- Ian Lessem
VC101.2 – Venture Capital in the Local Context (Newsletter 28/5/2019)
Updated: Jan 27, 2021
In our first edition, we kicked off with the basics of Venture Capital (VC) in our piece entitled 'VC101.1 - What is Venture Capital and how does it fit into the world of financing?' If you missed it, find it here. In this instalment, we are taking a closer look at VC in the context of the developing world, specifically, Africa, South Africa and Cape Town, our home and headquarters and 'start-up capital of the continent'. We further explore why we are favourably positioned for investment opportunities in a vibrant and robust innovation ecosystem.
Venture Capital in the Local Context
The US invests more than double the amount in new business development through VC investments per day than SA does in an entire year. In 2018, the US invested $130 billion; the total in South Africa was $89 million. Though local figures pale in comparison, the African continent experienced an almost four-fold annual increase in total startup funding in 2018, the 2018 venture investment report by WeeTracker shows. It further reports a record $725.6 million raised across 458 deals by African startups. VC is proven to be the most successful way of growing businesses when compared to investment alternatives. Without it, US native global game changers such as Apple, Google, Intel and Microsoft, would not be who they are today. VC strengthens and molds economies, promotes progress and shapes our world through innovation and its power to improve the status quo by solving real-world challenges. The recent surge in VC holds much promise for stimulating Africa toward its next phase of development. Technological innovation has allowed African countries to address many intrinsic and systemic challenges. We have seen mobile payments leapfrog traditional banking; tech innovations make healthcare more readily available and rural households connected with off-grid electricity solutions. Local challenges can be so pervasive that innovators simply have no choice but to tackle them head-on. These solutions create efficiencies, new products and opportunities that can be applied and used in both developing and developed markets. Not only despite infrastructure challenges but because of them, entrepreneurs, are stepping up to innovate at scale to transform their societies. From home, they have access to vast local and regional markets, and when coupled with technology, can reach the entire world in a cost effective way. The South African government recognises this and understands that the development of entrepreneurial culture is essential. It has launched various initiatives, an array of incentive schemes and funds aimed to stimulate direct investment in early stage businesses. Examples of this include the provision of grant funding through state investment arms such as the Department of Trade and Industry (DTI), the Public Investment Corporation’s (PIC) R500 million contribution towards the R1.4 billion SA SME Fund, as endorsed by President Cyril Ramaphosa, as well as SARS’ promotion of the Section 12J legislation which allows South African taxpayers an income tax deduction for investments in qualifying assets or companies. With Africa often being viewed as the next investment frontier, South Africa offers abundant opportunity for venture capitalists who are driven to dare. Cape Town is further coined as the startup capital of Africa by a 2018 report by Wesgro. The robust network of African entrepreneurs is making waves globally, building businesses across sectors that include fintech, edutech, ecommerce, gaming, travel tech, digital services and health and biotech. Examples include:
Fintech startup, Wigroup, an Mcommerce service that offers mobile transactional and incentive products, which has received investment from Virgin and Smollan to fast-track expansion into Africa and other emerging markets;
Edutech startup, GetSmarter, a world class education platform that partners with the world's leading universities to select, design and deliver premium online short courses with a data-driven focus, which was acquired by edutech giant 2U for $103 million in 2017;
Ecommerce startup, Jumia, an online marketplace originating from Nigeria, connecting Africans with each other and the world, which made history in April this year when it listed on the New York Stock Exchange, valued at $3.9 billion;
Digital services startup, Snapt Inc, a software company that provides load balancing, acceleration, security and caching for websites, applications and services, which is on track for 1000% revenue growth after landing $3 million investment;
Health tech startup, RecoMed, an intelligent, easy-to-use and powerful online platform for healthcare practitioners and their patients to easily find and book appointments in real-time. RecoMed is also a HAVAÍC portfolio company which has received investment from an Asian VC, who has expressed confidence that SA and Africa is showing extremely significant growth in Health Tech.
Drawing a comparison to the US, like Berkeley and Stanford Universities on the opposite sides of Silicon Valley, Cape Town has within a 50 km radius 4 world-class universities, 2 globally recognised business schools, research councils, private & public coding schools, all with the potential to uplift the local VC industry with skills development and technological innovations. By way of example, the University of Stellenbosch & Business School and University of Cape Town & Graduate School of Business register more patents annually than any other organization in Africa, and more than 12 000 engineering, science and tech mathematics graduates are produced annually, and more than 500 coders trained per annum. As a final thought, software engineers and developers in Cape Town are 40–80% less expensive than developed markets, which speaks to why mutlinationals such as Amazon and Google have chosen to set up offices here. With local VC investment on the rise, entrepreneurial activity flourishing, positive government involvement and with world class institutions nurturing talent, South Africa, and Africa, has all the makings of becoming the VC destination of the future. Ian Lessem Managing Partner