Interest in the Industrial Development Corporation’s (IDC’s) venture capital funding has exceeded initial expectations, with R600-million of a total allocation of R750-million having already been committed. Preparations are, therefore, being made to possibly double the size of the development finance institution’s venture capital allocation.

Venture capital providers typically extend seed capital for the research, evaluation and development of a concept or start-up or early-stage funding for new companies.

In South Africa, such financiers form a modest part of the larger private equity industry, which a recent report by the South African Venture Capital and Private Equity Association and KPMG showed had R126.4-billion in funds under management at the end of last year.

IDC venture capital strategic business unit (SBU) head Christo Fourie tells Engineering News Online that the first R250-million set aside for venture capital initiatives in 2007 was invested in less than four years. In addition, R350-million of a further allocation of R500-million, approved in late in 2010, has already been committed.

For this reason, a further allocation will be requested “soon”, particularly in light of an expectation that the residual R150-million should be committed within the current financial year. “We intend to request a further capital allocation of at least R750-million from our board during the current financial year,” Fourie reports.

Of the 32 technology start-ups supported by the SBU, 27 investments remain active, with four having failed and the IDC having exited one investment. “Of the 27 remaining investments, three are in distress and the remaining companies are making satisfactory progress,” he says.

The biggest uptake has been from companies developing medical innovations, ranging from small handheld devices to large, sometimes capital intensive, medical imaging equipment.

About half of the businesses are in the process of transitioning their technologies to a position of market-readiness, while the balance have finalised development and have started to commercialise their products.

Within two to three years the SBU should be in a position to begin liquidating its position in those businesses showing signs of being self-sustaining from a cash flow perspective.

In the meantime, the IDC is offering ongoing strategic support and guidance though a post investment management model, whereby an account manager has monthly interactions with the management. Typical areas of support relate to corporate governance, financial management, risk management and networking.

Fourie says the IDC has a preference for supporting start-ups that have researched their target markets, understand the skills and resources required to develop the technology or solution and have developed prototypes of the solution they wish to commercialise. “The applicant therefore, needs to have invested considerable ‘sweat equity’ and some cash before approaching a venture capital funder.”

The IDC considers investments of a minimum size of R1-million and a maximum size of R40-million, but has limited first-round funding to a maximum of R15-million. In return it takes a significant minority equity stake of between 25% and 50%, depending on the valuation of the business and the amount of funding required.”

“We are very proud of the fact that we probably have the quickest turnaround time in the local venture capital industry. Our average turnaround time (from date of application to date of approval) for the previous financial year was 41 days.”