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Institutional Capital needed to grow SA Venture Capital sector
Innovation to drive economic rebound
The 2021 SAVCA Venture Capital (VC) Conference was held on 15 November 2021. In a continuation from the March private equity conference, the overarching theme for the venture capital conference was “re:imagine” as we work towards re:imagining the role VC can play in rebuilding our economy.
The topics covered ranged from assessing how government can support the VC industry and the practical challenges faced by institutional investors wanting to invest in VC, to the business case for VC and how it can be used to make a positive impact to society in South Africa.
Some of the broad themes to come out of the insightful discussions included the need for improved education about the VC sector, increased collaboration and knowledge sharing with partners within the industry and those outside of it, and more government support, especially for early-stage ventures.
Government creating a foundation for innovation
The first session of the day saw Ketso Gordhan, SA SME Fund CEO interview Mmboneni Muofhe, Deputy Director-General: Technology Innovation (Department of Science and Innovation). They discussedhow government can re:imagine its role in supporting the VC industry.
Muofhe highlighted the strong foundation that the South African government has laid for innovation by investing in research and development (R&D). He cited the latest South African Research and Development Survey that shows the South African government funds more than 50% of the country’s R&D. This contrasts to other countries where governments’ contributions are typically closer to 33%. “We need to continue to strengthen R&D as a foundation for a thriving VC ecosystem,” he said.
He went on to illustrate the urgent need for innovation in SA. “There is no better time than now to strengthen the VC ecosystem, support start-ups and those coming up with good ideas and new solutions. Ultimately, we need innovation to get us out of our economic rut,” he said.
To invest or not to invest in VC?
Next, there was a debate on the practicality of investing in the South African VC industry for institutional investors.
The opposing front argued that high VC fees, illiquidity, volatility, difficulties with valuation and regulatory requirements were the main impediments to VC investing.
Mathabo Zandile Makhaya, Chairperson – Investment Subcommittee: Mineworkers Provident Fund,spoke about the need for capital allocators to improve their understanding of the VC industry. “There’s a gap in education in that capital decision-makers don’t always understand VC structures. The negatives of VC investing are well-known but we need to learn more about how to work around these issues,” said Makhaya.
Nchaupe Khaole, Chief Investment Officer: Mineworkers Investment Company (MIC), who sat on the proponents’ side of the debate,responded thatcollaboration is a way to mitigate some of these perceived risks. He said: “Because the industry is at such a nascent stage of development, industry players are very open to idea sharing to drive the industry forward.”
The Business Case for VC
The penultimate session of the morning saw a panel comprising a range of experts agreeing that there is definitely a business case for VC in South Africa.
Ketso Gordhan, CEO: SA SME Fund commented: “Backing entrepreneurs that are going to invest in science and tech is a key part of the economic solution in South Africa.” He alluded to a need to re:imagine how to achieve scale in the VC industry. “We need three things to happen in order to achieve scale: we need more seed funding, to convince institutional investors to allocate to VC and to encourage partnerships, especially between the VC industry and government, in order to maximise use of South African intellectual property.”
There was a general feeling that while the industry has a long way to maturity, growth needs to be inclusive. We’re making progress on this front, but it’s not enough. Antonia Bothner, Capital Markets Lead at EndeavorSouth Africa said: “There does need to be more inclusivity and it’s not just in South Africa, it’s global. What’s interesting from a gender perspective is that of our 30 entrepreneurs that we work with in our main portfolio, we have six female founders. Four of these produce 75% of the jobs, which is amazing. While this is just one statistic, it does indicate that we are seeing inclusive growth in some places”.
SA success stories needed to convince institutional investors
Delegates were also treated to a session hosted byTanya van Lill, CEO: SAVCA in whichshe interviewed Doris Blasel, Partner Alternatives Venture Capital at Siemens Fonds Invest GmbH, who provided a case study of how Siemens successfully invests in VC, specifically early-stage.
She provided an interesting breakdown of how Siemens is diversified across geographies. More than 50% of her portfolio is invested in the US which is the most experienced VC market in the world. There is no exposure to either Africa or South East Asia.
Commenting on what would change a pension fund like Siemens’ mind on investing in Africa she said: “You want to see some successes in the VC market you’re going to invest in, you want to see an environment where these successes are repeatable,” she said. “This means you need to have critical mass of VC funds and entrepreneurial activities and an institutional investor base that can invest across stages.”
The final session of the day was a panel discussion on the case for a greater focus on African venture impact.
Anton Baumann, Co-Founder: Empowerment Capital Investment Partners emphasised the importance of investing into the SME sector. “It’s globally recognised as the engine of job creation. We must support the ‘missing middle’. In developed countries, as much as 80% of GDP comes from companies that hire between 10-20 people,” he said.
Gladwyn Leeuw, General Partner: Kingson Capital, commented on the myth that investors must sacrifice returns if they invest for impact. “There’s a misconception that if you invest for impact you must accept lower returns. This is simply not the case,” he said.
Focusing on impact measurement, the panellists were asked what constitutes impact for them and the various answers underlined the point from Sibonakaliso Mavuka, Manager – Special Projects: Tshikululu Social Investments, that “There is a lack of standardisation in how to report impact.”
Mabinty Koroma-Moore, Founder and CEO: Legacy Impact Venture Enterprises Africa (LIVE Africa) said: “It’s important to identify key indicators to measure in more detail the dimensions of social and environmental impact. For example, when assessing employment, look at the types of jobs, who’s being employed, and other influencing factors.”
New feature: showcase competition
A new feature of the SAVCA VC Conference was this year’s showcasing of six early-stage VC firms and their investee companies – Aura, Flex Club, Matter, FinFind, Homefarm Designs and Tripplo – who demonstrated how their deals make a positive impact on society and the environment.
The showcasing component of the conference was held as a competition, with delegates invited to vote for their favourite early-stage start-up. Tripplo, a digital platform that facilitates the safe and efficient movement of road freight cargo across SADC, was the winner.
VC FMP Launch Announcement The conference closed with an exciting announcement: the launch of the SAVCA VC Fund Manager Programme (VC FMP) in partnership with the SA SME Fund and TiA. “The aim is to grow and transform the VC fund manager landscape and in doing so attract more capital to the asset class,” said Thiru Pather, Investment Principal at SA SME Fund.