The venture capital (VC) sector in South Africa is still expanding strongly, with early-stage fund managers contributing R1.31 billion to 121 businesses over the course of 186 investment rounds. The 2022 Southern African Venture Capital Association (SAVCA) Venture Capital Industry Survey confirms this.
The poll covers equity investments in early-stage and start-up companies for the year 2021.
According to survey results speaker Stephan Lamprecht, two-thirds of all transactions had an investment value of less than R5 million.
Despite fewer fund managers engaging in active deals during the survey period, “our data showed that investing activity in 2021 were quite similar to those observed in 2020,” he said.
According to the report, 57% of all venture capital (VC) acquisitions in South Africa were in the information and communications technology (ICT) sector in 2021, which is in line with trends in major VC markets like the United States and the United Kingdom. Together, deals involving financial technology (“fintech”) and education and training technology (“edtech”) account for 25% of all deals completed in the year. Fintech, which attracted the most deals during the time period, continued to dominate among investors.
Fintech and EdTech are critical subsectors for South Africa, according to Shelley Lotz, acting CEO and head of policy and regulatory affairs for SAVCA. While the local financial system is highly developed and internationally competitive, financial inclusion remains a significant concern.
“Technology improvements in the education sector also offers several advantages, including the chance to reach societal groups that were previously unreached, to increase productivity, and to close skills gaps.”
Fintech received R298 million in investments, which is second only to the food and beverage industry, which retained its top spot from the previous year.
The Western Cape and Gauteng remain the favoured investment destinations for venture capitalists, with Johannesburg obtaining more deals overall in 2021 than Cape Town. But the majority of the businesses in VC fund managers’ active portfolios continue to be based in Cape Town.
Additionally, the poll finds that independent fund managers are in charge of the majority of new deals.
Thiru Pather, investment principal at SA SME Fund, elaborated on what needs to be done to encourage increased levels of fund manager activity in South Africa, saying: “First, we need to acknowledge that VC is still a developing asset class in our country, especially when compared to more developed countries.”
“As a result, for the industry to completely unlock its potential for economic development, involvement at all levels is required. From a macro standpoint, more work needs to be done to entice institutional investors, such as banks and pension funds, to the asset class.”
She continued by explaining that the asset class needed to be de-risked in order to draw in these institutional investors. This may be accomplished by creating a kind of subordinated finance, which would provide institutional investors with the necessary downside protection and the assurance they need to invest more prudently.