Why South African Investors Should Rethink How They Back Startups

To Investors,

“Capital flows to where it’s treated best.”

I’ve been pondering why the venture capital ecosystem in South Africa isn’t as vigorous as it is in other regions globally. We can talk about politics, demographics, and any of the many social issues; but I think that, although the space has grown significantly over the years, the South African venture capital ecosystem isn’t surging because fund managers aren’t using the right fund structures to effectively attract capital, allocate capital, and update the liquidity & risk profile of venture capital investing.

The current venture capital funding model was created in the 1960s and 70s. I can’t talk about what it was like in that period but I can promise you that it’s very different to today. The typical private equity/venture capital funding model includes a fund structure where you raise “X” amount with a fund duration of 7-10 years. As the fund manager you charge your clients an annual management fee for the duration of that fund, and then take a percentage of the profits in the event of a sale or “exit” from an investment when you return capital to your clients, when the fund matures. So as a fund manager you keep your clients locked in an investment for 10 years, with zero liquidity options whether the markets are booming or busting, and you charge them an annual fee no matter what, while you hope to make them a minimum 15-20% return on their investment. Seems like a hell of a lot of risk for the client for just 15% after 10 years.

While their capital is locked-up, South African investors must particularly worry about political uncertainty, demographic issues, and broader economic uncertainties such as whether this product can scale beyond South Africa’s small economy because it needs to scale beyond South Africa for it to be a viable product.

All of these issues are why experienced venture capital operators say that there isn’t enough risk capital flowing into the venture ecosystem. But maybe it's not flowing into the ecosystem because the liquidity profile needs to change (i.e. fund managers need to make investors more comfortable with taking risk).

I think that it's time for new fund structures across the board, no matter how “experienced” a fund manager you are.

Ninety One, Robert Hersov through African Gold Acquisition Corporation, Gabriel Theron through Cilo Cybin, Sequoia, Coatue Management, Pershing Square, and Social Capital, are a few examples of fund managers that have tried to encourage more of us to use these other fund models that may be better alternatives to the current general fund structure that I described earlier in this letter.

The alternative models I want to talk about today are Interval Funds, Evergreen Funds, and Special Purpose Acquisition Companies (SPACs). These are some of the fund structures that we’re exploring deeply, and I’ve been interested in these funding models for years as these are the special tools that the top capital allocators employ when they want to solve specific problems like liquidity constraints, long-term alignment, regulatory requirements, or even market psychology.

Let’s unpack these through real examples…

Interval Funds

An interval fund is a closed-end fund that does not trade on an exchange but allows redemptions at set intervals (usually quarterly), offering some liquidity while retaining the benefits of long-term investing.

Coatue Management, an ~ $60B tech-focused investment firm, recently launched an interval fund for their clients to allow the firm to manage public as well as private equity investments.

When talking about the reason for this new fund, founder of Coatue Management Philippe Laffont noted two problems that