Entrepreneur accelerator company Grindstone has launched a venture capital fund called Grindstone Ventures focused specifically on post-seed investments, where there is currently a gap in the South African funding landscape.

The $6.5-million, or R100-million, fund is dedicated to seed funding predominantly South African innovative technology startups that have completed or are part of its Grindstone Accelerator programme, which acts as an early due-diligence mechanism for the new fund.

The fund will target between 30 and 50 early-stage companies that possess strong intellectual property, demonstrate high growth potential and have the ability to raise follow-on funding from credible funders in the ecosystem, or deliver sustainable cash yields over the long term.

The typical investment structure will involve a simple agreement for future equity to align speed of negotiation and execution with the investment stage, Grindstone says.

A successful startup ecosystem, where businesses are able to grow, prosper and expand is key to accelerating the vision of South Africa becoming a startup nation, and to enabling job creation, social impact across the small and medium-sized enterprise development ecosystem and tangible economic value, the company states.

Grindstone Accelerator has supported startups and entrepreneurs through access to mentorship and the investment of time and knowledge that helped startups to move forward, for seven years, says Grindstone shareholder and director Andrea Bohmert.

"Investing in companies does not only mean investing only money. We have demonstrated how effective this work is, and it is absolutely critical because venture capital as an asset class will not work without a network. Investing in early-stage companies is critical and necessary to build a pipeline, and is definitely necessary for an entrepreneur and startup ecosystem," she adds.

Grindstone, its partners and its startup cohort share a passion for making venture capital as an asset class work in South Africa and Africa, she says.

Half of the private sector investment fund SA SME Fund has been invested in the venture capital industry, notes SA SME Fund principal Claudia Manning.

Post-seed funding is a known gap in the pipeline. This is where the startups are not yet ready for Series A funding, but need funding just past seed funding.

However, the Grindstone Ventures fund will fund only the cohort of Grindstone Accelerator startup ventures, says Grindstone shareholder and director Catherine Young.

"Doing a long due diligence process for a R1.5-million investment is difficult to justify, but we have to do due diligence to determine the most appropriate post-investment support in a way that is sustainable so that we can grow the effect, because it is not good enough to only provide funding without due diligence," Bohmert notes.

"At Grindstone Accelerator, we have been working with companies for many years and we [recognised] that we needed a fund that we could leverage to the best advantages of being associated and attached to the Grindstone Accelerator that has proven effective at finding great startup companies," says Bohmert.

The Grindstone Ventures fund goes through a thorough evaluation to identify which entrepreneurs and startup ventures have potential. The startup acceleration process has helped Grindstone to streamline the pipeline and the fund will bolster its network of mentors and coaches so that it is able to achieve things that other venture capital funds would struggle to justify, Bohmert says.

"This is the benefit of the Grindstone Ventures fund. Because it is linked to the [Grindstone] Accelerator, we can cost effectively make a difference. We are excited and we think we have cracked a model that will work to address this gap."

However, creating a startup nation requires that such models are scaled up to develop more entrepreneurs and bring them into the startup and venture capital ecosystem. Grindstone will continue to rely on its partners, and it requires an ecosystem to raise a startup, Bohmert says, quoting Knife Capital CEO and Grindstone shareholder and director Keet van Zyl.

"The challenge remains post-investment support and this requires an effective ecosystem, as well as mentors, corporate [companies] and access to market and traditional funding sources. Grindstone is only able to help a little bit, but this is important as a first starting point and to help get companies over the initial funding gap," Bohmert says.

Grindstone believes its model to identify companies and make post-seed funding work without large overheads is effective, and it has seen significant support, she adds.

"Grindstone Ventures will only work if the ecosystem works together. We have the ingredients, but we now have to scale. The appeal for participants is the desire to make South Africa a bit better and help entrepreneurs and startup companies at all stages of their lives, which needs initiatives such as the Grindstone Ventures fund and support from everyone," Bohmert says.