“For many South African SMEs [venture capital] remains theoretical,” VC and co-founder of VC firm, Knife Capital, Keet Van Zyl wrote in an article for SME South Africa.
VC firms invest in early-stage, emerging SMEs with high growth potential in exchange for minority equity ownership.
Despite some advances in the country’s entrepreneurship ecosystem, venture capital investors (VCs) continue to be something of a mystery to many entrepreneurs.
Entrepreneurs are more familiar with funding options like commercial banks or government funding agencies such as the IDC or Sefa. According to the SME Landscape Report 2018/2019, 50% of SME owners who indicated that they received non-government funding, said they had sourced funding personally and/or from friends and family. This was followed by business incubators (24%) and the big banks (20%).
To help demystify venture capital, SME South Africa speaks to Tanya van Lill, CEO of Southern African Venture Capital and Private Equity Association (SAVCA), the industry body and public policy advocate for private equity and venture capital in Southern Africa.
The VC Industry in South Africa is still an emerging industry with few VCs that have limited funds to deploy. The VC industry is however growing, and we’re seeing more participants enter the industry and providing entrepreneurs opportunities to access VC funding.
The funding an entrepreneur needs or takes onboard depends on the life stage of the business and what the funding is needed for. In South Africa there are various forms of capital available to entrepreneurs whether debt, grants or equity. A VC brings more than just capital to the table, they also bring skills, experience and networks.
When taking onboard a VC, you are also taking on a partner that is going to help grow the business but in doing so, will interrogate various aspects of your business. Not all entrepreneurs are ready for this.
VC’s in South Africa traditionally invest in a business that already has some clients/revenue, and are looking for a startup that has the potential to grow, with a repeatable and scalable business model. In other words, a fast growing business that already proved product/market fit and how shown some traction.
A VC in South Africa raises third party funds from investors, traditionally in South Africa these would be high net-worth individuals and family offices. The VC then invests these funds on behalf of its investors into fast growing businesses.
As the VC industry in South Africa is still emerging, there aren’t as many investors investing in the industry in comparison to what we see in other parts of the world. There is therefore an opportunity in South Africa for more institutional investors such as pension funds and Development Finance Institutions, to start investing in the industry. As the industry matures and develops a track record, we are hoping more investors will invest into VC’s which in turn would mean more investment opportunities for entrepreneurs.
In the SAVCA VC Industry Survey in 2018, we surveyed 38-VC backed South African companies and we found the following:
• 97.1% of the VC backed businesses would not have existed or would have developed slower were it not for VC investment.
• Following the VC investment, businesses are more predisposed to increase employment which includes better remuneration.
VC stimulates growing businesses which directly benefits the economy through job creation and increased contribution to the fiscus via taxes.
Most VC deals originate via leads passed on from within the wider trusted networks of the VC. There are various startup and other VC-related events in the industry that is good for making new contacts and building up a network. The entrepreneur must also do their homework into the VC funds that are investing in SA to determine if their business is in line with the types of businesses/sectors the VC’s they are considering invests in.
And when engaging with a VC, whether in a formal meeting or running into them at an event, it is important for a startup to be able to succinctly articulate the company’s purpose. Perfect your pitch.