existing revenue streams, the IDC invests much earlier on in the innovation process. “That is not to say that we simply invest in any good idea,” reveals Fourie. “The IDC prefers to see some investment of ‘sweat equity’ by the entrepreneur before becoming involved.” He reports that most entrepreneurs funded by the IDC have researched the market, put in place a business plan and developed their intellectual property to a demonstrable point. However, they lack funding to cover the costs involved in industrialising and commercialising their product as well as ongoing operating costs and working capital requirements.
“The SBU invests in ventures whose technologies have an aspect of global uniqueness. This always means investing in unproven technologies. We prefer that the product is patentable internationally to help ensure a sustainable competitive advantage, and do not provide debt funding because the risk is so much higher than in other types of businesses. Usually we take a company shareholding of between 26% and 49% instead.”
According to Fourie, most entrepreneurs point to a lack of funding as one of their biggest challenges. “However, we more often find the challenge is about getting business owners the right advice and support,” he says.
The IDC’s venture capital model is based on remaining engaged with the businesses it invests in during the post-investment phase. “Each month we dedicate about three to four days per client, to meet with executive management and provide strategic advice, tapping into the deep knowledge within the IDC,” reports Fourie. “In our experience, entrepreneurs are more technically inclined and may not have the commercial skills needed to grow their business.”
Medical imaging company, Lodox, is a good example of what can be achieved with IDC funding and post- investment support. Lodox developed a unique technology with the ability to provide full-body X-ray images, in one 13-second scan at a low radiation
dosage. When the IDC inherited the transaction in 2007, it was clear the company had potential, but it was bleeding cash. The IDC put its own CEO in place to run the company, and restructured the balance sheet and shareholding, taking an equity stake of more than 50%. Lodox’s financial position has improved dramatically and should surpass break even point during the current financial year.
Another successful investment for the SBU is Omega Refrigeration. The refrigeration cabinets traditionally used by supermarkets have demonstrated numerous shortcomings. Omega devised and patented a water- cooled, self-contained cabinet to overcome these problems. The company has shown excellent progress and the IDC will soon provide expansionary funding to help it grow further.
“The IDC’s involvement in these and other companies takes into account the organisation’s involvement in the company over the medium term, with an exit contemplated only when the IDC can realise its target return,” reveals Fourie. “In industries like biotech, where there are more regulatory hurdles to overcome when taking a product to market, this might take as long as ten years, while in the information technology sector, it may be as short as three or four years. So far, we have exited from only one of the companies we have invested in.”
While there is little doubt that there are huge untapped knowledge bases in the area of innovation waiting to be unlocked, the challenge is developing these into real businesses that eventually create jobs, points out Fourie.
“Government can encourage innovation by providing more accessible tax incentives to individuals and corporates that want to invest in companies that develop new technologies. By adopting a holistic approach to making sure these new ventures succeed, the IDC hopes to show other investors that venture capital is indeed a viable and exciting asset class,” he concludes.
EDGE | November 2011 37
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