2020's silver lining: Venture capitalists eager to fund start-ups

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While funding for businesses has dried up because of Covid-19, for most venture capital investors, it's business as usual. Photo: Getty Images.
While funding for businesses has dried up because of Covid-19, for most venture capital investors, it's business as usual. Photo: Getty Images.
  • The Southern African Venture Capital and Private Equity Association (SAVCA) released its 2019 Venture Capital Industry Survey on Thursday.
  • During the presentation of the survey results, SAVCA, which spoke to venture capital fund managers after the lockdown, said they are continuing with business as usual.
  • The economic aftermath of Covid-19 has also seen some managers grow appetite for investing in early-stage ventures.

Venture capital, the industry that funds ideas and start-ups that most investors would rather not, is continuing with business as usual, despite funding drying up around the globe because of Covid-19 jitters among investors.  

In South Africa, venture capital is relatively small compared to private equity or SME finding provided by banks. In 2019, venture capital funded 162 deals to the value of R1.23 billion. Just over half of this money went to businesses who needed seed funding or who are still at start-up stage, the latest Venture Capital Industry Survey conducted by the Southern African Venture Capital and Private Equity Association (SAVCA) showed.

But the sector is increasingly becoming an important source of funding for tech-based businesses in the country, including agri-tech and fintech, a sector that has shaken up the financial services industry, making digital-only banks and unconventional payment systems become a norm.

Stephen Lamprecht, founder of Venture Solutions who was involved in the compilation of the SAVCA survey that was released on Thursday, said while 2020 has turned many industries on their heads, venture capital deals are continuing unabated because most of the money is raised upfront.

"Most of the investors reported that they were busy spending the money that was already raised," he said. Lamprecht added that apart from deals in the hospitality sector, retail and manufacturing, where activity had to stop during the early days of the lockdown, the rest of the investors say "it's business as usual" and they don't expect a negative impact.

"I think where we might see a difference, not necessarily next year but in years thereafter, would be in the fundraising point of view because fundraising is generally difficult and this year it could be even more challenging," he said.

Where's the money?

The SAVCA survey report showed that fewer and fewer venture capital deals are being funded with money raised from the public sector. Only 26% was funded through public sector money compared to 74% in 2014. Big corporates have become the main source of venture capital funding, followed by the Section 12J investments, while local pension funds and insurance companies are choosing not to venture into this space.

SAVCA CEO Tanya van Lill said SA's venture capital industry looks set to continue with its winning 2019 streak. Last year, the industry enjoyed one of its best years, as investors were able to exit 38 deals, more than triple the exits recorded in 2018.

In venture capital, when investors exit deals they funded some years ago, it usually means that the businesses they funded are now self-sustaining and making a profit, which allows the investors to take their money and invest in the next person who needs financial backing.

But exits could also happen when investors decide to cut their losses on a non-performing investment or to close unprofitable businesses. But in the case of deals that SAVCA members exited, 50% were profitable, giving investors R830.5 million returns to potentially plough into the next big idea.

"There is no doubt that the current health and subsequent economic crisis will reflect in next year’s results; however, we can find some solace in [the 2019] results, which suggest a strong foundation and an overall positive outlook of the venture capital industry," she said.

Lamprecht said the current state of South Africa's economy has increased appetite for early-stage investments among some managers, who might want to back industries that have emerged as gainers under the current crisis.

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