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VC firms invested R1.5bn in SA start-ups in 2018

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Start-ups within the manufacturing sector received the most venture capital investments.
Start-ups within the manufacturing sector received the most venture capital investments.

Southern African venture capital (VC) firms and fund managers invested around R5.37 billion in 665 active deals across the region in 2018, with R1.5 billion channelled towards South African small businesses.

This is according to the SAVCA 2019 Venture Capital Industry Survey, released by the Southern African Venture Capital and Private Equity Association (SAVCA), conducted in collaboration with research partner Venture Solutions.

The report, which provides insights for fund managers, investors, entrepreneurs and policy makers about the South African VC landscape, consists of data gathered from 56 fund managers as well as other industry investors.

The study, now in its sixth edition, reveals that the South Africa VC industry experienced significant growth in 2018, with 181 new VC deals reported, up 14% from 159 deals reported in 2017.

Of all funding sources, independent VC fund managers comprise the largest share of active portfolios (35%), with Captive Government Funds and angel investors also increasing investment activity, fuelling the growth of early stage investments in SA.

“Around 41% of all VC deals closed in 2018 were categorised as start-up capital,” explains Tanya van Lill, CEO of SAVCA.

“The overall value of all deals amounted to just over R1.5 billion. This was a substantial increase from the R1 billion invested in 2017. It is exciting to witness that despite a tough economic climate in SA, the VC industry continues to grow. An increase in deal activity is anticipated in future, as a large number of fund managers have raised money for VC deals, but have not yet had the opportunity to deploy capital.”

As the industry starts to mature, we may see more fund managers opting to specialise in specific industries or new funds being established as new sources of capital become available from institutional investors such as the public sector, fund-of- fund-of-fund entities and corporates who want to capitalise on early stage investments as part of their own product/service expansions, adds Van Lill.

Gauteng takes the lead

From a geographic perspective, the majority of local investments are still mainly in the Gauteng and Western Cape region. Gauteng-based businesses received the largest share of VC investments in 2018 (R658 million), a 38% increase from 2017, according to the report.

The Western Cape still remains a hub of activity for many investors, with VC investments amounting to R433 million in 2018. KwaZulu-Natal backed VC businesses saw a substantial increase in 2018, with investments amounting to R71 million.

Growth in annual deal activity seen since 2013 remains evident despite a smaller increase in deal activity in 2018 compared to the significant increases in total deals per year reported for 2015 and 2016.

“A marginal increase in the number of fund managers in 2018 is due to the entrance of newly formed independent fund managers drawing on the Section 12J tax incentive. A number of existing fund managers have launched new funds based on specialisation (i.e. investing only in a specific sector such as health care or energy) or as new sources of capital becomes available for the VC sector from institutional investors such as the public sector and fund-of-fund entities.”

Although there has been a healthy increase in the number of deals concluded, the number of exits reported in 2018 declined in comparison to 2017, the report found.

“A total of 15 exits were reported in 2017, and only 11 exits were reported in 2018. Determining the lack of exit activity in the sector is something SAVCA intends to explore, as the continued growth and success of the sector would be dependent on the number and quality of exits reported.”

Consumer sectors targeted

In terms of sectors, the manufacturing sector comprised 14% of the value of all deals invested by 31 December 2018, with food and beverage and medical devices and equipment accounting for 12.3% and 10.5% respectively, according to SAVCA.

The software sector amounts to only 5.2% of deals if taken by value, and consumer products and services to 5.4%, but combined make up 1 in 5 transactions in the overall dataset. Deals into energy type businesses amounted to the fourth largest share in active deals if taken by value.

“A significant observation is the balance between products and services targeting the consumer, and business activity that focus on business-to-business offerings. This is evident in the growth in sectors such as food & beverage (12.3% by value, third biggest in the overall portfolio) and health (5.8% by value),” adds SAVCA.

The World Economic Forum Global Competitiveness Index for 2018/2019 recognised the well-developed status of the South African financial system.

This system includes not only retail and commercial banking and insurance, but also technology and services for security, mobile banking enablement and data analysis.

According to SAVCA, investments into early stage businesses that target these sectors have gone from virtually zero five years ago, to 14% of all deals by number of transactions, as large financial services sector players are increasingly opening up their supply chains to start-ups and small to medium enterprises specialising in fintech solutions.

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