Cape Town-based venture capital (VC) company Knife Capital has announced the launch of its second Section 12J Venture Capital fund for new investors to support South African entrepreneurs.
Titled KNF Ventures II, it maintains the same investment mandate as the first fund and aims to accelerate the growth of local startups and SMEs and to generate returns for entrepreneurial-focused investors.
Section 12J venture capital companies enable investors to invest in higher-risk SMEs and in turn, generates innovation, employment opportunities, and overall economic growth. Investors are able to claim amounts incurred on acquiring VCC shares as a deduction from taxable income.
The global pandemic has demanded a rise in innovation as many entrepreneurs and business owners aim to meet the demands of an ever-changing dynamic. This has resulted in the adoption of digital technologies and the creation of disruptive technologies.
Keet van Zyl, Partner at Knife Capital provides insight into the rise in disruptive technology-based startups.
“There is a tangible shift towards embracing new ways of working, learning, interacting and transacting. This can also be felt in the investment space,” said Keet van Zyl, Partner at Knife Capital. “Certain alternative asset classes like venture capital – where fund managers have been investing in technology companies for years – are experiencing increased interest from institutional and individual investors wanting to diversify.”
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The sunset clause
The VCC regime is subject to a sunset clause that stipulates that no new Section 12J deductions will be granted after June 2021.
Van Zyl claims that even amidst this uncertainty on whether the government will extend the lifespan of the Section 12J incentive, money has not stopped flowing into venture capital companies.
While currently tax deductions will still be granted until June, Van Zyl highlights the importance of looking beyond the 12J tax incentive.
“It needs to be about more than the tax break. Sure, 12J is a good incentive as investors start the investment process in a favourable Internal Rate of Return (IRR) position due to the immediate tax benefit. But without a credible venture capital asset class backed by institutional in investors, family offices as well as individuals, access to growth funding by South African SMEs will continue to be a challenge.”
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