Vital boost With a significant increase in funding, the venture capital landscape signals good news for SA’s entrepreneurs Every month SA venture capitalist Clive Butkov receives more than 100 pitches on average, every single one from a hopeful entrepreneur seeking funding. ‘We only actually meet with about 10,’ says the former CEO of Kalon Venture Partners and co-founder of the recently launched venture capital (VC) firm Conducive Capital. Having been in the industry for roughly four decades, he has helped grow more than 100 businesses and continues to look for ‘the brilliant minds and ideas of the entrepreneurs based in South Africa, who create a very exciting investment opportunity for VCs in both early and late stage’. Butkov says that ‘for us the most promising ones are AI-first companies in deep technology across various sectors. We also like some of the advancements made in jobtech, edtech and virtual reality/extended reality’. This ties in with the findings of the South African Venture Capital Association (SAVCA), whose 2024 VC Survey revealed that ICT (which combines several active sub-sectors such as fintech, edtech, software, agritech, e-commerce and online markets) continues to be an attractive sector for VC firms. ICT captured nearly 88% of the total capital flow, led by fintech with 18.3%. Other popular VC investment sectors are food and beverage, consumer products and services, business products and services, and healthcare. ‘There is a general growth in alternative investments in South Africa, including in private equity [PE], private debt and venture capital investment,’ according to SAVCA CEO Tshepiso Kobile. ‘All three asset classes experienced growth in 2023, notwithstanding the ongoing geopolitical concerns, which typically result in a risk-off approach by investors and thus affect fundraising, as well as a decline in VC activity across the continent and globally.’ PE fundraising – which typically focuses on more mature companies, while VC tends to invest in higher risk, early-stage start-ups with high growth potential – reached a 13-year high. While PE investments have covered a broad spectrum of sectors, SAVCA found that the energy sector has dominated in recent years, followed by manufacturing and infrastructure. ‘This is likely driven by escalating concerns around climate risks, which is a clear focus area for investors and an area of immense opportunity,’ says Kobile. ‘It’s interesting to note, though, that the PE firms are not restricting themselves to only greenfields renewable projects, but also exploring opportunities across the value chain and outside South Africa.’ When it comes to picking out the most promising VC and PE deals of 2024, she says it’s difficult to narrow down the list. ‘Many deals are demonstrating the resilience of the asset class, be it successful exits of companies that are leaders in consumer and business services sectors, including a notable VC exit; sizeable fundraises by VCs; a number of acquisitions by members; investments in the infrastructure sector; and so on.’ She says the industry has started to share these good news stories, which is bringing more visibility into the dynamic activity that was always there but maybe not as visible to the broader public. Recently, the home-grown Quicket made headlines when it was bought for an undisclosed sum by US ticketing giant Ticketmaster. Founded in 2011, Quicket is a pan-African self-service ticketing platform that allows anyone organising an event to deliver an efficient ticketing experience. According to TechCental, the acquisition marks an exit by local VC firm Knife Capital from its investment in Quicket. Knife Capital had invested in 2017 to streamline the ticket company’s local service offering and focus on growth in key African markets. Quicket will continue as a standalone business unit in Cape Town, led by its existing MD. The deal is reportedly ‘a perfect fit’ for the firm’s next growth phase. ‘Africa is exhilarating from a start-up view point – these are outstanding entrepreneurs solving many complex problems, and I see risk capital looking for these opportunities,’ says Jonathan Marks, an entrepreneur, professor and faculty lead for the MBA Entrepreneurship Focus at Gordon Institute of Business Science. ‘I’m also seeing that capital is coming with more significant support for entrepreneurs; beyond business support or market development, but also for leadership and human capital development.’ What people may not realise is that there are many more African rather than SA ‘unicorns’ (start-ups valued at $1 billion or more), according to Marks. The latest is Nigeria’s Moniepoint, a comprehensive, empathy-driven fintech solution that addresses the specific needs of individual and business users. ‘The majority of these fintech businesses speak to the opportunities created by legacy banks that are unable, or unwilling, to serve complex markets in Africa,’ says Marks. He cautions that SA is being left behind with VC funding. For example, Kenya raised $437 million compared to SA’s $125 million during the first three-quarters of 2024. Kobile agrees that a common challenge across both VC and PE is the pedestrian growth in capital allocations to these asset classes in SA. ‘Both asset classes have, over several years, been held back by the multitude of global and local macro-economic events, including the stagnant growth, state capture, the COVID-19 pandemic, load shedding and others,’ she says. Does that mean there’s not much risk appetite in SA? ‘Most VC/PE investors are essentially fund managers in that they are not investing their own money – like angel investors do. So their investment decisions are always cautious,’ says Marks. ‘There is a necessary balance between taking on risk, which would affect the cost of capital and the future return, and ensuring good portfolio growth and the future reputation of the fund. I don’t see much change in the market in this regard, as the risk exposure is often dictated by those investing upstream into local funds.’ To showcase what can be achieved with VC/PE funding, SAVCA’s annual industry awards celebrate SA-headquartered portfolio companies that have thrived as a result of PE and VC investment. All nominated businesses have one thing in common – they have developed unique solutions to problems that face communities and society at large. For example, the 2023/24 start-up award winner, HearX, is on a mission to democratise ‘hearing’ health. The health-tech company launched a suite of digital solutions to detect, diagnose and treat hearing loss cost-effectively. With the help of VC funding, the founders were able to expand and help more than 2.4 million people in underserved communities across 190 countries. Another start-up called Lipa Payments won the new Chairman’s Award for ‘commitment to impact beyond the commerciality of the business’. The fintech firm enables contactless payments via cellphone, specially designed to meet the needs of micro-enterprises in townships and rural areas where connectivity is unstable. Marks has noted increased interest from international investors in the more mature VC/PE space. ‘South African – and African – funds have raised considerable funds for local investment, which surely signals a positive view of African investment and the growth potential,’ he says. ‘This may be driven by two broad trends – a maturing of the start-up landscape in SA/Africa as businesses become more “investable”, and an increased knowledge of and interest in investing in Africa from international investors or providers of capital.’ According to SAVCA, the 13-year high in PE fundraising in SA was fuelled by allocation from international development finance institutions, and strong increases from pension and endowment funds (R4 billion to R7.4 billion), with a bias towards larger funds. This is a positive move towards seeing VC as a viable asset class for institutional investors, says Marks. ‘Most large institutions are risk-averse and prefer to avoid being exposed to early-stage risky investments, which may also be outside their investment mandate anyway. The increase in institutional funds also expands the pool of available VC funding, which is excellent news for entrepreneurs.’ He adds that investing institutional capital, primarily via corporate VC, means that entrepreneurs (theoretically) have access to skills, networks and markets via that company. Pension and insurance funds play an important role as sources of long-term capital. ‘There is significant scope for them to diversify their portfolios, generate a liquidity premium, drive more impact and gain exposure to assets that may not always be available in the listed environment,’ says Kobile. ‘The regulations have enabled this through, firstly, increased thresholds for investment into PE and infrastructure. And, secondly, by putting greater emphasis on income security during retirement, which longer-dated assets – such as those found in PE are well suited for. Conditions are therefore ripe for an increase from the current 4% of assets allocated to unlisted private markets.’ Clearly, there is money available for start-ups and more mature companies, but for entrepreneurs seeking funding, it’s not enough to have a brilliant idea. As Butkov puts it, ‘ideas are a dime a dozen and there are very few million-dollar entrepreneurs who can take an idea and build a sustainable profitable business’. Venture capitalists don’t want to invest in ‘me-too technology’ (that looks exactly like something that’s already been done), he told ITWeb. Instead, he says their product must be 10 times better than everything else in the market. Another critical part of every business pitch is knowing your competition, value proposition and competitive advantage. Ultimately, entrepreneurs must understand a potential investor’s expectations, because if they don’t share the start-up’s vision, the funding on offer might not be worth it. Research on SA edtech start-ups found that start-ups are more successful by remaining faithful to their objectives above all else. With the right pitch, entrepreneurs should be able to pique the interest of venture capitalists such as Butkov, who may then start engaging with more than only 10 out of the 100 entrepreneurs who ask for funding every month. By Silke Colquhoun Image: Gallo/Getty Images