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Venture Capital industry Insights: “South African venture capital continues to grow”

26 July 2021 The Southern African Venture Capital and Private Equity Association (SAVCA)

SAVCA releases 2021 Venture Capital Industry survey highlights and tackles pivotal issues

In 2019, 69 early stage fund managers invested R1.23bn into new and startup stage South African businesses. In 2020, despite the COVID-19 pandemic that catalysed a ripple effect throughout the global economy, the venture capital and private equity industry in South Africa surged forward.

Last week Thursday, the key findings from the 2021 Venture Capital Industry Survey; conducted by the Southern African Venture Capital and Private Equity Association (SAVCA), were unpacked in an online event that included a panel discussion exploring how the venture capital industry was impacted by the COVID-19 pandemic. The webinar was moderated by Mosidi Modise, Managing Director at Pivot Ventures, with comment from four industry experts.

Another record year has been concluded, with 74 South African early stage fund managers investing R1.39bn into 122 entities through 167 investment rounds, amidst a turbulent economic climate. These results come despite reporting that 3 out of the top 5 established fund managers prioritised supporting existing portfolios as opposed to making new investments.

On this, Vuyiswa Nzimande, Investment Principal at Edge Growth Ventures commented: “During the first three months of COVID, many businesses temporarily closed down. Some were still committed to paying salaries but as a result, the turnaround time for their recovery post-COVID was prolonged. As an investor, we set aside funds to help these businesses where we could. We also considered whether these businesses had the capacity to pivot and save themselves and jobs in the short- to medium-term. The time between the onset of COVID-19 and now has given us a chance to be more aggressive in terms of our investment capacity and there is indeed a perception that the risk appetite has increased towards SMEs since the onset of the pandemic due to COVID Funding initiatives and new funds.”

The majority of funding in 2020 came from Cape Town based investors with 51.5% of independent fund managers governing the largest number of active deals (an increase of 7.2% from 2019). Furthermore, as it stands, the public sector remains a major investor, holding 28.1% of all active portfolios by value of deals, which is currently worth R1.75bn.

As we head into Women’s Month, the spotlight falls on gender equality across industries. As part of the panel discussion, a poll was taken which asked attendees to estimate the percentage of female equity in the venture capital industry. The majority of attendees answered, “3%” – a far cry from the actual figure and a microcosmic indication of the difference between public perception and the substantial steps we have taken as a nation towards gender equality. As the 2021 Venture Capital Industry Survey reports, 51.3% of respondents reported having female equity. As Ketso Gordhan, CEO at SA SME Fund expanded: “There is room for improvement in terms of the country needing more women-controlled teams and funds. Having said that, our attitude towards diversity is improving and we need to recognise that.”

Expanding on the topic of diversity, Ketso added: “We also need to consider diversity from the vantage point of experience. We need a more equal distribution of new, emerging funds and funds that have years of extensive experience in the market. This will present more options and increase the confidence of institutional investors who have their eye on the South African venture capital industry. In the developed world – like in the US for example – the industry is more mature and more attractive to institutional investors. We have some maturing to do but eventually we will start seeing real, long-term results.”

The largest sector by investment value in 2020, was Agritech, which coincides with the latest stats from Tracxn which put the number of South African Agritech startups at 106, many of which concern the development of exciting innovations like drone-based farm monitoring, electromagnetic induction (EMI) soil scanning and geographic information system (GIS) mapping.

As part of the panel discussion, Mosidi Modise asked for comment on South Africa’s township economy and how investors could develop a more inclusive lens to invest in unfamiliar territory in businesses that are providing solutions which address the needs of the majority of South Africans.. On this Matsi Modise, Vice-Chairperson at industry-led startup support initiative, SiMODiSA commented: “The word, ‘community’ is key because it takes a village (as it were) to bring up a small venture. The biggest opportunity gap exists in nurturing startups from pre-revenue to post-revenue, to a stage where venture capitalists can do their part. For that, we need effective accelerators and incubators situated in townships that are committed to inclusivity above all and leverage their network to get behind real potential.”

Nzimande echoed this sentiment, stating that, “the township economy is the South African economy. These concepts are not mutually exclusive. It is our duty as stewards of industry, to push the boundaries with funders and demonstrate the potential of investing in businesses that fall outside of the norms. It’s important for us to advocate for the funding of township ventures more than those that exist within and for commercial city centres. When we begin to believe in our economy’s potential, our funders will too.”

Also under scrutiny during the panel discussion was the decision not to extend the Section 12J tax incentive. According to National Treasury, the scheme was not assisting with alleviating unemployment but instead was granting significant tax deductions to wealthy taxpayers. Stephan Lamprecht, Strategy and Workshop Facilitator at Venture Solutions commented on the questionable and potentially detrimental nature of this decision but inferred that: “The policy managed to put the spotlight on the venture capital industry and brought more attention to what fund managers are trying to achieve. Since the introduction of the policy, we’ve seen a surge of interest from investors, increasing the money and options available to early stage entrepreneurs. We need more players and more money in order to make a lasting impact so in that sense, the incentive has reaped positive results for the industry.”

Wrapping up the panel discussion, SAVCA CEO, Tanya van Lill reminded attendees that this event will be followed by a 2021 Venture Capital Conference, which is taking place on 15 November at Eureka Estate, Durbanville, Cape Town. Both in-person and virtual attendance will be accommodated. Registration for the Conference is now open and can be accessed here.

Mosidi Modise, Managing Director at Pivot Ventures; SAVCA CEO, Tanya van Lill ;Vuyiswa Nzimande, Investment Principal at Edge Growth Ventures; Stephan Lamprecht, Strategy and Workshop Facilitator at Venture Solutions; Ketso Gordhan, CEO at SA SME Fund

Quick Polls

QUESTION

South Africa’s Financial Sector Conduct Authority (FSCA) has the power to raise revenues by issuing administrative penalties and fines against non-compliant financial services providers, with this money flowing back to the Treasury… Does this, in your view, create a regulatory / government conflict of interest?

ANSWER

Absolutely, as conflicted as it gets
Maybe, I’m on the fence on this
No, the FSCA can do no wrong
The guilty must pay
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