Venture capital in South Africa – known for its high risk, high return investments – will benefit substantially from the new Companies Act which will come into effect in 2010.
According to Eben van Heerden, portfolio and investment manager of Mark Shuttleworth’s venture capital company Here Be Dragons, venture capital companies are exposed to enormous risk as they focus on fast growing businesses – often without being involved in the day to day management of the companies. Major changes to the companies act including raising the bar on financial reporting and greater accountability for directors go a long way in helping manage this risk.
"As we have to rely hugely on executive directors to make best possible use of the finance, the new Companies Act gives us protection in that it ensures that directors carry out their responsibilities. It also provides a more clear framework to directors – which in the case of venture capital are often fairly new to the role – on what is expected of them.
"Without accurate financial reporting, it is very difficult for a venture capitalist to identify problems in the business and know when to intervene. As we work with many young companies, it has always been a challenge to quickly get the standard of financial reporting to a very professional level. The new Companies Act helps us achieve this, as it has raised the bar on what is required from a legal perspective in terms of financial reporting," says van Heerden.
"Likewise, the new legal framework in the new Companies Act around well structured and regular board and other committee meetings creates a healthier forum for group wisdom. It again provides the opportunity for the venture capital company to intervene more constructively in the strategy of the company.
"We have always encouraged our portfolio companies to adopt good corporate governance and compliance practices, since young companies tend to apply their energy elsewhere," highlights van Heerden.
"Corporate governance has for a while been seen as a purely compliance orientated procedure, but it is far more than that. It encourages good management of companies if followed correctly.
"As a result, the Act is expected to impact positively on the business environment for growing companies. It will 'force' younger companies to comply with matters that they should be complying with on their own volition. This has to improve the overall standard of business engagement.
"There are fairly few aspects of the new Act that impose unreasonable compliance orientated obligations on younger companies."
In fact, the act works in favour of young companies when it comes to business rescue. The new Act provides for a company in financial distress, in that it must go through the complex process of business rescue before it is liquidated. An individual will be appointed to manage the company’s affairs and attempt to resurrect it. This will encourage both the entrepreneur and the venture capitalist to save a new business with potential, rather than exit a non-profitable company too quickly.