‘No risk, no reward,’ advises HBD Venture Capital CEO Julia Long at USB talk

Current conditions in the South African economy present an opportunity for venture capital firms to fund entrepreneurs successfully, said Julia Long, CEO of HBD Venture Capital, at a recent Leader’s Angle talk at the University of Stellenbosch Business School (USB).

HBD Venture Capital recently had the first successful sale, namely of Red Five Labs, from its HBD Fund 1 at a cash profit in excess of 100%, which is proof of the favourable conditions for venture capital firms said Long. She led the development team at Mark Shuttleworth’s Thawte – the digital certification authority which was sold lucratively to a US consortium Verisign.

Venture Capital is defined as equity funding provided by outside investors into early stage ventures in return for above-average returns.

It is however very risky for Venture Capital firms to invest in an unproven business, said Long.

“HBD has invested in seven companies of which one was sold for a profit, one was given back, the verdict is still out on three, and two have closed down. With venture capital there is no payback if a company fails. This is a huge risk to us,” explained Long.

She said the American model of venture capital does not work in South Africa. “We have a bigger demand for money with greater risk and smaller returns. The demand on earlier stage investment is also increasing. There is a funding gap and we need to invest in the early stage of companies otherwise later stage investment will not be around.”

Long gave the USB audience a good idea of the processes venture capital firms go through when entrepreneurs approach them with a business plan.

“For our HBD Fund 1 we received more than 3 000 business plans to look at. We only invested in 20 start-up companies. A lot of the business plans did not meet our mandate. We also place a big emphasis on technical evaluations.”

She said entrepreneurs must take time to research what venture capital firms are interested in. Then they should design and tailor-make their plan so that the venture capital firm can see how this opportunity fits into their investment criteria.

Long advises entrepreneurs with an idea firstly not to listen to family members. She said a lot of people have an idea and go to venture capital firms first. This is not what venture capital firms expect from entrepreneurs.

“Test your idea first. Get feedback from people. Do proper research. You need to believe in your idea. Create some value, although admittedly it is difficult to value an idea. But, if you do, it will be easier to obtain money. The hardest part for us is how to place a value on an idea without share prices, trends or a cost base.

“Entrepreneurs see opportunity, while we see risks.”

Entrepreneurs are warned not to chase after money without having a match with the right people. Venture capital firms take shares in companies with board representation. It is thus important to have the right partners, said Long.

She said venture capital firms are interested in exclusivity, and the business plan should show how the venture capital firm can ‘exit’ from the business by selling the shares it holds once it has reached maturity. This is when venture capital firms make their above-average returns – which only happens with one in ten investments, said Long.

“Venture capital has a boom and bust cycle. South Africa tends to follow overseas markets. Our country has fantastic innovations. The government has a lot of influence and they are aware of this and making the necessary legislative changes.”

Long’s last words of advice to entrepreneurs were: “Investors must take risks. Don’t take no for an answer!”

The Leader's Angle series of talks is presented by the University of Stellenbosch Business School (USB), the USB Alumni Association, USB Executive Development Ltd (USB-ED) and the Institute for Futures Research of the University of Stellenbosch, in association with FinWeek and KPMG.

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