ANTONIA BOTHNER: SA venture capital: nothing ventured, nothing gained
There is a need to create a positive investment environment and an enabling ecosystem for high-growth entrepreneurs to flourish
In the past SA typically fell through the cracks when it came to international venture capital. As a market, scalability simply wasn’t there. But with the rise of internet connectivity throughout Africa and the digital opportunities created, investors are recognising the continent’s potential.
Things have changed and are still changing. Africa’s digital economy is estimated at $115bn and is expected to grow to about $712bn by 2050. However, while it is still the entry point to Africa, SA is now competing head-on with Nigeria in West Africa and Kenya in East Africa. Our status as the golden child of the continent is something of the past, which brings a renewed focus on how to expand the SA high-growth entrepreneurial ecosystem to attract venture capital and expand liquidity.
SA absolutely needs an increase in foreign direct investment (FDI), particularly due to our current account deficit. We believe the country has the potential to attract significant FDI flows, provided we create a positive investment environment and an enabling ecosystem for high-growth entrepreneurs to flourish. This will in turn attract venture capital investors.
As a start, venture capital firms need to believe that when they invest money in a country the structures are in place to make the most of their investment, in other words, the risk-reward ratio is positive. This needs to hold true in a global setting, relative to investment opportunities explored in other jurisdictions.
SA has a burdensome regulatory environment that hampers the growth of high-growth entrepreneurs, often making it more costly for scale-ups to found businesses in SA, compared to Nigeria and Kenya and elsewhere in the world. These include the difficulties encountered by scale-ups to move their intellectual property overseas.
As SA entrepreneurs establish international holding companies (to house their intellectual property and attract global investors), local legislation requires the entrepreneur to buy back their shares in the international holding company with cash that is ex-SA, rather than through a share swap. This triggers capital gains tax, which is enormously restrictive from a cash-flow perspective for a company that is just starting out.
Apart from creating an attractive investment environment, SA can take a few lessons from Nigeria and Israel, countries that have a strong influx of foreign investment from their diaspora. Our country has lost amazing talent due to emigration, but for many South Africans living abroad the connection to the country remains. So too for those expats who have made a name for themselves in the investment world or through entrepreneurial endeavours — Mark Shuttleworth, David Frankel, Roelof Botha and Patrick Soon-Shiong, among others. They know what South Africans are capable of and understand the risks; presented with a good opportunity they are often best placed to invest.
How does one build connections with countries unfamiliar with SA and what we have to offer? One interesting exploration, implemented by Endeavor Global, is a programme that recruits MBA graduates fresh from Ivy League schools in the US or abroad, to live and work in SA as an “externship”. These are graduates looking to travel and experience new markets, with SA offering the perfect opportunity. The country benefits not only through foreign expertise but also from the participants’ organic connection with SA after their stay. As they continue their careers back home there is a bridge where previously there was none.
This again touches on the need for building a welcoming environment for high-growth entrepreneurs. Local scale-ups often require skills only available from foreign professionals. The country’s visa system is too cumbersome and is not providing the long-term work visas that are required. These are not workers coming in to take local jobs — the local skill set does not exist or is lacking. They are professionals who want to help local scale-ups grow (creating further jobs in SA) and contribute to the local economy through taxes. Plus, wherever they might work in the future the connection to SA has been established.
There is far more capital available for funding internationally than locally — according to Partech in 2021 the global venture capital market totalled $643bn, versus just $1bn in SA — but it is local venture capital firms that have the expertise needed to help scale-ups effectively tackle local problems, especially consumer-facing companies. Understanding local challenges makes investors less prone to cut ties once the going gets tough.
While belief remains that if you build a high-quality scale-up the investment will follow, it must be acknowledged that SA venture capital is centred on Series A and earlier, with Series B rounds still nascent. However, new funds are being raised that deal with this market failure, coupled with a new swathe of private equity “technology” players dipping their toes into the earlier stage of these scalable businesses.
SA does have the potential to bridge the liquidity gap through our financial institutions, which hold $190bn in assets under management, according to Boston Consulting Group, and are well advanced compared to other African markets. Unlike them, there are pools of capital in SA, such as pension funds, that can be used effectively to fund high-growth entrepreneurs. Yes, risk must be managed, but certain pension funds, such as the Mineworkers Investment Company and the Public Investment Corporation are already actively looking at the high-growth entrepreneurial space.
Welcomed
This should be welcomed; our high-growth entrepreneurs have flourished under the right stewardship and conditions. Take Rand Merchant Bank Group, which has served as a phenomenal incubator, contributing to the success of companies such as Discovery and OUTsurance. With cost-effective distribution the holy grail of many start-ups, will we see the likes of Vodacom and Capitec providing start-ups with a home to grow in?
Both international and local venture capital depends on a positive policy environment. For this to happen all efforts must be made to encourage more high-growth entrepreneurs and reduce — dare we say get rid of — restrictions that are hampering their expansion. This new breed of entrepreneurial “animal spirit” can so easily be ignited, and is sorely needed in our growth-starved country.
• Bothner is the capital markets lead at Endeavor SA.
