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Growth in South Africa’s venture capital (VC) industry remains robust with early-stage fund managers investing R1.31 billion into 121 entities through 186 investment rounds. This is according to the newly released 2022 Southern African Venture Capital Association (SAVCA) Venture Capital Industry Survey.
The survey covers equity investments into start-ups and early-stage businesses for the 2021 period.
Stephan Lamprecht, who spoke to the survey results, said that the findings indicated that two-thirds of all deals were for less than R5 million investment value.
“These results revealed that investment activities in 2021 were fairly similar to those observed in 2020, despite fewer fund managers doing active deals within the survey period,” he said.
The survey reveals that the information and communications technology (ICT) sector accounted for 57% of all VC deals in South Africa during 2021, which corresponds with trends seen in more developed VC markets like the United States and United Kingdom. Together, financial technology (“fintech”) and education and training technology (“edtech”) deals make up a quarter (25%) of all deals concluded during the year, with fintech maintaining its dominance amongst investors by attracting the most deals during the period.
The five sectors which attracted the greatest number of deals in 2021 in South Africa were fintech (15.9%), edtech (9.1%), consumer products and services (7.9%), ICT (7.9%) and software (6.7%). Together, these five sub-sectors amounted to 44.7% of all capital invested in 2021.
SAVCA acting CEO and head of policy and regulatory affairs, Shelley Lotz, says that both Fintech and EdTech are crucial sub-sectors for South Africa, and while the local financial system is highly developed and internationally competitive, financial inclusion remains a pressing challenge.
“Technology advancements in the education sector also offers many benefits, including the opportunity to reach previously underserved segments of society, improve efficiencies, and close skills gaps.”
Fintech also attracted the second largest rand value of investments (R298 million), beaten only by the food and beverage sector which maintained its leading position from the previous year.
Other notable findings included that Gauteng and the Western Cape remain VC’s preferred investment destinations with Johannesburg topping Cape Town in receiving the most deals by number in 2021. However, Cape Town remains the base for the biggest pool of companies in the active portfolios of VC fund managers.
The survey also reveals that independent fund managers are responsible for most new deals.
Expanding on what needs to be done to stimulate higher levels of fund manager activities in South Africa, Thiru Pather, investment principal at SA SME Fund said: “Firstly, we need to acknowledge that VC is still a developing asset class in our country, especially when compared to more developed countries.
“As such, the sector needs intervention at all levels for it to truly unlock its potential for economic development. From a macro perspective, more needs to be done to attract institutional investors to the asset class, including banks and pension funds.”
She went on to elaborate that to attract these institutional investors, the asset class needs to be de-risked. “This could be achieved by introducing some form of subordinated funding, which will give institutional investors the confidence they need to invest in a more prudent manner by having the requisite downside protection.”
Discussing the role that fund managers can play in supporting entrepreneurs, panellist James Tagg, founder and chief executive of Quicket says that as an event ticketing company, they were knocked flat by the onset of the Covid-19 pandemic.
“After losing 95% of our revenue in the first week after events were banned, prospects of survival were looking exceptionally bleak.
“We considered liquidating the company, however, upon discussions with our fund manager, Knife Capital – we were assured that they would support us through this period of uncertainty, from both a financial and operational perspective.
“This stability, mentorship and support enabled us to innovate our way through the pandemic by developing a niche streaming product that gave event organisers and entertainers a platform to start engaging with their audiences remotely.
“As a result of this, we now have a wide range of verticals and products that allowed our business to bounce back. Without the unwavering support and guidance provided through the venture capital sector and our fund manager, Quicket may have closed its doors for good.”
Noting the important role that VC can play in supporting entrepreneurs in their journey towards growth and positive economic development, Lotz concludes: “We are optimistic that the nascent industry will continue to grow and evolve, allowing it to attract more institutional capital thereby enabling it to fund more entrepreneurs and early-stage businesses in South Africa and the region.”