Early-stage VC fund Launch Africa Ventures has begun making its first exits, while also confirming slight tweaks to its investments strategy as it begins deploying from its second fund.
Launched in July 2020 by Zachariah George and Janade du Plessis, with chairperson Margaret O’Connor also on the board, Launch Africa Ventures closed its its inaugural fund, Launch Africa Ventures Fund 1, in March 2022 at US$36.3 million, with investments from 238 retail and institutional investors in 40 countries. It made 133 investments via that fund, establishing itself as easily the most active VC firm on the continent.
Disrupt Africa reported in June the Mauritius-based fund had invested a total of US$4.3 million in 16 startups from across the continent so far as part of its second fund, Fund II, which managing partner Zachariah George told Disrupt Podcast should be closed by the second or third quarter of next year.
Only 12 per cent of Fund I’s investments are no longer operational, a percentage that George believes is excellent from a VC perspective, while Fund I is currently sitting at an internal rate of return (IRR) of 31 per cent. Launch Africa has also started making its first exits.
“Most of our exits in our fund come through secondaries; we typically look at either partial or full sales of our portfolio companies at Series A, and definitely at Series B,” George said.
“It’s important as a fund manager to balance the need for IRR versus the need for liquidity. So part of our strategy is to make sure that we hold on to our best performing assets, or call it your your top quintile, and make sure that your second and third quintile companies are actively out there as secondary sale options, to other funds, private equity firms, corporates, funds of funds, et cetera.”
Launch Africa has so far made three cash exits through secondaries, in addition to seven stock exits that it has had in the last year.
“We’re on a good wicket, as they say. And we’re busy raising for Fund II, and deploying at the same time,” George said.
Meanwhile, the firm’s strategy is being adapted with Fund II. Whereas Fund I was a lot more fintech-focused, the second fund is more diversified.
“The sort of over-reliance on fintech that we had in Fund I, because of the market and the timing, is a bit different as the markets evolved in Fund II. So if you’re talking four or five years ago, you needed to have a lot of investment into fintech, especially payment gateways, payment rails, lending, SME financing, and invoice discounting companies, because that paved the way for the evolution of other sectors, like health-tech and ed-tech,” George said. “So now that we’ve seen that fintech investment landscape mature, there’s now a lot more smart money going into other sectors.”
That includes climate-tech, an area Launch Africa is becoming a lot more active in. In September, it launched its Mezzanine Impact Fund, which invests mezzanine growth capital into leading technology companies that demonstrate strong ESG principles.
“We did not have a lot of climate-tech deals in fund one, simply because most of the climate-tech deals in Africa tend to be very CapEx-heavy, very asset financing heavy,” George said.
“However, in Fund II we are seeing a lot of deals in the carbon credit space, the carbon sequestration space, and platforms for e-mobility that don’t have the the CapEx burden that other climate-tech deals have. So we are a little more open to more climate-tech deals in Fund II, and obviously AI deals, but especially in the warehousing logistics space.”
The amount Launch Africa invests in ventures is also changing, though this is heavily based around meeting KPIs.
“In Fund II, the most we would invest into any one given company was US$300,000. In Fund II, it is now up to $1 million, but our initial entry check would be typically US$250,000. With certain KPIs being met within six to 12 months of our investment, we could up that to US$1 million, and get slightly more favourable terms,” George said.
“So in Fund II, we’re looking at a minimum of 10 per cent to a maximum of 20 per cent stakes in these companies. In Fund I, our average stakes in the companies we backed were between five per cent and seven per cent. So there’s a shift in, if not in our strategy, in our allocation.”
This means Launch Africa will be investing in far fewer companies with its second fund than it did with its first, when it backed 133.
“We expect to invest in between 70 and 85 companies,” said George. “Fund I had to cover the entire continent, because no fund before us had covered the whole continent and specialised in doing seed deals. So we almost had to be the forerunner, and lay the ground, or plant the seed. Now that we’ve done that, we can go a bit more deeper, and not just wider.”
