Survey: South Africa’s Venture Capital industry is now worth a massive R2bn

The South African venture capital (VC) industry now represents almost R2-billion in assets under management, a survey released by Southern African Venture Capital and Private Equity Association (SAVCA) found.

If you’ve been following Ventureburn, you would have seen a lot of exciting investments this year, from Silvertree Capital investing over R20-million in the first half of 2015 to radar startup iKubu exiting to Garmin in January and many more. To comprehend what these deals really mean to the local ecosystem, however, requires quantitive research that can shed light on the true value and state of South Africa’s VC environment.

Read more: 11 of SA’s biggest (and most exciting) tech startup investments of 2014

SAVCA’s survey reveals that between 2011 and 2015, 21 public and private VC fund managers and angel investors completed 168 new deals amounting to a total value of R865-million. As at July 2015, total VC assets under management were valued at R1.87 billion, comprising 187 deals.

This is good news for the South African VC scene, where players are often lambasted for not being more active in the startup industry. SAVCA CEO Erika van der Merwe elaborates:

The survey results confirm that the South African VC industry continues to expand in line with the increase in entrepreneurial high-tech activity in the market, a deepening pool of skills and experience, a growing exits track record, and lower barriers to entry for VC-type deals, especially for those that target businesses that involve the use of digital technology (e.g. online, e-commerce and new media) to expand service offerings.

The survey also indicates an uptick in the number of VC deals done, from the 11 deals struck in 2012, to 18 in 2013, 34 in 2014 and 43 annualised in 2015 to date.

Read more: African VC activity shows impressive spike in 2014

However, the average deal size has declined by 22% in recent years, which values R7.3-million during 2011 and 2015. This decline is said to be on par with international trends as leaner approaches to starting businesses become more prominent. SAVCA also suggests that another reason for this decline is the dwindling deal activity by public fund managers and public-funded entities, given that these entities in the past typically have done larger transactions than private sector managers.

SAVCA found that nearly half (56%) of fund managers with deals on their books had exited from at least one investment during the 2011 and 2015 survey period. The average rate of return on investments, for all declared deals that were exited with a gain, is 20% (compound annual growth rate).

Read more: SA radar startup iKubu exits to Garmin technologies

The amount declared as write-offs over the survey period totals R187-million, compared with the total value of profitable exits of R438-million.

Echoing the findings of the Ventureburn Startup Survey conducted earlier this year, the Western Cape shows the most VC activity in South Africa, followed by Gauteng:

Van der Merwe explains that the overall trends are positive in that they mirror a growing South African economy:

The trends highlighted in this survey are positive, in that they signify the advancement of a still-emergent industry that is an integral component of a vibrant and healthily functioning economy — and which is considered a critical enabling mechanism for new high-growth and entrepreneurial sectors and technologies that have the potential to transform the South African economy.

The one concern picked up though is that of a lack of public-sector VC funds, which have yielded impressive results in countries such as Israel. Stephan Lamprecht from Venture Solutions, which conducted the survey, explains that public-private support is critical in order to fast-track this sector:

Without visionary and consistent government backing for VC, the industry will at best continue to grow at average and organically driven rates, subject to market pressures and the high risks associated with being an emergent asset class. It is therefore imperative for the transformation of the entire economy that VC in South Africa is harnessed to support improved, more diversified and more sustainable economic growth.

Other highlights from the survey include:

· As at July 2015, there were 31 VC fund managers, up from 22 in 2012.

· New deals have been primarily driven by independent fund managers, and by angel investors (typically high-net-worth individuals): Angels concluded 55 transactions (33% of total number of deals), amounting to R42.55 million (5% of total value of deals).

· Personal networks are the preferred way to source viable deals.

· Early-stage/start-up businesses account for 51% of deal activity.

· Private sector fund managers collectively have now overtaken government as the primary source for VC-type deals, at 81% of deals recorded in the survey period. However, government-backed investors still represent a significant portion of the value of deals, given the magnitude of their transactions.

· The average equity stake taken by VC investors is 37%. Government investors on average take significantly larger equity stakes (43% average shareholding) than private sector investors (31% average shareholding).

· The average annual rate of return on investments (ROI) achieved for all deals exited with a gain is 20%.

· When exiting VC deals, trade sales (sales to third parties operating in a similar industry) are the preferred mechanism, with the second-most common exit strategy being sale to management.

· There are relatively healthy confidence levels in the VC sector, with two-thirds of respondents reporting that they anticipated a profitable exit in the next 12 months, with profitability expectations ranging between two and five times money back.

· In view of the current economic climate, almost all respondents indicate a willingness to wait up to three years for a profitable exit.

· The average investment holding period is four years and seven months. Government-backed investors remain invested for longer compared with private sector fund managers.

· The ICT-type sector accounts for almost half of all deal activity, including software (26%), e-commerce (10%), electronics (4%) and media/entertainment (7%). This is more than double from the previous survey. Many deals in other sectors such as financial services and business and consumer services are also driven by new technologies involving information and communications technologies.

· The Western Cape (75%) has rapidly overtaken Gauteng (20%) as the geographic source of VC-type deals.

You can download the full SAVCA report here.