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Venture capital is on the rise in South Africa. According to a recent survey by Southern African Venture Capital and Private Equity Association (SAVCA) this year’s total assets under management represents nearly R2-billion (R1.87-billion), with the total value of deals struck valued at R865-million. While these figures are likely to put a smile on stakeholders’ faces, there’s a lot yet to be done to fast-track this sector and ultimately become globally competitive and uplift socio-economic conditions.
Some obstacles in the ecosystem continue to persist, including the inability to establish constructive dialogue between entrepreneurs and fund managers, implement forward-thinking government policy and adapt successful models to foster successful ecosystems around the country.
Stephan Lamprecht (pictured left) from Venture Solutions, who conducted the survey, summed the findings up well when he wrote:
The VC asset class in South Africa is a functioning, albeit niche, asset class that remains emergent in nature, and has the fundamental momentum and impact that, through sensible backing and enablement by government, ought to be leveraged as an instrument to accelerate socio-economic transformation.
To further help us get to grips with all the latest facts and figures on the country’s VC scene, Ventureburn sat down with Erika van der Merwe (pictured right), the CEO of SAVCA.
Ventureburn: We’re glad to see that the VC scene is on the up. Though investors are often lambasted for not being too active in the startup ecosystem. Do you think that’s an unfair statement, given the results?
Erika van der Merwe: If you look at it from the VC fund manager’s perspective, they want deal flow — they’re looking for deals. That’s the reason for their existence. If you speak to them it’s about their ability to find suitable deals. I suppose it’s rational behaviour in doing the right deals so you can see yourself in the space where within the next two to three years you’ll be able to generate an attractive exit.
VB: So then what can startups do to get access to capital and what can VCs do to educate or facilitate more deals?
EM: If you listen to what VC fund managers have to say, perhaps startups seeking funding should do their preparation and homework — first of all understanding what venture capital is all about and what the fund managers are looking for and what the nature of such a relationship would be. It would be pretty hands-on. They’re providing equity capital, they want to be involved in your life and they want to make sure your business idea is indeed viable.
It’s about handing over some ownership in a true tangible sense as well as a more philosophical sense — sharing the destiny of your business with this fund and being teachable.
On a very basic level, the survey shows that personal networks remain the best way for VC fund managers to source their deals and being contacted through public websites and networks, in fact, doesn’t seem to be a good source for deals.
My conclusion is that perhaps seekers of funding aren’t doing their homework. Are they approaching the right people whose mandate matches their specific funding and capital partnership needs? Advice to a startup would be, first of all, do your homework — approach the right person. It’s not a blank email to all the names you might find on the SAVCA website. Also, make sure that your business case is extremely strong. I’m constantly hearing our members saying the applicants for funding are unable, in a succinct and compelling fashion, to set out their business case. You should be able to page clear, wonderful, well-illustrated roadmaps about where your business is heading.
VB: What do you think is the main thing that makes the Western Cape standout from the rest of South Africa in terms of deal flow?
EM: The majority of VC-type deals and the businesses behind those deals are headquartered in the Western Cape. The majority of VC fund managers are based in the Western Cape. So we’re seeing this clustering. In itself, it becomes sort of a self-fulfilling prophecy, because you have this attraction. There already is a network, there is a group of people who understand the nature of your conversation and who understand what it’s about to be entrepreneurial — to have sacrifice and have given up a paying job, to risk everything, to pursue a dream. Somehow maybe the natural, physical attraction of the Western Cape would have attracted those with a background in funding.
VB: Most of these funds are private initiatives. What pointers can government take to get more involved, given the finding that government-private funds are lacking and that the state partaking in the scene is so distant from what’s happening on the ground? What do you think can government do more and how can they approach it?
EM: The survey showed that 81% of deals in volume are done by the private sector and there’s a shift away from deals done by government-backed and funded entities. We’re seeing a concerning withdrawal by government from the private sector.
There are so many different ways to approach this. There’s direct support through funding programmes and initiatives. While the others would be the incentives. First of all, all of this would require an overhang vision of government.
We need vision, understanding and commitment to VC funding. We’re talking about risk equity support — understanding that this is not SMEs. These are not soft loans. But this is risky, equity that you’re involved in, and understanding that money can be lost and understanding why one is supporting a VC.
It’s stimulating entrepreneurial activity which is helping develop and stimulate new technologies, new sectors, new businesses. Why do we need that? Because we need to stimulate the economy, entrepreneurs to help us become a globally competitive market and to help bring about socio-economic transformation.
It’s more about supporting VCs in and of itself, because venture capital is only one of the instruments we can use to bring about socio-economic transformation and become globally competitive.
I’m hearing from respondents in the survey that they get zero deal flow from university and government-backed entities. Clearly they are talking a different language — it’s not part of the same pipeline. I think some critical thinking is required about current government projects to support VC.
Perhaps it’s also about creating an enabling environment and understanding that it’s those with business background and deep mentoring skills and entrepreneurial skills who should be doing that allocation of capital and mentoring of entrepreneurs. Government should be creating an enabling environment by providing funding into such VC funds to be managed by the private sector.
VB: The survey found that two-thirds of the VC fund managers are confident in making a profitable exit within the next 12 months. Would you say that there’s a disconnect between the current, fragile economic climate and the investors?
EM: Perhaps you’re right. There’s also the stats that show they’re comfortable to wait three years for such a profitable exit. In other words, there is an element of patience and understanding. But yes, what [the startups] are doing is so innovative and interesting that the market will need it regardless. Maybe it touches on the entrepreneurial mindset of the VCs involved — they are optimistic; psychopathically so. They have to be. That’s what makes them so successful to keep going and that’s why we need them.
We need to be realistic about this sector. It’s still short of R2-billion. The survey shows R1.87-billion if you just total up all the deals. So it’s not including dry powder or potential capital, but deals that have been done. If you look at private equity — which is a far broader sector of [SAVCA’s] membership base — going up to these massive deals that’s over R170-billion. Yes, it’s growing and we’re excited about that, but on an annualised basis the number of deals done in 2015 were 43. Obviously, we’d like to see more than that.