The performance of the venture capital (VC) sector in South Africa defied the downwards trend in annual deals seen since 2020 as investments hit the R3 billion mark in 2023, displaying the level of resilience that has since become synonymous with the start-up ecosystem.
The Southern African Venture Capital and Private Equity Association (SAVCA) yesterday said the local information and communication technology (ICT) stole the show once again, capturing investor interest and reiterating the sector’s position as a frontrunner in economic development and innovation.
This was one of the key insights to emerge from this year’s SAVCA VC Survey Launch 2024 – an annual research initiative by the SAVCA launched last week in Cape Town.
SAVCA CEO Tshepiso Kobile shared her ongoing conviction that the VC industry must continue to play a pivotal role in supporting high-growth start-ups and early-stage businesses, while also enabling innovative solutions to our unique challenges as a country.
“The need to continuously reflect on this question and keep a close eye on the development of the sector is why research like the VC survey is so critical,” Kobile said.
“Today, equipped with the most recent data, I am proud to answer that yes, VC is alive and on a positive trajectory in South Africa – both in terms of active and sizeable deals.”
This year saw total capital flow to start-ups reach more than R3bn for the first time since the launch of the survey 14 years ago in 2010.
Holistically, since inception of the survey, the South African VC asset class had R10.73bn invested in 1 106 active deals.
Activity by the number of deals has remained stable, with a slight decrease in 2023 as the number of entities receiving funding slowed down, with more investments going into the same companies.
Notwithstanding the decrease in number of deals in 2023 (184 compared to 195 in 2022; and 186 in 2021) deal activity remained higher than the pre-Covid-levels of 162 in 2019; and 167 in 2020.
“Across the continent, we have seen VC gain popularity as an investment strategy,” Kobile said.
“Our economy depends on this sustained investment into our entrepreneurs and into innovative solutions that can help leapfrog South Africa into a more competitive and inclusive economy,” he said.
Similar to the previous year, a noticeable feature was the growth in co-investment activity, demonstrative of corporations and foreign investors investing alongside early-stage fund managers.
The ICT sector, which combines several active sub-sectors such as Fintech, EdTech, Software, eCommerce and Online Market continued to outweigh the investment activity in other sectors.
ICT as a primary sector almost doubled in the number of investments compared to 2022, amounting to 87.6% (48.1% in 2022).
Fintech remained the front-runner by value (18.3%) and number (14.8%) of deals, followed by Software at 9.8% of the total number of deals (6.7% by deal value).
eCommerce made a significant jump from 2022-levels – a testament to the continued uptick in online shopping that was seen and rapidly developed during and after the pandemic years.
In terms of the types of fund managers engaging in active deals, independent funds led the charge in 2023 at 66.2% of the total number of deals in the active portfolio of VC investments – up from 61.8% in 2022; and 57.8% in 2021.
This was followed by captive corporates at 34.3%, with angel investors making up a small proportion of active deals at 7.1%. Interestingly however, the average deal size of VC transactions by angel investors amounted to R6.15 million – a relatively large value when compared to the average deal size coming from independent funds, which currently equate to R7.47 million.
Safeera Mayet, head of policy and regulatory affairs at SAVCA, said they have been at the forefront of engagements with the government to create the most enabling working environment in which VCs can thrive and operate.
“The most significant development of late has been the implementation of the Remote Work Visa which allows individuals employed by foreign companies to work remotely in South Africa. This legislation will go a long way towards driving growth and innovation, as well as allowing foreign workers to impart and share knowledge through their interactions with South Africans,” she said.
“The next priority on the list is the South African Reserve Bank exchange control regulations that apply to technology and telecommunications (TMT) companies. In essence, SAVCA and its partners have been paramount in calling for the relaxing of exchange controls in order to attract foreign investment into TMT companies and to grow the capital base available for VCs,” Mayet said.
BUSINESS REPORT