PoweredbyVC exits CSense to GE – Interview with Keet van Zyl

Reposted from http://www.justinstanford.com/2011/04/poweredbyvc-exits-csense-to-ge-interview-with-keet-van-zyl/

Yesterday my friends at PoweredbyVC (the new independent VC fund manager spun-off from the old HBD, and now managing its investment portfolio) announced the successful exit of their Pretoria-based portfolio company CSense to US-based GE.

As we don’t often see successful exits publicised locally and there is much debate about the existence of a viable foreign exit market for local startups, I think this is an important enough event worth looking at more closely. So I asked Keet van Zyl from PoweredbyVC to answer a few questions to give us some more insight:


Describe CSense in 140 chars?

CSense offers rapid process troubleshooting and process improvement software solutions to enhance the performance of industrial processes.

At what stage of the company did you become an investor in CSense?

Early stage for rapid expansion. The company was established 5 years before HBD’s (Mark Shuttleworth’s ‘Here Be Dragons’ managed by PoweredbyVC) investment by a group of four engineers (still the core management team) who self-funded and bootstrapped the company throughout the life-cycle.

What was the investment amount, and/or the number of rounds invested?

Undisclosed. It was not disclosed in the initial press releases. Sorry! We provided equity funding in one round (typical ‘Series A’) as well as short-term working capital bridging finance where required for growth spurts here and there throughout the life of the investment.

How many investors were there, or were you the sole backer?

We were the sole institutional equity provider, but the company introduced different finance providers at the appropriate stages. This included early-stage angel investment and government backed R&D grants promoting technological innovation as well as leveraging debt instruments as and when appropriate.

How many years were you in CSense for?

7 years. It was one of HBD’s original investments.

Did you play an active role or were you a passive investor?

Very active. We had two seats on the board of directors and had monthly face-to-face management meetings with the management team. The partnership has evolved over the years, moving from focusing on profitability, to acting as a sounding board for CSense management to test business strategies. HBD added value in CSense’s expansion phases by assisting with financial forecasts, negotiations and accurately determining the fair value of the company. We were also involved in ensuring that good corporate governance was maintained.

How did you begin to solicit exits? Were you approached by a US acquirer or did you market it overseas?

In this case it was a natural progression where GE evolved from being a CSense client, to signing an OEM (original equipment manufacturer) contract and ultimately acquiring the company.

Was the exit of an SA company to a US acquirer relatively easy or hard?

The negotiations and ‘Conditions Precedent’ were relatively complex compared to a local exit and should not be underestimated, but because of our open relationship with the management team and other investors, all stakeholder interests were aligned which facilitated the process.

Would it have been easier or more desirable to make a local exit?

Local exit would have been easier, but ultimately a trade sale to an international strategic buyer was more desirable in this instance as they were more in tune with global benchmarks for revenue and EBITDA multiples in the tech space.

Was it a sale of shares or sale of IP exit?

It was a sale of the IP technology assets from the company: CSense Systems (Pty) Ltd
If applicable, did the latest SCA judgment regarding IP no longer constituting capital make the exit any easier?
N/A in this case as the deal was initially negotiated a few months ago.

Will the company continue to operate from its current base in Pretoria, SA?

Yes, but some members of the key management team (including the CEO) will relocate to the US to facilitate knowledge transfer.

Are you happy with the outcome and results of your investment and exit?

Yeah! Other than the ‘story’ of a local VC backed tech startup being sold to a US company in the Top 10 on the Fortune 500 list, returns on investment were in line with anticipated VC returns and aggressive international benchmark industry multiples. The exit would have been more favourable if the time horizon of 7 years were shortened to 3-5 (which is when the original OEM agreement with GE was done) but I guess the global financial crisis delayed a few exits by a year or two.

Do you believe SA startups and investors face difficulties in finding good local or foreign exits? Is the market picking up and are barriers dropping?

It is extremely difficult for local startups to grow aggressively and still have future strategic significance for potential investors to ensure a successful exit. The fortunes of private equity investors in the developed world have been largely linked to those of the market for IPO’s. Experience has shown that for South Africa a trade sale to a strategic investor or sale to another investment group are the most viable alternatives. Global business barriers are dropping, facilitating cross-border transactions for smaller transactions (compared to larger private equity type deals), boding well for the VC industry.

Thanks very much Keet for sharing! Some valuable insight into the emerging and growing local VC and startup eco-system. I’m glad to see some more openness around these matters starting to permeate into our local sector too.

3 thoughts on “PoweredbyVC exits CSense to GE – Interview with Keet van Zyl

  1. Hello Justin,


    In reading this interview I cannot help but wonder as to how well (or not ) the employees of companies such as CSense have been served by this particular form of exit strategy.


    My curiosity is aroused in particular by the comment ” The fortunes of private equity investors in the developed world have been largely linked to those of the market for IPO’s. Experience has shown that for South Africa a trade sale to a strategic investor or sale to another investment group are the most viable alternatives.”


    The logic of young, bright techno-geeks joining start-ups “in the developed world” and working incredibly long hours for little pay while living of pizza and coffee, is that one day their stock-options will make millionaires out of them,  when their company successfully goes IPO (Initial Public offering).


    This route of going for an IPO does certainly appear to be available in South Africa with the AltX branch of the JSE.


    In this case here, it certainly appears that the principals of CSense have done well out of the deal with GM. However, without knowing more of the particulars of the deal, I am not clear how the employees who have helped build the company have benefited, if the culmination of the company’s succesful growth is that it sold privately? (By privately I mean in contrast with public, as on the stock exchange.)  Or did the employees in fact also have some kind of share , which was also paid out as part of the deal?


    I do realize that part of the satisfaction in working for a startup is the excitement as well as the fun of being involved with cutting-edge innovations.


    However, it seems to me that In the absence of some other mechanism for generously compensating employees of companies which do not go the IPO route, start-ups in South Africa could be deprived of an important incentive for attracting and retaining bright young workers to help them become a success.


    I fear that if there is no such incentive, at the end of the day employees of some startups may well wake up one day to realize that they could just as well have worked for a reasonable salary in “traditional” companies and saved themselves some hard-living, or have I missed something in the foregoing interview?

  2. Good comment by George. If broken down in three groups:

    FOUNDERS/ PRINCIPALS ~ In general (as in this case) the expectations and strategy of the founders/ principals and key management team is aligned with the VC as they shoot for a specific exit strategy together over a number of years. They directly benefit financially from exit/ partial exit, and usually it is only the VC and minorities who exit totally, with the founders switching from having a financial and growth partner to a strategic partner that can grow the company through its channels and clients. 

    KEY EMPLOYEES ~ Key employees who help build the company are usually incentivised through share options or opportunities to participate in minority share issues along the way (as in this case). It is becoming increasingly important even for small companies to ensure that key staff is properly incentivised through a mechanism where they can participate in the upside of an exit (or other successful corporate action) and we – as I’m sure most of the other VC’s in SA – have rolled out incentive schemes to key staff members of all our portfolio companies. You don’t need an IPO to reap the benefits. So if you are a “bright techno-geek joining a start-up to work incredibly long hours for little pay while living of pizza and coffee”, make sure you negotiate share options or form part of the key beneficiaries in a staff incentive trust or something from the outset (bearing in mind you might have to prove yourself first for a year or so). If the founders don’t realise and appreciate that you have a massive chunck of the IP of the co. in your head and need to be locked in to assist growth (or avoid joining a competitor), they are not good managers and you should subtly point this out.

    NON-KEY EMPLOYEES ~ George’s comment is, however very valid for the ‘non-key’ employees… Sometimes the share incentive scheme spans across all employees – especially in SA with BEE targets and the like – but most likely in a small co. these employees might “just” get a performance bonus and don’t necessarily share in a VC exit upside. But then you could argue/ question if at that level you would rather have on your CV that you work for <insert small unknown start-up name> or a bigger company like GE for career development?


    Good food for thought!


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