Inventive ‘tech gems’ hard to find, say SA venture capitalists
Lack of high-quality tech innovations and replicas of existing international solutions with no relevance to the South African market are among the reasons hindering SA’s leading venture capital (VC) firms from investing more in tech start-ups.
While SA’s VC sector is growing, with increasing investment activity spurred by new players entering the market annually, local VC firms say finding undiscovered gems that have developed winning solutions is often a challenge, as many projects resemble those of international unicorns.
Still in its early stages, the funding local market was estimated to be worth over R5 billion in 2018, according to the Southern African Venture Capital and Private Equity Association’s (SAVCA’s) 2019 Venture Capital Industry Survey.
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, says the association.
Clive Butkow, CEO of Kalon Venture Partners, says most local tech SMEs do not have access to mentors or coaches that have walked the journey before them, resulting in a lack of true innovation and experience.
“There is a lack of high-quality innovation-led entrepreneurs with previous start-up/entrepreneurial experience and a lack of entrepreneurs that have ‘been there and done it before’. VCs don’t want to pay the entrepreneur’s school fees with all the hard lessons one encounters in building highly scalable tech businesses.
“True innovation of existing industries is a challenge. We tend to find more replicas of solutions that have been built globally then a true world-changing technology that is contextually relevant.”
Butkow believes that while there are many innovative and ambitious tech entrepreneurs in the local market, there exists a lack of human capital and talent to build scalable tech start-ups, including engineering skills, commercial skills, industry skills, access to market and relevant mentoring skills.
Southern African 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, according to the SAVCA 2019 Venture Capital Industry Survey.
Keet van Zyl, co-founder and partner of Cape Town-based VC firm Knife Capital, says while there are many opportunities in SA’s robust tech ecosystem, it is fragmented and not adequately capitalised to help businesses scale.
“Most tech SMEs lack the ability to clearly articulate their value proposition and sell a complex solution to a well-defined target market. Another challenge is striking the right balance between a good company that has sensible valuation metrics in order for the investment to make sense and talent,” he notes.
While international investors are increasingly co-investing with local partners and backing South African businesses that have the potential to successfully scale internationally, Van Zyl points out that VC firms themselves encounter challenges in securing the right resources to manage and support the small businesses from the growth and scaling phase all the way to successful exit.
“Access to funding lines, limited partnership investors and lack of resources to support the VC asset class so that we are able to support and manage the tech businesses to successful exit, are among hindrances faced by venture capitalists,” he explains.
Amrish Narrandes, head of unlisted equity transactions at fixed-interest asset manager Futuregrowth Asset Management, says although he has seen some truly successful entrepreneurs come out of SA, only 15% of South African start-ups are successful.
“The South African current tech ecosystem is still in its infancy but showing great growth. It seems that every entrepreneur thinks their company is the next unicorn. Lack of focus is among the cons – many SMEs try to be many solutions to many problems; founders need to be more focused and need to channel all their energy on their product/service and their customers.”
Futuregrowth Asset Management invests in businesses that advance social, environmental and governance reform.
Narrandes points out the key characteristics Futuregrowth seeks in potential businesses include: a disruptive proposition in its industry, businesses addressing a large addressable market, a good management team with a mix of technical and business skills, and a realistic and achievable growth forecast.
Implementation of great ideas
Ian Lessem, managing partner at investment and strategic advisory firm Havaic, says looking at the rate at which technology adoption has accelerated during the current coronavirus crisis, it is clear that technology-enabled businesses are more important now than ever before.
“However, one challenge we find is often the local talent, local solutions and local platforms are overlooked in favour of international and often pricier and even inferior solutions.
“As an industry, local tech and innovation often doesn’t get the credit it deserves and even though we are world leaders in sectors such as financial services, safety and health, and compete on the world stage, often we will have tech solutions in these and other sectors gaining more traction abroad than locally,” notes Lessem.
While investment in other parts of Africa seems to be growing at a faster rate than in SA, Lessem adds it is important to remember from an implementation point of view, that a fair amount of the tech talent resides in SA.
Painting a picture of the African VC landscape, he notes Cape Town has more developers than in the rest of Africa combined.
“Importantly, while ideas are great, someone has to implement them, and while one would be naive to ignore key African markets such as Nigeria, Kenya and Egypt, given their higher gross domestic product growth rates, rising middle class and consumer economy, etc, for the above reasons one simply cannot ignore SA either, as the talent resides here,” he adds.
Lessem points out that home-grown South African technology solutions are highly distinguishable in comparison to those developed in other African markets.
“SA, for instance, has a strong blue-chip corporate backbone and many young businesses meeting with success have chosen to service this market – they are following a business-to-business strategy; whereas Kenya, for instance, with access to 150 million consumers via the Common Market for Eastern and Southern Africa, is finding success with a more business-to-consumer strategy,” according to Lessem.