Shake up in VC/start-up funding in 2023

Adrian Hinchcliffe
By Adrian Hinchcliffe
Johannesburg, 18 Jan 2023

There’s a good deal of economic turmoil and uncertainty globally and locally.

ITWeb spoke to a panel of venture capitalists to get their predictions for what could and needs to happen in the local space in the coming year.

At the tail end of last year, the panel also gave a round up of the major trends they had witnessed during 2022.

Turning to 2023, Clive Butkow, CEO of Kalon Venture Partners, says there has been a noted slowdown in the funding of start-ups by investors. This is resulting in start-ups having to stretch their existing funding.

“Hopefully, we’ll see this turning around at the later end of the year. I don’t think it will happen for the first six months, I think there’s still too much uncertainty in the marketplace, and there's not enough capital.”

Fabian Whate, head of Naspers Foundry, says there has been a change in attitudes among investors towards start-ups in recent months, and agrees this has increased pressure on start-up finances.

Fabian Whate, head of Naspers Foundry.
Fabian Whate, head of Naspers Foundry.

“Venture-funded companies raise funding for a distinct period of runway (financial lead-time), it could be six months up to 24 months. But at some point, they run out of capital, assuming they haven’t broken even, and need to raise further capital. With fewer companies having raised capital last year, there have been a few casualties. And that’s something that’s likely to continue, assuming the tight funding market persists into 2023.”

Justin Stanford, co-founding general partner at 4Di Capital, says this “correction” and conservatism to funding was necessary.

“We’d reached a point where virtually anything was getting funded, and to a degree that wasn’t sensible. Sky high valuations and businesses without sound fundamentals were getting put into the headlines.

Sky high valuations and businesses without sound fundamentals were getting put into the headlines.

Justin Stanford, 4Di Capital.

“What’s already happening, and will probably play out in the coming year, is a bit of a necessary clear-out in the market. There will be more of a flight for quality by investors, more of a rigorous assessment of which companies deserve to raise funding. There was too much money chasing too few companies. I think things will stabilise and companies will get funded, but there will be a healthy rebalance and expectations will be reset.”

Gideon Greaves, MD of CV VC Africa, says there is a need for stronger pre-investment assessments by venture capital investors, with the collapse of crypto-currency exchange FTX last year playing its part.

“I think there will be much stronger due diligence. I think FTX not only painted a negative connotation on crypto, but it also did the same for venture capital investments in general. This happened many years ago, where one big name comes in and then all the others follow without doing any due diligence.”

Clive Butkow, CEO of Kalon Venture Partners.
Clive Butkow, CEO of Kalon Venture Partners.

This increased due diligence will come in tandem with the market entry of more institutional capital, as amendments to Regulation 28 of the Pension Fund Act were introduced last year, which regulates how pension funds are allowed to invest, he adds.

Keet van Zyl, co-founder and partner at Knife Capital, says: “More institutional capital will come into the space over the coming years, and we’ll see larger investment rounds, new fund managers, so it won't just be the old guard,” he says.

Stephan J Lamprecht, independent research partner for SAVCA, also expects change in the space, driven by legislation.

I think there will be much stronger due diligence.

Gideon Greaves, MD of CV VC Africa.

He is hopeful more progress will be made this year in realising the Start-up Act, which is currently a proposal being pushed by the industry to government.

“There’s definitely a lot more momentum building. And there’s been a lot more profile raising via the Start-up Act movement in terms of getting in the ear of the president.”

He says international adoption of similar legislation that encourages the start-up space could trigger something closer to home.

“It’s becoming more of a hot topic, for example political parties in the UK are talking about launching a new manifesto for start-ups, scale-ups and high-growth companies. As innovative as our government wants, and claims, to be, most of the good ideas come from abroad. So they may eventually pay attention to what the politicians overseas are saying and doing, then I wouldn't be surprised if you start seeing that coming up more in our in our political speeches.”

For Lamprecht, creating an enabling environment for such companies will be key to encouraging our own economy.

“If we really want to save our economy and do well as a country, we're going to have to invest a lot more and champion start-up entrepreneurs. Then, as per the Start-up Act idea, we need to remove the things that are keeping them from really having a much bigger role in the economy.”