Brazilian development bank BNDES has just launched a 100-million real ($30m) fund that will see the state co-invest alongside angel investors. Yet it comes only months after a new tax norm was released which will effectively disincentivise angel investing.
The new fund (Fundo de Coinvestimento Anjo) was launched on 14 November and will see the development bank put down 40% of the 100m reals, sourced through its investment arm BNDESPar, with the remainder to come from private investors.
The fund will invest up to 500,000 reals (provided an equal proportion of funding is secured from an angel or accelerator) in technology startups with an annual revenue of up to 1 million reals in sectors such as biotech, smart cities and nanotech.
Those startups that get initial funding can also qualify for a second round of funding from the fund – provided their annual revenue grows to between one and 16 million reals. In second round funding they will be able to tap up to 5 million reals.
Angels and accelerators that want to tap funding have up to 12 January next year to submit their proposals to BNDESspar.
Angel investing is growing in Brazil. Statistics released by angel investor association Anjos do Brasil in July show that the volume of investments by angels was up nine percent in 2016 to 851 million reals ($260m). Yet the number of angels fell by three percent.
The association estimates the country has 7,070 angels who each invest about 120,300 reals ($37,000) on average (the US in 2015 $24bn channeled into 71 000 deals).
The association reasoned that the figure climbed despite the recession, because most of these investments were in high growth companies that don’t depend on the economic situation to grow, while some investors moved from the local stock exchange with its negative returns.
No tax deductions for angels
A law introduced in October last year, as part of reforms to kick start the economy got investors wondering whether angel investments would be granted a tax deduction as is common elsewhere,
Yet in a tax norm gazetted in July, Brazil’s tax authority has ruled that angel investors will be required to pay tax on their investment – at a rate of between 15% and 22.5%.
This seems out of step with other jurisdictions which offer tax deductions (including South Africa – see this post). In the case of Turkey (see this post) a 2013 law allows angel investors a 75% corporate tax reduction should they hold company shares in recipient businesses for at least two years. The government also co-invests with angels.
Anjos do Brasil president Cassio Spina (pictured above) is concerned. In August he said the new tax norm could compel investors to put their money into safer bets like property or listed companies over more risky startup investments.
Spina says the tax authority is not listening to angels’ submissions. He points out that every real invested can generate a further 2.20 reals in tax.
BNDES’s move is noble. Along with a new equity crowdfunding rules which came into force in July (see this post) they could help edge up economic growth. Yet if Brazil is to expand faster a far more bolder approach is needed to unlock investment in startups.
But the lesson of South Africa is instructive to Brazil. A venture capital tax incentive there only took off after onerous measures were removed (see this post). Things then could still get better for angels in Brazil – but only if authorities are willing to adapt and learn.
Timm is a South African who writes on small business in emerging economies. He speaks Portuguese and lived in Brazil in 2014 and 2015. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
The value of venture capital (VC) deals concluded in South Africa last year mushroomed by 134% over 2015 - more than doubling, from R372 million ($26m) to R872m ($62m), data from the Southern African Venture Capital and Private Equity Association (Savca) reveals.
The data, revealed in a report released last month by Savca, also shows that the number of investments increased from 93 in 2015 to 114 in 2016 - an increase of 23%. The number is also the highest since Savca began tracking the sector in 2000 (see the below graphs drawn from the report).
Savca CEO Tanya van Lill (pictured above) said in the report that the introduction and improvement of Section 12J tax deductible investments had driven greater flow of capital to VC and from a broader base of individual investors (see this earlier post).
The SA Revenue Service (Sars) recorded R1.8 billion raised by 49 investment vehicles registered for the tax incentive, having already invested into 56 qualifying companies. Not all of these Section 12J investment vehicles focus on VC as an asset class.
“Through Section 12J, more VC investors, not limited to high net worth individuals, are willing to participate in the VC eco-system. Data from SARS informs that the uptake of individual investors into Section 12J VCs at February 2017 totalled 892 investors,” she said.
By value of deals concluded in 2016, seed funding and start-up capital totalled 42% (2015: 53%) - roughly the same split as VC investments in the US in 2016 (44%) shows a US report.
The average deal size of new VC investments in South Africa increased from R4m ($300,000) in 2015 to R7.6m ($540,000) in 2016.
However this is still at over one 50th of the average deal size concluded in the US - where the average deal size in 2016 was $30.4m - or about a 10th of that in Europe ($5.5m) or Brazil ($4.4m).
Deals involving the ICT sectors account for the largest portion of investments (30% of all deals concluded by number of deals and about 17% by value of deals),
The report also revealed that there were 14 exits in 2016 compared to eight in 2015. In all 38 exit events were reported to have taken place between 2012 and 2016 – about 55% of which were exited profitably (see the above graph from the report).
At the end of 2016, 53 fund managers (up from 36 in 2015) managed R3.5 billion in 461 VC deals. Three state-managed funds accounted for R1.28m or 39% of the value of all deals and invested in just under a quarter of all deals.
Angel investors invested about R44m in 2016 from 33 deals, slightly down from R45m from 30 deals invested the previous year.
The number of deals concluded between 2007 to 2016 - at 538 for a total investment of R3.6bn ($260m) - may be dwarfed by the 8,136 deals valued at $79bn concluded in the US in just 2016, but things are hotting up.
It comes even though the economy in the last year and half has slowed to under 1% growth.
Yet following a decrease in VC investment activity after the financial crisis in 2008, the VC sector saw growth in investment activity towards the end of 2013. And venture capital investments could be set for an even better year in 2017.
Speaking this week at the launch of Savca publication of 20 recent VC success stories, venture capitalist and co-founder of Knife Capital, Keet van Zyl, says 2017 has been "a hell of a year" so far.
"I tell you when I sit and have my G&T at the Breede River at the end of this year it is going to taste like no other G&T has tasted before," he said.
Yet with the VC investments having grown so dramatically of recent, policymakers will wonder what the jobs and revenue potential is of the sector. Sadly the report does not reflect this.
Better data on this may convince the state to co-invest with the private sector as other countries such as Chile, Malaysia, Brazil, Israel and the US has done (see this earlier post). This could propel the sector to new heights.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Six equity crowdfunding platforms in Malaysia have concluded over 30 deals since authorities there gave it the green light just over two year ago.
This comes after equity crowdfunding platform pitchIN revealed earlier this month that SalesCandy, a sales performance and lead management customer relationship management provider, raised 1.50 million ringgits ($350,000) from 54 investors this month.
The deal is the 10th this year for the platform, which has raised more than 12m ($2.8m) ringgits for companies so far.
In June 2015 six platforms were approved by Malaysia’s security commission chairman Ranjit Ajit Singh (pictured above) to carry out equity crowdfunding in the country.
In all 31 deals in 2016, 2017
To-date, the local equity crowdfunding industry has concluded 17 deals this year, according to Malaysian newspaper The Star. It’s not clear how much funding these raised. A total of 14 deals were concluded last year, raising 10m ringgits ($2.4m).
Other deals concluded so far include a health and wellness online community portal that raised over 1.8m ringgits from 117 investors, a houseware chain store which raised almost 3m ringgits from 89 investors and a halal speed dating service which raised 90,000 euros from 44 investors.
Malaysia was one of the first emerging economies to regulate equity crowdfunding. Crowdfunding rules allow private companies with paid-up capital of not more than 5m ringgits ($120,000) to raise no more than 5m ringgits or no more than 3m ringgits ($71,000) a year for small firms.
Retail investors are allowed to invest up to 5,000 ringgits ($1,200) per company and 50,000 ringgits ($12,000) a year. Investors are eligible for Malaysia’s angel tax incentive.
Anyone found guilty of fraud under Section 179 of the Capital Markets and Services Act can go to jail for up to 10 years.
To ensure quality deal flow, at least one platform – Crowdplus Asia - uses qualifying merchant investors to identify deals and help and mentor investee firms. The platform claims it has 100 such lead investors.
The platform is also backed by a ventures group, Netrove which offers mentoring to companies investors invest in.
If a UK report is anything to go by things look good for those countries that allow equity crowdfunding (Brazil in July became one of the latest to do so - see this post).
In the UK equity crowdfunding now makes up 15% of all early-stage entrepreneurial finance there. In the seven years since its inception, the sector had by June 2017 provided equity funds of almost £500 million ($660m) for 1,538 entrepreneurial pitches.
Using interviews with investors and investees in the UK, the report by the London School of Economics in September revealed that in the UK equity crowdfunding provides real additionality to the sources of entrepreneurial finance while not bringing major new risks for investors.
Equity crowdfunding therefore has the potential to become an alternative vehicle to unlock millions of dollars of funding for fast growing small businesses.
More emerging markets should step up and craft rules that permit investors to take part in equity crowdfunding.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
China’s ban of initial coin offerings (ICOs) this week has raised questions on whether other jurisdictions will do the same, and on how viable the vehicle is for SMEs to raise finance.
The Chinese government banned ICOs on Monday (September 4), effectively cutting about 40% of the ICO market out, while last month in the US the Securities Exchange Commission (SEC) began moves towards regulating ICOs.
In China 65 ICOs raised closed to $400 million over the year to July, according to Chinese news agency Xinhua.
Statistics by CoinSchedule, a cryptocurrency tracking site, show that to September 7 over $2.1 billion has been raised in 139 ICOs, up from just 46 valued collectively at $96m last year. The biggest ICO last year was $16m raised by a company called Waves.
So far this year four ICOs have each topped $100m, with the highest – Filecoin – having raised $257m. The majority of ICO funds – 44% - have been to raise funding for infrastructure, followed by data storage (13.5%) and trading and investing (10%).
In June, ICO funding hit over $550 million and it was the first month ever that it surpassed angel and seed VC funding.
Meanwhile Russia’s central bank said it won’t allow (for now) the trading of cryptocurrencies on official exchanges, nor the use of their technology for clearing and settlement infrastructure.
Despite this a Russian Blockchain venture fund, FinShi Capital said on Wednesday that it plans to will invest in ICO-related projects worth up to $1bn.
The fund aims that it has already raised $1.3m in a pre-ICO campaign, and aims to generate another $50m in an ICO in October.
'SARB offers no protection'
South Africa’s Reserve Bank also weighed in. It said as cryptocurrencies are not guaranteed by the Reserve Bank, there would be “no recourse or protection to consumers thereof”.
The Reserve Bank’s position on virtual currencies is set out in the Position Paper on Virtual Currencies issued in 2014, the bank recently established a dedicated fintech programme to increase focus and assist the existing working groups to research and analyse technology innovations in the financial services industry.
Part of the review is aimed at assessing the impact on cross border financial flows and stability of the financial system.
'Only temporary setback'
Despite this Bitcoin Foundation executive director Llew Claasen (pictured above) told SA tech publication Ventureburn that he reckons China’s ban is only a temporary setback for startups looking to raise capital through ICOs.
Claasen admitted that while there are people that are “darn right scamming” and those that are listing utility tokens as if they were securities, regulators should not place an outright ban on ICOs.
Where there is a clear expectation that those participating in the ICO will gain a share of the profits and be able to have a say in the governance of the company, the ICO can be described as essentially an initial public offering (IPO), he added.
However he said regulators should allow utility tokens to be raised - those where users can become part of a network by buying tokens but where they don’t necessarily profit from the tokens themselves.
It will however be hard to convince regulators. In the end more jurisdictions are likely to clamp down on what many believe is merely a massive casino game.
The sooner regulators get on top of things and issue clear guidelines - the better for real SMEs looking to raise cash.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a