Venture Capital Report by SAVCA | #eBizInsights | Erika van der Merwe

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The South African venture capital (VC) industry now represents almost R2bn in assets under management, with healthy confidence levels that are commensurate with reported rising deal activity, a pleasing exits record and a significant increase in VC fund managers and industry professionals.savca

These findings are encapsulated in the SAVCA 2015 VC Survey, which covers VC-type transactions that took place between January 2011 and July 2015, and follow two previous VC studies produced by the Southern African Venture Capital and Private Equity Association (SAVCA), in 2010 and 2012.

The latest survey reveals that in the 2011-2015 period, 21 public and private VC fund managers and angel investors completed 168 new deals amounting to a total value of R865 million. As at July 2015, total VC assets under management were valued at R1.87 billion, comprising 187 deals.

SAVCA CEO Erika van der Merwe says: “The survey results confirm that the South African VC industry continues to expand in line with the increase in entrepreneurial high-tech activity in the market, a deepening pool of skills and experience, a growing exits track record, and lower barriers to entry for VC-type deals, especially for those that target businesses that involve the use of digital technology (e.g. online, e-commerce and new media) to expand service offerings.”

Uptick in deal flow activity, a decline in per-deal values

The survey indicates an uptick in the number of VC deals done, from the 11 deals struck in 2012, to 18 in 2013, 34 in 2014 and 43 annualised in 2015 to date.

In line with international trends, the average deal size has declined in recent years: The average transaction value has reduced from R9.3m over the 2009-2012 period, to R7.3m during 2011-2015, a decline of 22%. Lean approaches to starting new businesses, which translates into smaller quantities of capital required for transactions, is a key reason for this development. Another reason is the dwindling deal activity by public fund managers and public-funded entities, given that these entities in the past typically have done larger transactions than private sector managers.

Erika van der Merwe of SAVCA

Erika van der Merwe of SAVCA

Pleasing exits performance

The survey shows that 56% of fund managers with deals on their books had exited from at least one investment during the 2011-2015 survey period. The average rate of return on investments, for all declared deals that were exited with a gain, is 20% (compound annual growth rate).

The amount declared as write-offs over the survey period totals R187 million, compared with the total value of profitable exits of R438 million.

“The trends highlighted in this survey are positive, in that they signify the advancement of a still-emergent industry that is an integral component of a vibrant and healthily functioning economy – and which is considered a critical enabling mechanism for new high-growth and entrepreneurial sectors and technologies that have the potential to transform the South African economy,” van der Merwe says.

VC needs visionary public-sector backing

Findings from the survey that public-sector VC funds are reducing their activity is a concern, though.

Stephan Lamprecht from Venture Solutions, who conducted the survey, comments: “Evidence from other markets is that sensible government backing and enablement of seed-stage and early-stage VC activity are vital in ensuring not only the development of the VC asset class, but, more importantly, the growth of high-tech, high-growth entrepreneurial activity. Without visionary and consistent government backing for VC, the industry will at best continue to grow at average and organically driven rates, subject to market pressures and the high risks associated with being an emergent asset class. It is therefore imperative for the transformation of the entire economy that VC in South Africa is harnessed to support improved, more diversified and more sustainable economic growth.”

Erika van der Merwe of SAVCA

Erika van der Merwe of SAVCA

Other highlights from the survey include:

  • As at July 2015, there were 31 VC fund managers, up from 22 in 2012.
  • New deals have been primarily driven by independent fund managers, and by angel investors (typically high-net-worth individuals): Angels concluded 55 transactions (33% of total number of deals), amounting to R42.55 million (5% of total value of deals).
  • Personal networks are the preferred way to source viable deals.
  • Early-stage/start-up businesses account for 51% of deal activity.
  • Private sector fund managers collectively have now overtaken government as the primary source for VC-type deals, at 81% of deals recorded in the survey period. However, government-backed investors still represent a significant portion of the value of deals, given the magnitude of their transactions.
  • The average equity stake taken by VC investors is 37%. Government investors on average take significantly larger equity stakes (43% average shareholding) than private sector investors (31% average shareholding).
  • The average annual rate of return on investments (ROI) achieved for all deals exited with a gain is 20%.
  • When exiting VC deals, trade sales (sales to third parties operating in a similar industry) are the preferred mechanism, with the second-most common exit strategy being sale to management.
  • There are relatively healthy confidence levels in the VC sector, with two thirds of respondents reporting that they anticipated a profitable exit in the next 12 months, with profitability expectations ranging between two and five times money back.
  • In view of the current economic climate, almost all respondents indicate a willingness to wait up to three years for a profitable exit.
  • The average investment holding period is four years and seven months. Government-backed investors remain invested for longer compared with private sector fund managers.
  • The ICT-type sector accounts for almost half of all deal activity, including software (26%), e-commerce (10%), electronics (4%) and media/entertainment (7%). This is more than double from the previous survey. Many deals in other sectors such as financial services and business and consumer services are also driven by new technologies involving information and communications technologies.
  • The Western Cape (75%) has rapidly overtaken Gauteng (20%) as the geographic source of VC-type deals.

Download the full report by clicking here.

InsightErika van der Merwe in conversation with eBizRadio’s Nick Snow

PODCAST | Click HERE to listen

 

| Format: MP3

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eBizRadio is a live multi- platformed social media service providing an online forum to the business community for holding conversations on the key issues related to specific businesses as well as availing a space for cross-business collaboration in response to key issues affecting the world of business. The place to go if you want to know about business and lifestyle

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