24/12/2014 – Disrupt Africa –
Clifftop Colony is an independent investor and investment advisory firm, focusing on high-potential businesses in Sub-Saharan Africa. Chief executive officer (CEO) Oliver Drews spoke to Disrupt Africa about Clifftop Colony’s activities to date, what makes a startup attractive, and how to spur investment on the continent.
Disrupt Africa: What is Clifftop’s business model?
Drews: Clifftop Colony is a corporate finance boutique which specialises in high potential businesses and fast growing companies in Sub-Saharan Africa. Our typical client is the owner of an interesting business asset in need of either fresh capital or a strategic partner. With our main team on the ground in Cape Town and a small team in London and Zurich, we track not only the African private equity and venture capital market but also cover a vast network of overseas institutional and private investors with an interest to build capital allocations on our continent. In addition to capital raising and M&A, we also try to develop investment platforms, which can channel entrepreneurial capital to interesting themes and we also have our own proprietary platform to provide investor relations services and monitoring & financial steering capabilities, which we think is crucial to build sustainable relations with the investor market globally.
Tell us more about the investment platforms you are developing, and how they differ from other investment firms?
When we started Clifftop Colony in 2012 we did a few direct investments to establish ourselves in the market and build some institutional traction. A theme we liked at the time was technology and we developed quite a nice African technology practice from that activity. However, I always struggled with the concept of an African technology fund, especially for the established venture capital model in Africa. I just don’t see the broader market buying into a larger African, early-stage closed-end fund, for many reasons. So we started to explore other avenues, such as corporate platforms pursuing buy & build strategies or partnerships with institutional investors on a deal-by-deal basis. I think for the moment, those projects are a better way to spend time on if we want to get something done, i.e. channel the right sort of capital into high potential African situations.
What investments did you make in 2014?
On the tech side we did follow-ons into our two main projects: Wyzetalk, a social business media company we helped seed-finance in 2012, and a small follow-on in Perk, a mobile tracking and engagement company, which is exploring iBeacon technology applications for the South African market. We would have loved to have rolled some of our corporate finance fees into equity stakes in other tech situations but couldn’t this year. For the future that will become a more important component of our business model though. On the educations side, we set up a very exciting platform called EduKazi, where we’re exploring ways to make South Africa an education hub for vocational training for the African continent, similarly to Australia being an education hub for Asia. We are currently engaging with an investment group to obtain funding for this platform to test some ideas.
What sort of companies do you work with?
Sector-wise we focus on three areas. Firstly, the performance of Governments is going to be crucial for African success, so we are interested in anything related to public policy, regulated markets, Government agencies etc. This covers a broad field obviously: Education, Healthcare, Public Pension Funds, Energy to name just a few. Secondly, our old friend “the African Consumer”, which is probably the main growth driver everyone is getting excited about. Finally, I believe that the filling of institutional voids is a big theme for the next ten to twenty years and crucial for economic progress; business and financial services will play an important role here. Although not necessarily a requirement for our involvement, I believe that technology and engineering solutions will be an overriding theme for all these three areas.
What sort of startups do you avoid?
Unfortunately, we can only take on a limited number of projects each year, so we need to be very selective. Apart from the obvious business, financial, personnel and ethical criteria, we need to feel that Clifftop Colony can actually make a difference to a project. I mean, you wouldn’t come to us if you need to raise ZAR5 million (US$430,000) and that’s it. The strength of Clifftop comes to play when the business will need a substantial amount of capital over time and/or a leading global partner to engage with. We normally don’t get involved unless we believe there is a ZAR1 billion (US$86 million) business to be built which will find interest in the market.
What returns did you see in 2014? Are you looking for short or long term returns?
To be honest, since we don’t have external limited partners, we don’t conduct a formal valuation process of our portfolio. Also, the other parts of the business are equally important to us, the portfolio is more something that runs in parallel for the long-term value growth of Clifftop Colony. But obviously, we do sit down at the end of the year and do some guess-work around valuations. For 2014 the value of the portfolio grew in the 20s/30s range, which is fine considering the early stages of the investments. Since these positions are proprietary there is no need to sell anything, so we will look to optimise each exposure and dispose when the right time has come.
Are you planning investments for 2015? Any info?
Apart from supporting our portfolio companies, we’re also considering another investment platform, but it is too early to talk about that.
Any plans to expand out of South Africa?
We are hoping that our recently established activities in London will bring us closer to the East and West African markets but we have no plans to build teams there. Next physical location will have to be Jo’burg, to cut down on my travelling!
What are your views of the African startup landscape?
We have entered one of the most exciting periods of African business building and when you go back to the Asian story, starting in the late 1970s and despite some recent issues carrying on until today, you will see that many business owners have done really well. Owning African businesses and having exposure to African assets will present phenomenal value opportunities for a very long time. However, one of the main challenges remains execution and creating balanced start-up and business building teams. A good start up team covers the broader business building aspects of product, sales and finance. In many cases I just see specialised project managers. The other issue I see that teams underestimate the capital required in most business plans to build something substantial. Hence they don’t focus enough on early-stage valuation and then are faced with heavy dilution further down the line. Not enough emphasis is placed on the corporate finance aspect of building businesses. And finally, it is important to focus on structures and processes if you want something sustainably scalable, you unfortunately also need to deal with the more mundane day-to-day housekeeping stuff.
What are your views of the African investment landscape? As compared to Europe/US?
I could bore you with this topic for a very long time, but let me summarise that there is a disconnect still between business builders and capital allocators. This asymmetry obviously exists all over the world but is particularly prevalent in Africa, where the financial infrastructure of channeling different types of capital are underdeveloped and where asset classes still need to be established. The raison d’etre for our business is that we try to bridge this as well as possible, but it is a Hercules task. In order for Africa to overcome this, we need to show a consistent flow of successful exits, not only for the business owners selling but also for the investors buying into these opportunities. In my view, Cape Town/Stellenbosch alone, if it wants to be a hub for startups, noticed by the international investor community, needs to produce 3-5 exits of over ZAR100 million (US$8.6 million) per year, where the acquirer is seen to make serious returns. At this point, we are still far away from that.
What changes need to be made to spur investment across Africa?
Again this is a very interesting topic, deserving a much deeper discussion. But in a nutshell, if Africa will continue growing like this, more and more people will become part of the exchange economy, this means that increasingly private sector solutions become possible. It is important that Governments across the continent open up to this because that will attract more investment and in turn allow for more improvements in standard of living. Sadly, a large part of the population will remain below the line where an exchange economy is feasible and hence we need to continue to search for public private partnership solutions. So I see two ways to increase capital flows to Africa: prioritise sustainable economic growth and allow the private sector to unfold and seek more rigorously solutions for people who by themselves cannot be serviced properly by the private sector. India has some great examples which could serve as a model for us.