020

January 2020

It’s been an exciting start to 2020!  Over, a Cape Town-based software company building mobile design tools for creatives, announced that they are being acquired by GoDaddy, a publicly listed U.S. technology company with a market cap of over $12.5B.  Over was my first seed stage African angel investment, and I had the opportunity to work closely with the founder/CEO and see the team build a world-class software company in Cape Town.  Today Over has customers in 150 countries and 1 million monthly active users who generate over 225,000 projects every day.  This was all achieved on a relatively modest amount of paid-in-capital (<$4M in equity).  The company has grown exceptionally fast, built new core products, and recently was awarded Apple’s prestigious ‘Best of 2019 App Trend of the Year’ award.

I’m excited for the 76-person team at Over and the broader Cape Town tech ecosystem.  Read more from Techcrunch, here.

As we start a new decade, it’s good to acknowledge the progress founders are making in building companies that are changing the way people live, work and play.  Venture capital in the African continent while still nascent today at $2B in 2019 (a bit more than the city of Atlanta), is continuing to show strong momentum (7.3x in growth over the last 4 years), and more importantly, is attracting high quality investment partners.

Here are some thoughts on how long-term capital allocation trends will shape the technology ecosystem in the African continent:

We are seeing strong interest from global investors to invest in companies that are solving hard problems and that have a clearly articulated purpose (the so-called North Star).  There is growing evidence that companies with a focus on purpose not only create value for customers but generate more value for shareholders over the long-term (see a study of long-term investment outperformance of companies with purpose vs traditional benchmarks like the S&P 500, here).  (Thank you for this, Ahmed.)

Below is a quote from John Mackey, the founder of Whole Foods, on why companies focused on purpose and doing "good" generate long-term results.

“These companies generate very high levels of sales because they excel at creating value for customers; they willingly operate with lower gross margins than they are capable of, yet they achieve higher net margins than their traditional counterparts. Over time, conscious businesses develop sterling reputations and grow faster. They attract more loyal customers, committed team members, higher-quality suppliers and generate greater community goodwill. All of this helps these firms earn more and receive higher valuations relative to their earnings.”

In Larry Fink’s most recent annual letter, titled, ‘A Fundamental Reshaping of Finance,’ he addresses company purpose, sustainability and governance (read the letter here).  Below is an excerpt from Larry's letter on purpose:

The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.

I believe the letter’s message is important for several reasons.  First, Larry is the CEO of BlackRock, the world’s largest asset manager with over $7 trillion in assets.  Blackrock, through its scale and global relationships, can influence company management teams and “move the needle”.  Second, limited partners are pushing their investment managers for change -- the paragraph below (taken from Larry’s letter) is worth reading and thinking about in the context of how limited partners will influence the broader investment landscape:

“In the discussions BlackRock has with clients around the world, more and more of them are looking to reallocate their capital into sustainable strategies. If ten percent of global investors do so – or even five percent – we will witness massive capital shifts. And this dynamic will accelerate as the next generation takes the helm of government and business. Young people have been at the forefront of calling on institutions – including BlackRock – to address the new challenges associated with climate change. They are asking more of companies and of governments, in both transparency and in action. And as trillions of dollars shift to millennials over the next few decades, as they become CEOs and CIOs, as they become the policymakers and heads of state, they will further reshape the world’s approach to sustainability.”

We are in the early innings of a capital wave and believe it will accelerate over the coming decade. This acceleration will be especially profound for Africa's technology company builders where purpose-driven capital will accelerate how sectors from education to financial services will work for the benefit of its customers and stakeholders (while building valuable enterprises).  Many of the foundational African technology companies are being built today and with their continued success we will see a flywheel of human and investment capital flow into Africa's tech ecosystems.  This flow of human capital talent will create significant opportunities for us at Raba and I couldn't be more excited about the potential ahead.

Building bridges

Part of our mission is to continue to build bridges between African tech ecosystems and global companies and investors.  A few weeks ago, we hosted a team of Facebook product managers in Cape Town (photo below). The genesis of the trip was to have product managers (from various business lines within the company) meet local founders and to develop deeper relationships across respective technology ecosystems.

Below is a note from a visiting product manager regarding the teams visit:

“Over the course of several days, we had the opportunity to meet with some of South Africa's most prominent entrepreneurs, investors, and non-profits. It was an incredible opportunity to witness first-hand the amount of rapid growth and investment that's being funneled into the country.  South Africa has a long history of entrepreneurship and strong engineering culture. Cape Town has a significant amount of engineering talent coming from two of Africa’s leading universities, which are based in Cape Town/Stellenbosch. Learning about the technology and entrepreneurial ecosystem of the country, along with speaking first-hand to some of its prime movers has given us a tremendous amount of perspective, and we're excited to come back and visit again soon.”

If you are an investor or company looking to learn more about the Cape Town technology ecosystem, send us a note.