INVESTING IN LOCAL VC - SA CONTEXT

July 24, 2019

 

Although Venture Capital (VC) is largely seen as countercyclical in nature, the old adage must surely apply that no man is an island. In this edition of the SMART VC series we focus on the SA investment outlook with the emphasis being on how recent developments in investment inflows from abroad are likely to benefit the local VC market.
 
Foreign Direct Investment (FDI) is an important enabler of economic growth. For emerging market economies such as SA, foreign investment inflows are crucial for transferring both money and expertise from investors and multinational companies to local enterprises, thereby not only greasing the engine, but providing sustainable and much needed skills transfer in the process.
 
So what are foreign investors looking for when they consider a direct investment into a country?
 
A 2019 PWC report outlines variables that investors consider when making foreign investment decisions. Notable factors include political stability, policy continuity, exchange rate stability, labour force affordability and flexibility, safety and security, property rights, investment freedom, competitiveness of the economy, quality of infrastructure, efficiency of government regulation, control of corruption, rule of law, investor protection, corporate tax rate and ease of trading across borders.
 
While factors highlighted above set SA apart when compared to other emerging market investment destinations, there are red tape challenges that can deter potential investors from investing specifically in SA as outlined in the same PWC report. These factors include dealing with the SA Revenue Service (SARS), labour-related issues, dealing with local government (municipalities) and compliance with broad-based black economic empowerment (B-BBEE) rules.
 
With this in mind, a savvy investor will weigh up the underlying investment attributes against the backdrop of the underlying economic and political landscape before making an investment.
 
Locally, President Cyril Ramaphosa’s government is taking “decisive steps to rebuild investor confidence” by spearheading a drive that has already yielded encouraging results. His aim is to attract $100bn (R1.4 trillion) of investments to SA by 2023. To date this drive has generated R250bn worth of investments with a further R300bn of investment earmarked for catalytic projects.
 
In 2018, FDI into SA increased by 446%, growing from $1.3 bn in 2017 to $7.1 bn (R98.6 bn) a United Nations report found. The report states that SA successfully managed to turn around the sharp declines in FDI since 2014.
 
In context to the rest of Africa, the continent has achieved one of the fastest, most persistent growth spurts since the turn of the millennium. A 2019 African Development Bank report indicates that the continent’s economic growth continues to strengthen, with gross domestic product growth reaching an estimated 3.5% increase in 2018, about the same as in 2017 and up 1.4% from the 2.1% in 2016. Although lower than China’s and India’s growth, Africa’s is projected to be higher than that of other emerging and developing countries. Growth in Southern Africa has however been comparatively moderate, due to SA having been on a downward trajectory between 2014 and 2016, while under President Jacob Zuma. A positive turnaround brought a modest recovery during 2017 and 2018, fueled by the inauguration of President Cyril Ramaphosa and with the above-mentioned in mind, the recovery is expected to continue and lead to renewed growth.
 
But what does this all mean for VC locally?
 
SA ticks many of the investor criteria covered above, and with more entrepreneurs coming to the fore than ever before, on the back of an increasingly supportive investor backdrop, local VC remains well placed to thrive in the “new new” SA. 
 
According to Ventureburn, in the first 6 months of 2019, SA tech startups have raised almost half-a-billion rand in disclosed VC investments and we see a continued trend where not only more local investors are investing in VC, but FDI in the VC space too is really starting to thrive. Recent examples of local start-ups attracting significant foreign capital include RapidDeploy, Lulalend, Yoco and RecoMed who have raised foreign investment from GreatPoint Ventures, Samsung Next, IFC, Quona Capital  and AAIC respectively.
 
While in recent years the SA economy has suffered from heavy headwinds, with FDI on the increase both in the greater economy and in the VC sector, coupled with  an ever growing local entrepreneurial ecosystem where local companies are competing internationally with globally scalable technology solutions, at HAVAÍC we are incredibly optimistic about the potential of the VC market locally and are incredibly excited to continue this journey together.

Ian Lessem
Managing Partner

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