Endeavor South Africa is a non-profit organization that identifies and supports innovative, high-impact entrepreneurs in emerging markets. Under USAID INVEST, Endeavor is launching the Harvest II Fund to finance high-growth, impact-oriented businesses in South Africa. In this interview, Alison Collier, the Managing Director of Endeavor South Africa, discusses the Fund’s unique model, opportunities for enterprises during COVID-19, and what to expect when working with USAID.
By Carolanne Chanik, INVEST Communications Coordinator
Endeavor South Africa (“Endeavor”) is a global organization deploying a unique pay-it-forward model in South Africa. Supported by a team of 150 pro bono, entrepreneurial mentors in South Africa, and more than 5,000 globally, the NGO manages a series of funds to grow promising, medium-sized enterprises across Southern Africa.
“Our theory is that medium-sized enterprises are the underlying drivers of economic growth in an emerging country,” states Alison Collier, the Managing Director of Endeavor South Africa. “Entrepreneurs hold the key to job creation, revenue growth, and overall economic health. By investing in them, we’re investing in sustainable economic growth.”
The USAID Southern Africa Regional Mission engaged INVEST to facilitate increased private sector investment across the region. Under this engagement, INVEST is supporting Endeavor’s Harvest II Fund, a growth fund that will deploy support to up to 12 promising South African enterprises in need of equity capital and previously vetted under Endeavor’s portfolio. By leveraging Endeavor’s rigorous entrepreneur selection process and a catalytic contribution from the USAID Southern Africa Regional Mission to support set-up costs, Endeavor can waive success fees and reduce the Fund’s transaction costs. As a result, Collier and team can incentivize new private investors to get on board.
“We follow a qualified lead-investor and match their terms,” states Collier, speaking on Harvest II Fund’s rules-based structure. “We make these co-investments without taking any board seats and, without the expense of a lengthy active due diligence process, we’re able to significantly bring down the cost of a transaction. So, it’s an interesting model from both an investor and investee perspective.”
By subsidizing initial startup costs, USAID has given Endeavor South Africa the opportunity to test a new sustainable fund model. “Because we have our startup costs covered, we are able to cap the management fee at maximum of two percent, which is 25 percent lower than the typical active venture capital fund fee in South Africa. Endeavor will reinvest 20 percent of its carry back into the organization to help support additional entrepreneurs in local South African markets. “The model becomes self-sustainable, and we shouldn’t require continued funding for this Fund or future funds,” explains Collier.
Endeavor designed the Harvest II Fund to best suit the needs of local SMEs that require smaller pools of capital as they grow. “Through Harvest II, we can take small slices in the businesses that we are working with and invest in them at a very low cost, writing cheques of R10 million on average,” states Collier. This enables the Fund to have a much broader portfolio of investments compared to similar sized VC funds. “We are supporting a model that is a better fit for the market in which we’re operating.”
Much of Endeavor’s portfolio is in the disruptive technology space — innovation that significantly alters the way consumers, industries, or businesses operate (think ridesharing apps or fintech companies). This space is seeing growth in the face of COVID-19. Collier reports that top South African tech enterprises are currently raising funds at four times the pace they had been prior to the pandemic. “South Africa is a good place for these businesses to grow since the operating costs are still relatively inexpensive and South Africa has a well-developed corporate landscape,” says Collier. “Our investees can build their solutions here for a relatively low cost and then sell their solutions to the U.S. and other large international markets.”
Through INVEST’s support, Endeavor closed a fundraise for Harvest II ahead of schedule and partnered with its first financial institution. According to Collier and her team, having secured an institutional investment partner is a huge win that forecasts a promising future for South African high-growth entrepreneurs. “If just five to 10 percent of the money currently allocated for private equity can move into the venture capital space, I believe we’ll see an enormous increase in entrepreneurs who choose to enter this market and they’ll build incredible businesses,” says Collier. “Entrepreneurs will feel confident that they will have access to capital as needed to support their growth.”
For Collier, this has not been her first experience working with USAID, but it’s been her best. “USAID has very clear objectives, but they’re willing to work with you in a way that’s fit for purpose,” she explains. “USAID and the INVEST team have been so accommodating and open-minded in figuring out a way to work together to deliver the best results for the project — catalyzing private capital in Southern Africa in high-growth entrepreneurs, without mandating a process for process’ sake. I encourage them to keep thinking outside of the box.”
Check out the video below to hear more from Endeavor South Africa’s Collier on the challenges facing growth-stages business and the human impact of investing in SMEs.