Key Ingredients Needed to Bolster Venture Capital in South Africa

A lot of effort has gone into establishing a conducive environment for the venture capital (VC) industry to thrive in South Africa, and there is growing international interest in deploying capital towards early and late-stage investments in Africa.

The continent brought in deals valuing $350 million in early 2020, but the pandemic is expected to decrease venture capital investments in Africa by 40% in 2020.

Support from industry bodies such as the Southern African Venture Capital and Private Equity Association (SAVCA) has helped a number of players in South Africa’s nascent VC sector have a more unified approach to VC as an asset class. The 2015 development of 12J Venture Capital Companies, which incentivise high net worth individuals to plough capital into small businesses in return for tax breaks, has resulted in $648M being raised and the creation of around 10,500 jobs.

Cape Town was named among the world's top cities creating an environment for start-ups to thrive, according to StartupBlink. At least, 60% of the country´s startups are based in the city, and it remains the hub for tech companies and venture capitalists.

Naspers established the Naspers Foundry, an early stage funding initiative, which has committed to investing $965M into tech start-ups in South Africa, with a focus on those solving big societal needs in the country.

The Foundry´s initial investment was $2M into SweepSouth, an online platform matching companies or private customers to home services such as cleaners and gardeners. Since 2014, SweepSouth has created more than 10,000 jobs for people who were previously unemployed. In 2020, Naspers Foundry invested $5.6M into agritech startup Aerobotics, which uses AI drones and software to help farmers manage crop health and predict yields. The company operates in 18 countries across Africa, the Americas, Europe and Australia.

While these have been some progressive milestones reached through venture capital funding, many funders and SME´s feel the VC industry in South Africa still has a long way to go.

The Org engaged with industry players to get their perspective on how the VC landscape can become more inclusive, and help create a thriving ecosystem for SMEs and high-growth, high impact businesses in the country.

Harry Apostoleris was working in private equity for over six years before co-founding Umkhathi Wethu Ventures in 2017. He said venture capital was young in South Africa, and still deemed risky by investors who had alternative assets with more secure returns. Even in economies with more established VC ecosystems, such as the U.S., less than one percent of firms have raised money through venture capital.

Umkhathi Wethu´s approach to generating value has been to partner with existing funding vehicles, such as Allan Gray´s VC arm, and provide early-stage investments to firms. Those firms include Peach Payments, a payment gateway solution, and Inclusivity Solutions, a digital microinsurance company. Apostoleris’ hope is to see better economic prospects in South Africa through higher growth in GDP, which he says will attract more capital and lead to more wealth creation and a rise in entrepreneurship.

After selling her U.S.-based ecotourism company Under Canvas, Sarah Dusek had a strong inclination to move to South Africa. There, she established Enygma Ventures, a fund that provides early-stage investments to women-owned businesses.

“My reason for becoming an investor was the frustration of being a female entrepreneur and encountering only male investors who didn’t understand me and my business,”Dusek said. Her motivation wasn’t just to create a more favourable environment for women entrepreneurs to get funding, but to get more women investing.

Enygma provides early-stage capital of between $200K to $1M and they have made ten investments to date in companies in the education, FMCG and technology sectors in Southern Africa. Dusek highlighted how it’s not only the gender bias that needs to be addressed.

“There is an unfortunate statistic when you look at VC investments on the continent where most of it still went to white male expats, almost 95% of it, which is huge,” Dusek said. “If we only keep investing in white male expats, we aren’t going to solve the problems of the continent. There are problems that only Africans can solve and there is plenty of talent and highly capable human beings with great ideas here.”

She said locals needed to be empowered to take their idea forward and access funding. To address this need, Enygma Ventures has partnered with the Africa Trust Group. Together they are creating a platform called Start up Circles, which helps entrepreneurs from all over the continent make their ideas more appealing for investment by breaking down the key metrics investors look for.

To explore the inherent biases that are prevalent in the funding landscape, the SA SME Fund wanted to understand why VC in South Africa was not diversified by age, gender, or race, and why capital kept circulating in the same circles. Digital Africa Ventures was born out of the need to answer these questions.

The SA SME Fund seeded the venture capital firm, which is tasked with funding primarily Black-owned companies building digital solutions in Africa, with $2M. Co-founder Thandeka Xaba told The Org that very few VCs have the lived experience of an entrepreneur trying to raise funding, and that was the strength the team brought to the table.

Addressing investor biases, Xaba said people were inherently drawn to relatable people who shared common experiences, adding it was part of the human condition. She said the relatability factor negatively impacted early-stage ventures the most, where the entrepreneurs don’t have a track record and investors need to use their gut to decide whether to invest or not.

Xaba believed there should be a greater focus on making patient, philanthropic capital available, through programs like the Allan Gray Orbis Foundation´s entrepreneur in residence program, which incentivizes young people to take up the risk that comes with the entrepreneurial journey.

Yongama Skweyiya and Zolani Madikazi established their $10M VC fund Isimovest to invest in early stage, scalable and capital-efficient businesses focused on consumer-focused solutions. Madikazi had been working at established VC firm Knife Capital as an associate analyst, but felt not much of the firm's focus was on funding entrepreneurs who were solving problems experienced by 80% of South Africans, of whom 50% live primarily in the townships.

“We have noticed that there is a huge opportunity in the townships for tech-enabled businesses that will transform communities there and we´ve found it quite difficult to translate this market opportunity to traditional VC firms that are primarily white-owned,” Skweyiya said. The pair have recently acquired a 5% equity stake in online food delivery and payment ecosystem Jinjer, which is built primarily for the township economy in South Africa with the aim of scaling into the rest of Africa.

For entrepreneurship to flourish in South Africa, Skweyiya believes in building ecosystems that improve the quality of the transactions. “The South African VC system is a lot more risk averse than in America, so we need to invest in building partnerships as investors with the entrepreneurs to de-risk their proposition. There is a huge people development component in that equation,” Skweyiya said.

The aspiration for Isimovest is to be like the U.S. based VC firm Harlem Capital, leveraging knowledge and social capital to change the narrative that Black founders and entrepreneurs can build valuable businesses.

To corroborate with the key points from discussions with the investors, The Org spoke to Vuyo Radebe. Radebe has run a private equity firm full time and is now the founder of Yethu Africa, a tech startup providing access to delivery services for the underserved African township and rural consumer market, through existing commuter taxi networks.

Radebe believes the greatest market opportunity is to design products for Africans made by Africans, and to do so with insight and deep knowledge about the market. “If the investor has not lived with the 80% of the people in the local market, then his view of the opportunity is going to be limited. You need capital that trusts the intuition of the people designing products for this part of the economy,” Radebe said.

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