Local start-ups continue to encounter hindrances in accessing equity investment.
Funding limitations within South Africa’s venture capital (VC) ecosystem have once again been thrust into the spotlight, with an executive openly stating it is undercapitalised.
Patrick Krappie, executive: innovation enabling at the Technology Innovation Agency (TIA), made the comments at a recent roundtable engagement it hosted.
The TIA is an entity of the Department of Science, Technology and Innovation (DSTI), with a mandate to invest in and support innovators, entrepreneurs and SMEs to commercialise their technology innovations. The agency also has programmes that provide non-financial support to innovators and small, medium and micro enterprises.
When it comes to foundry funds, the VC sector is valued at about R3 billion, revealed Krappie. However, there are lots of problems within the VC sector, with the first being that there is not enough money to go around for those individuals with entrepreneurial pursuits, he told the audience.
“If someone approaches a VC and has a need for R50 million, the response is usually: ‘We’ll give you R20 million, if you can show us where the R30 million is going to come from.’ Otherwise, we’ll walk away.
“You also have to deal with the issues of the risk of IP [intellectual property] flight, because a great deal of the capital that is deployed into our projects is not South African money.
“As government, led by [former] minister [Dr Naledi] Pandor at the time, we said we need a sovereign innovation fund, to plug the gap of commercialisation and the lack of funding within the venture capital system.
“That fund has evolved. The department [DSTI] has been piloting the innovation fund, to be a fund of funds approach. As part of this, our issue is to deal with transformation because it is an untransformed sector, concentrated in Cape Town.
“With this fund, we’ve said we will emphasise black people and women…most of them work for these VCs but would like to go on their own and have nowhere to start. We will issue calls, fund them and allow them to run on their own. In this manner, we’re placing them on a developmental path.”
He noted that VCs in Cape Town will always spend money on people ‘going to the moon’, and not necessarily grassroots innovators.
“As TIA, we will continue to fund projects, be transactional. The main reason for this is that there are certain segments of society that still need to be protected from the risk of market failure.
“Publicly-funded IP, for example, a VC won’t bother with it. It doesn’t matter how much it has been derisked, our VCs don’t bother…and that’s why some of the richer universities are establishing their own VC funds.
“We need to look after the grassroots innovators…and be present within their journey because they are the most vulnerable within our society. The fund of funds is deploying R300 million, between ourselves [TIA], SA SME Fund and impact investor E Squared Investments.
“We’ve put aside R100 million each and are disbursing the funds to some fund managers. We have also issued our own call, emphasising first-time and emerging fund managers. This means we’ll put them on a capacity development path and not just dump money and allow them to fail.”
Injecting capital at the early stage of a businessis regarded as the cornerstone of innovation and entrepreneurial success, as well as regulatory certainty.
It has also been noted that there is a gap in SA’s VC ecosystem, where later-stage investments, such as Series A and Series B, have historically attracted more funding.
High-profile start-up founders have openly disclosed the financial struggles they encounter when trying to get their businesses off the ground.
In 2020, SweepSouth co-founder Dr Aisha Pandor previously revealed that lack of funding and VC support led to her and her husband, Alen Ribic, whom she co-founded the start-up with, to sell everything they owned to fund the business, and move back home with her parents.
Pandor, who founded on-demand cleaning services platform SweepSouth in 2014, shared her start-up journey in a panel discussion with her mother, Dr Naledi Pandor.
Noting that the first four years of SweepSouth were tough, Aisha Pandor pointed out that black women receive 0.2% of tech funding globally, despite making up 8% of the global proportion of tech founders.
“Today, I think our company is probably one of about 50 black woman-led tech start-ups globally, which has raised more than $1 million in venture capital funding. So, this space is not representative of women, it’s not dynamic and there aren’t near enough women in the forefront running tech companies.”
While it proved to be a tough start for SweepSouth, the business managed to attractfunding from several VC firms that helped fuel its growth over the years.
However, attracting funding isn’t the only barrier local inventors and start-ups have to contend with.
South Africa’s exchange control regulations have been noted as among the factors that affect the flow of foreign investment capital into the local start-up ecosystem.
In 2022, a panel discussing investing in Africa’s Silicon Valley and scaling up tech entrepreneurs agreed that the regulatory net around capital flows sometimes posed a challenge for foreign investment. The panel included former MTN chairman Phuthuma Nhleko.
According to Nhleko, capital funding looks at the opportunities, but over and above this, it looks at the environment from a regulatory perspective, in terms of the flow of funds in-and-out – how easy it is and so on.
“We absolutely need to attract the venture capital kind of finance and start-up capital that is missing in SA, as well as the rest of the African continent. As much as SA has a pretty sophisticated financial sector, that layer of capital is completely missing. That’s something we need to work on.”
In a recent interview with ITWeb TV, Naspers SA CEO Phuthi Mahanyele-Dabengwa stated that the early-stage and start-up ecosystem is of critical importance for a developing nation like SA and the rest of the continent.
According to Mahanyele-Dabengwa, the world is not short of capital, but the issue is private equity funds and a need for venture capitalist investors.
“People with start-up businesses struggle to raise capital, because the type of capital needed is not debt capital but real equity, or even grants for some businesses.”
