The venture capital industry in South Africa is maturing, and knowledge of the role of venture capital as an asset class is growing, but regulatory hurdles remain and the number of professionals and firms in the industry needs to be increased to enable the industry to help catalyse innovation and grow the economy.

These are some of the views proffered by venture capital and investment experts at industry organisation the South African Venture Capital Association's conference on November 15.

South Africa remained attractive as a base for venture capital into Africa, owing to its robust legal and regulatory framework, said startup company accelerator Endeavour capital markets and deal leader Antonia Bothner.

However, the country has a two-speed economy, with the grassroots economy being relatively underdeveloped but burgeoning, which is similar to the rest of Africa.

The continent was predicted to have one-billion young people by 2030, which presented an opportunity for South Africa to serve as a launch pad for companies to be incubated at a relatively low cost to then take technologies and services to an international market, she said.

The newly created Innovation Fund, which was a grant initiative to identify and support innovative solutions to the barriers faced by young people to meaningfully participate in the labour market and the wider economy, disbursed R150-million through the South African Small and Medium Enterprise Fund (SA SME Fund), the Public Investment Corporation, the Technology Innovation Agency and the Industrial Development Corporation to startups and accelerators in 2020, Department of Science and Innovation (DSI) deputy director-general for technology innovation Mmboneni Muofhe told delegates.

The Innovation Fund would increase this to R350-million this year and expected to disburse R500-million in 2022, he said.

"The aim is to strengthen the foundation of an effective venture capital ecosystem to support research, development and innovation, because more than 50% of research and development in South Africa is supported by government programmes and initiatives, compared to an average of 33% of research and development support provided by governments worldwide.

"A stronger venture capital industry will also grow the foundation of research and development in South Africa, which is restricted to only a handful of universities, universities of technologies and science councils. However, this programme remains in the pilot phase and the DSI calls for feedback and input on the work over the past three years to support innovation to strengthen what works, shore up weaknesses and ensure that we can make gains and grow the momentum," he said.

South Africa's venture capital industry remained at a relatively nascent stage of development, with a welcome surprise being how willing all participants were to collaborate and share lessons learned to prevent repeating problems experienced in the past and drive the industry, said investment holding company Mineworkers Investment Company (MIC) chief investment officer Nchaupe Khaole.

"This openness and collaboration has made it easier to allocate early-stage investment and there are lots of skilled people and organisations in the market that we can tap into. We are a permanent investment vehicle that invests our own funds and we are cognisant of the risks around volatility and the illiquid nature of these investments.

"However, we would gain exposure to early-stage investments and we have been on a three-year journey to convince our board and investment committee to allocate funds to early-stage investments by addressing and mitigating the risks in creative ways. Ecosystem collaboration helps to remove some of the perceived risks, such as that only the top quintile of venture capital fund managers successfully achieve their goals in early-stage investment.

"Our research shows that as much as 50% of venture capital funds achieve returns that are in excess of a public market equivalent.

"As an allocator of funds, this is a strong data point that suggests we should try to gain additional exposure to early-stage investments, but on a considered basis and through finding the right partnerships," said Khaole.

Bothner, meanwhile, posited that, as partners of the SA SME Fund, the role of accelerators such as Endeavour and the venture capital ecosystem was to formalise and standardise the process of identifying, supporting and investing in startups, which would also reduce the burden on entrepreneurs to focus on growing their businesses.

Venture capital is a good vehicle for diversification of defined liability and long-dated investment organisations, but the costs remained high and active management was required to ensure the investment was safeguarded over time to derive the returns required by such investment funds, said Mineworkers Provident Fund investment subcommittee chairperson Mathabo Makhaya.

"We are not opposed to venture capital, but we are currently unable to invest in it as an asset class. We do not have the internal skills to deal with this, including the initial costs and due diligence required. Therefore, in this space, it is easier to identify organisations that are good at this work and to invest in vehicles that pool venture capital investments to share costs and risks," she said.

Companies and organisations that had portfolios of startups, such as accelerators and innovation agencies, helped to ensure diversity of investments to mitigate risks, said workers compensation claims administrator Rand Mutual Assurance investments and corporate finance group executive Andile Keta.

Backing entrepreneurs through investments in innovation, science and technology was a key part of the economic solution for countries and needed to be scaled up in South Africa, said SA SME Fund CEO Ketso Gordhan.

"Firstly, South Africa needs to invest more into seed funding to increase the number of bets we make on early-stage ideas. Secondly, we need to persuade institutional investors to allocate even 0.5% of their funds to venture capital. This will not increase their risks and can be done, although regulatory decisions need to be made to enable this.

"Finally, the country needs to figure out how government will participate to develop the substantial intellectual property (IP) generated by universities and science councils. We need to make the process to commercialise them easier and ensure capital is available.

"If we can achieve these three necessary drivers and release government IP, we may start to see the effect show in gross domestic product numbers within a few years."

However, the core challenge remained that, despite venture capital being a vehicle to actively invest in and promote innovation and development and allow people to change their circumstances, there were significant regulatory restrictions to investing in this asset class, said early-stage venture capital firm Newtown Partners co-founder and managing partner Llew Claasen.

"In terms of volatility and fees being barriers to institutional investors, these issues are not new. We forget the big picture that there is a significant amount of risk taken for the sake of high returns, and venture capital funds bring their investors along on this journey.

"We have seen regulators suggesting that they should regulate the decisions of where funds can allocate their capital, especially pension funds exposed to high risk assets, but this should not be a regulatory decision," he said.

While the venture capital industry in South Africa remains in its early days, if many of the necessary components are not established, capital will be deployed elsewhere. Newtown Partners has done transactions in Egypt, Kenya and Nigeria and is looking into opportunities in Senegal.

South Africa is the most difficult market to invest into in Africa at the moment, Claasen emphasised.

He added that venture capital globally was an emerging asset class, with corporate investment into this class based on slightly different incentives, namely to think how industries would evolve and how they would be disrupted, with venture capital serving as a means to invest in future capabilities to sustain an industry as it evolved.

"Many organisations in South Africa are struggling with the issue of deploying capital for future opportunities. We deployed $15-million in the past 18 months to early-stage entrepreneurs and startups. It is not just about empowering entrepreneurs, but also about future capabilities that are of interest to us, which should be a part of the overall venture capital conversation," he said.

Financial services provider Alexander Forbes, meanwhile, was not convinced that there were insurmountable impediments to developing venture capital as an asset class, but partnerships to structure risks and support to make it easier for investors to access opportunities would be required. However, there has not been achieved yet, said Alexander Forbes head of alternative investments David Moore.

Cloud services multinational Amazon Web Services startup business development manager Henri Zietsman said funding vehicles and instruments, such as the SA SME Fund, enabled investors to use them as a vector for investment in startup companies and ecosystems because these investors did not have to be lead investors.

"With, for example, 50 startup technology companies, such as startup accelerator Grindstone, it has a diverse portfolio that can be built, while addressing the various exposure risks, such as segment and country risks. An example of an effective framework is the Canadian pension fund investments into venture capital," he highlighted.

Meanwhile, Gordhan said South Africa should, ideally, triple the number of fund managers in the country and ensure it had between 30 and 50 active venture capital funds operating.

"A fund of funds approach can be taken, where investments are made into 10 to 16 venture capital funds, improving the chances of recouping investments and getting healthy returns. We remain optimistic that institutional investors will invest in venture capital and help South Africa to turn the corner on its need to support startups and entrepreneurs."