Luno pays off for Naspers and RMI
Cryptocurrency isn’t a topic you’ll read about often on The Finance Ghost. In fact, this is probably the first time I’ve written anything on it.
My reasoning is simple: cryptocurrency is like religion; you either believe or you don’t. It’s not a topic for rational debate.
I don’t invest in cryptocurrency because, to this day, nobody can give me a straight answer on how to value it. If I can’t understand the valuation, I cannot possibly put my money behind something. I may as well bet on Djokovic ejecting himself from a tennis tournament with a badly aimed ball.
However, there’s an old saying that I do believe in: in a gold rush, sell shovels.
Luno is the shovel
You may recall an unfortunate period in history in the latter part of 2017 when “Buffett is dead” was the mantra of a new generation of investment geniuses who put all their money into Bitcoin. It was one of the most annoying periods of my life.
Even your Uber driver would fill the silence by recommending that you put some money into Ethereum, the next big thing. “Hot tips” from non-financial people remains my leading indicator of a bubble and sure enough the bubble popped in 2018.
By the end of 2018, Bitcoin was trading at the same price as late July 2017. Some people became wealthy over that period and others lost a ton of money.
After a strong first half in 2019, Bitcoin prices have limped along. It feels like the crypto market has started to mature, although I still don’t know how to value one of these mythical beasts.
It doesn’t matter though, because for as long as there are people trading in cryptocurrencies, there is a market for a business that connects buyers and sellers. This business is Luno.
A South African success story
Founded in 2013, Luno grew to become South Africa’s largest cryptocurrency exchange. It’s like the JSE of coins. With customers in 40 countries and 400 employees across several countries, it’s a proper business.
Over four investment rounds, Luno raised just under $14m. Investors included Naspers and Rand Merchant Investment Holdings (RMI) through AlphaCode, its specialist fintech investment arm.
Venture capitalists are not long-term holders, so it makes sense to read that Naspers and RMI sold their stakes to a global blockchain investor: Digital Currency Group (DCG).
There is always a bigger shovel
The thing about building the shovel is that you hope to one day be bought by a bigger shovel. That’s the entire premise behind the venture capital industry: invest, scale, exit.
Naspers and RMI won’t disclose what price they achieved, but they both sound happy in press statements. AlphaCode confirmed that the exit achieved a return “well above” the targeted IRR of 25% – 35%.
IRR stands for Internal Rate of Return and measures the return achieved in an investment by comparing all the cash you put in vs. the cash you get out. An IRR of 25% can be interpreted as a 25% annualised return over the period of the investment.
Luno’s management team has a lofty dream: reaching one billion people by 2030.
Good luck to them – I have nothing but admiration for a home-grown business like this, even if the underlying assets feel like sports betting to me.