With the fall of Silicon Valley Bank just days ago, many questions remain unanswered about the future of startup funding across the globe. The ripples witnessed in the startup ecosystem, make this a great time to begin exploring model alternatives to the traditional venture capital (VC) partnership fund structure.
VC investment has become an extremely dynamic space here in Africa over the past five years; however, the traditional partnership structure is proving in the eyes of some as not being the most effective approach to investing in emerging markets, like Kenya, Ghana, and many others.
Venture holding companies, operating under a structural framework like that of Berkshire Hathaway, the USA-based holding company founded and managed by Warren Buffet, are quietly becoming a more favorable means to investing in high growth-potential companies. The essence of a venture holding company is to generate sizable returns in a way that better aligns incentives for all stakeholders. The primary differences between a venture holding company and a VC firm are their respective investment timelines, exit strategy, and thesis.
One way in which venture holding models differ from traditional VC is that the success of the former is less dependent on its ability to mobilize its funds quickly. When a VC firm raises for a new fund, they typically have a 2-year window to distribute that money, forcing firms to work quickly. If partners and principals do not invest the entirety of their fund, this will have a negative impact their fund’s performance.
As an alternative to carrying the burden of making smaller investments into many companies, some VCs seek out companies raising larger rounds. There are comparatively few strong contenders raising large sums and as a result, investors may take positions in sub-par opportunities to get the money off their books in a timely manner. This can result in an underperforming fund if multiple companies within the portfolio do not perform as expected.
Another differentiating factor between these two models is that a traditional VC fund is designed to chase a swift exit – usually within just a few years. Exit opportunities are proving to be limited with VC’s often having three choices for next steps: sell their equity position to another investor or push for the company to go public or be acquired. A venture holding company’s priority is to receive a sustainable flow of dividends while also remaining flexible enough to exit their investment when a strong opportunity arises. As a result, the venture holding model is often an attractive alternative for entrepreneurs who are interested in growing a business that’s profitable and positioned for long-term sustainability.
The final difference between these two models comes down to their respective theses. An investment thesis is a strategy employed by an investment firm which dictates the industries they invest in, the check sizes they write, along with a trove of other factors. Venture holding companies typically, but not always, operate in a wider array of industries and verticals in comparison to VC’s overwhelming focus on technology and technology-adjacent companies.
While Africa’s technology community is hungry for scale and investment, there are other industries that need due focus for truly meaningful sustainable development to take place over the next 20-30 years. Export/imports, manufacturing, private-sector social services, Green Economy, and the formalization of the informal sector are all areas where scale and development are needed beyond core technology. The ability to focus on tech and non-tech industries gives venture holding companies a first-hand role in achieving impact targets such as job creation, social capital, and sustainable value chains across the economy.
In a conversation with the author, David Harlley, Co-Founder & CEO of ThirdWay Capital stated, “When we were forming our company, our team elected to use the venture holding company model because we believed and still believe to this day that prioritizing sustainable business development and aligning incentives to best serve the entrepreneur and the greater African economy, will be the investment conduit that will witness the most success in the long-term.”
There are not many venture holding companies operating in Africa, but the ones who are believe unequivocally in their model and approach. As the venture holding company model continues to gain traction, there is the potential for alternative models like those used by ThirdWay Capital and many others to begin making up a larger proportion of the venture investment pie in Africa.
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