A low-growth economy, high unemployment and the mounting pressures posed by the ongoing energy crisis have continued to weigh heavily on start-ups in Southern African over the past year. Early-stage investors likewise reported that these challenges have had a material impact on the local venture capital industry, with an overall decrease in the value of deals during the 2022 period. The local information and communication technology (ICT) sector, spearheading efforts to digitise the South African economy, has retained its position of attracting investor interest and confidence, despite the subdued investment climate.
This was one of the key findings to emerge from the 2023 Venture Capital (VC) Industry Survey, published by The Southern African Venture Capital and Private Equity Association (SAVCA). Speaking at the annual launch of the survey was SAVCA CEO, Tshepiso Kobile, who believes that the results of this year’s survey reflect that the sector is indeed experiencing trying times, yet the business case for it remains strong, with some attractive opportunities for investors.
In a country that has no shortage of successful entrepreneurs, she believes that the role played by venture capital (VC) in supporting high-growth, early-stage businesses has not only become more pronounced but has also become an effective approach and means to address deepening socioeconomic challenges.
Of notable interest was the fact that although the value of VC deals concluded during the survey period (2022), showed a 14.5% contraction from the year prior, the 2023 survey marked the fifth consecutive year that the industry has attracted over R1 billion in early-stage investments. At 48.1%, South Africa’s ICT sector represented the largest combined sector by number of deals in 2022.
Likewise, the local ICT sector held the largest allocation by number of active deals held in portfolios at the end of 2022 (40.6%). A detailed look at the spread of ICT-related investments revealed that the leading sub-sectors within this category were FinTech (12.3%), Software (8.9%), Telecoms (4.0%), AgriTech (3.9%) and Electronics (2.3%).
Furthermore, the overall allocation of capital based on the primary sectors of the economy, showed an abundance of ICT deals in active portfolios (37.7% by value, 40.6% by number of deals). This was followed by deals involving Consumer Products and Services (18.0% by value, 14.1% by number) and Business Products and Services (13.3% by value, 15.4% by number).
The 2023 survey found that investment sectors involving education technologies (or ICT EdTech) featured prominently in the 2022 investment year but makes up a small percentage of the overall portfolio allocation as it has only recently been introduced as an investment sub-sector.
For Kobile, these findings are indicative of the high level of innovation that exists within Southern Africa’s entrepreneurial ecosystem. “Of particular relevance is the fact that the FinTech category overtook the Food and Beverage category this year – a testament to the sector’s ability to leverage technology to address the mass market and existing inefficiencies in delivery of services.
While fund managers and institutional investors within the VC sector remain steered by the commercial viability of deals and fiduciary duties, the ICT sector also holds promise as a bedrock for social development as evidenced in areas such as education, by providing much-needed access to information and e-learning resources”.
Startups in the portfolios of South African VC fund managers pursue advancements in healthcare, governance and various industries through technological solutions. As a driver of innovation and efficiency, the sector can position South Africa on the global stage – attracting investment and fostering international collaboration.”
Speaking at a panel discussion which formed part of the SAVCA VC Industry Survey launch event was Kabelo Themane, Senior Investment Associate at small business development firm, Edge Growth. Echoing Kobile’s sentiments, Themane asserted that a dual focus on return-on-investment and impact involves the need to strike a delicate but important balance.
As she elaborated: “The unique challenges that face the Southern African market has warranted a closer look at the way ‘impact’ is defined. For Edge Growth, ‘impact’ needs to go beyond the bounds of ESG (Environmental, Social and Governance) and should also touch on issues that affect society at a grassroots level. Some of these issues include unemployment, the global sustainable development goals, imperatives such as financial inclusion, the emergence of the green economy and how to enable the way forward for education in the country.
These objectives can be met by deploying investment into homegrown businesses and truly investing in their growth – not only from a financial standpoint but in terms of mentorship, ongoing support and training.”
Motivated by the general findings of the survey, including funds under management (FUM), overall investment activity and exits, Kobile holds high hopes for early-stage investments heading into the new year. According to the survey’s findings, the bulk of available funding was allocated to new deals, which comprised either investment into start-ups, or the first investment from an investor. This trend can be attributed to an increase in follow-on funding into existing portfolios reported for the 2022 investment year.
Reflecting on the 2023 SAVCA VC Conference, which took place in Stellenbosch the day after the VC survey launch, Kobile expressed her belief that this important conversation must be taken forward and must remain a priority for all industry stakeholders. During the conference, local and international institutional investors, fund managers, entrepreneurs, advisors, and policy makers shared their ideas on the future prospects of the VC sector in Southern Africa.
To view the complete 2023 SAVCA Venture Capital Industry Survey, please click here: SAVCA-VC-Survey-2023-Electronic.pdf
