Despite a turbulent economic climate, the 2021 SAVCA Venture Capital Industry survey showed continued growth, with 74 South African early stage fund managers investing R1,39bn into 122 entities through 167 investment rounds in 2020. Another record year is expected when the 2021 results are released, with momentum continuing to build into 2022.
Ketso Gordhan, CEO of the SA SME Fund says that three things are required in order to achieve scale in the local VC industry: “we need more seed funding, to convince institutional investors to allocate to VC and to encourage partnerships, especially between the VC industry and government, in order to maximise use of South African intellectual property.”
2022 will see advances in all three of these areas. More seed funds are active in South Africa, and private Angel Investors are playing an increasing role in plugging this funding gap. Institutional funders like the Mineworkers Investment Company, and some banks, see VC as a credible, investible asset class, and collaborative efforts between key role players in the early-stage investment ecosystem are starting to bear fruit.
It is unfortunate for the VC industry that the Section 12J tax incentive ended in 2021. According to National Treasury, the scheme was not assisting with alleviating unemployment, but instead was granting significant tax deductions to wealthy taxpayers. A more sensible approach could have been to extend the June 2021 sunset clause while refining the 'qualifying investee' definition to stamp out abuse, thereby encouraging and forcing Section 12J VC Companies to stick to the spirit and intent of the tax incentive. Why would you not continue to back the SME Qualifying Companies that created jobs post investment?
The lag effect between investing in startups and the creation of employment and other impact measures should also have been more carefully analysed. Luckily, top tier VC firms with Section 12J offerings like Knife Capital and Kalon Venture Partners raised substantial amounts of capital from investors in 2021, and this will still be deployed throughout 2022.
The proposed SA Startup Act, spearheaded by SiMODiSA and other startup ecosystem organisations, is gaining momentum, and this could take some of the Section 12J learnings and successes forward. It outlines a set of provisions/ guidelines for ways that the ecosystem can support high growth, high impact startups. The initiative could be a stand-alone Act or set of proposed amendments to existing acts to govern how innovation-driven startups can be supported and nurtured to advance innovation, job creation and economic growth in South Africa.
Most South African VCs invest across industries in a diversified portfolio of investments, but top sectors expected to attract funding are FinTech – continuing its dominance on the continent, advancing financial inclusion; EdTech – COVID-advanced digital transformation in the education space, creating a platform for spring-boarding; HealthTech – investments across the value chain to provide access to safe and affordable healthcare; InsurTech – disruption of traditional insurance models; AgriTech – driving efficiencies in farming practices, logistics, food safety and traceability, as well as general Software products aimed at SMEs.
But investing in early-stage businesses is relatively easy compared to making a return on those investments through profitable exits. While VC investments have limited liquidity, SAVCA reported that in 2020, exit activity increased by 13.2% with a total of 43 Exits, of which 72.1% were recorded as being profitable, a trend that continued in 2021 as a result of market consolidation in various industries. With some of the investments in South African VC Funds maturing, 2022 should be the year that these investments enter the harvesting phase.
The South African VCs to watch out for in 2022 include:
Naspers Foundry, which has built up an enviable portfolio of investees and continues to help founders build long-term, leading companies;
4di Capital – a VC stalwart in the early-stage space, with a great portfolio and a co-investment track record;
Knife Capital, with two Section 12J funds. It also reached first close of its $50m Expansion Fund with backers that include the IFC and the Mineworkers Investment Company;
Grindstone Ventures – a newly launched female-led seed fund, investing in startups from its Grindstone Accelerator programme;
Invenfin – the venture and growth capital division of Remgro that works closely with management to help unlock opportunities and build shareholder value;
Kalon Venture Partners – an experienced VC team still deploying some of its Section 12J Funding raised;
Hlayisani Growth Fund – backing larger growth opportunities these days, but still has its venture capital roots for investing strategic support and capital into high-growth, high-impact SMEs;
MIC Khulisani Ventures is the Mineworkers Investment Company’s early-stage investment vehicle, which focuses on innovative and highly disruptive black-owned South African businesses across diverse high growth sectors;
Launch Africa Ventures – a pan-African VC fund solving the significant funding gap in the Seed and pre-Series A investment landscape in Africa, with a presence in South Africa.
Van Zyl is Co-Founder and Partner of Knife Capital.