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Venture Capital has the power to address SA challenges – but more Investors are needed
There is a strong business case for venture capital (VC) investing in South Africa, not least because of the opportunity it presents for positive social and economic impact. This was discussed extensively by a number of key industry players at the Southern African Venture Capital and Private Equity Association (SAVCA) VC Conference 2021 held in Cape Town last week.
VC’s potential to create jobs
SA’s dire economic situation is well known: our unemployment figures are amongst the highest in the world, we are one of the most unequal societies globally and many of our people live in poverty. VC may represent part of the answer, but more notice needs to be taken of the industry, especially by institutional investors, if it is to make a real impact.
“The big picture is that we have 64% youth unemployment,” said Llew Claasen, Co-Founder and Managing Partner at Newton Partners. “VC promotes entrepreneurship for people who want to change their circumstances.”
Ketso Gordhan, CEO of SA SME Fund commented: “Backing entrepreneurs that are going to invest in science and technology is a key part of the economic solution in South Africa,” he said.
It’s not just government and development funders’ responsibility to create jobs. In fact, as Gladwyn Leeuw, General Partner at Kingson Capital, pointed out, there’s not enough capital from these two sources to solve South Africa’s social issues. “Government is under pressure financially and even the private sector is struggling due to the country’s ratings downgrade,” he said.
The small-to-medium enterprise (SME) sector, where VCs typically invest, is an often-underappreciated mechanism by which an economy can create jobs. Anton Baumann, Co-Founder of Empowerment Capital Investment Partners, emphasised the importance of the SME sector. “It’s globally recognised as the engine of job creation. For example, in developed countries, as much as 80% of GDP comes from companies that hire between 10-20 people,” he said.
According to Leeuw: “Not enough value is placed on venture impact for the economy in terms of job creation and new industry development.”
In part, this is because misconceptions about VC abound. For example, there’s a mistaken belief that the technology being developed by VCs and other start-ups will cannibalise jobs. Leeuw believes this is unfair.
“Yes certain low-skilled jobs may be negatively impacted by some technology, but there’s significant potential for job creation in other, possibly newer, sectors. We just need to upskill our labour force to be able to take advantage of this,” he said.
Importantly, we need to address a pervasive skills mismatch. According to Sibonakaliso Mavuka, Manager – Special Projects at Tshikululu Social Investments: “There’s a gap between the skills the market requires and the skills school and university leavers are being equipped with. It’s up to us to help close that gap,” he said.
While the case for investing in South African VCs may be compelling, there are a number of structural impediments to doing so. These put many institutional investors off and, as a result, there is a significant gap in funding, resulting in VCs struggling to scale effectively.
According to Claasen, SA is the most difficult market in Africa to invest in. “In the last 18 months, we have invested heavily in other African markets, but we see South Africa as the hardest African market to invest in and are yet to invest here.”
Some of this comes down to a widespread lack of knowledge about how South African VCs operate compared to other markets. But others pointed to a lack of quality accelerator and incubator programmes.
Gordhan said: “While there are some notable exceptions, such as Grindstone and Endeavor South Africa, on the whole there’s a huge gap in the quality of accelerator and incubator programmes in South Africa.
“An informal survey of 30-40 of South African accelerator and incubator programmes revealed that none had been able to produce companies which had managed to raise more than R10 million from third party funders,” he said. “It’s crucial that entrepreneurs get the right kind of support, such as access to market and funding, in order to succeed.”
What else does the industry need?
There is a general feeling that while the industry has a long way to maturity, there is significant upside opportunity to attract private capital to stimulate job creation and economic growth. The industry is definitely making progress on this front, according to Antonia Bothner, Capital Markets Lead at Endeavor South Africa. “For example, our main portfolio of 30 South African Endeavor entrepreneurs has successfully raised over R5 billion so far in 2021, with R2 billion raised in 2020. There’s been a clear uptick in interest among both local and international private investors.
“What’s more exciting is the revenue growth and job creation that our main portfolio is generating: 63% p.a. and 27% p.a. respectively from 2017 to 2021. And these companies are driving inclusivity – over 80% of the jobs created are held by black South Africans. We not just talking a hand full of jobs, these 30 companies currently employ over 13,000 people.
“What’s interesting from a gender perspective is that of these 30 companies, there are six female founders. Four of these female founders produce 75% of the jobs in our portfolio, which is amazing.
“While these are just two statistics, they indicate that high-growth tech entrepreneurs are significant drivers of inclusive growth, particularly those with female founders”.
From Gordhan’s perspective, we need three things to happen in order for the VC industry 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,” he said. Tanya van Lill, CEO of SAVCA concludes: “The VC sector in South Africa is growing and is contributing positively to social and economic development, but it needs more support from big investors to make the impact it has the potential to.”