While South African venture capital (VC) investors may have seen a significant slowdown in deal activity this year as a result of measures implemented globally to contain the spread of Covid-19, the local VC landscape experienced record investment and exit activity in 2019.
This is according to industry body, the Southern African Venture Capital and Private Equity Association's (Savca's) latest 'Venture Capital Industry Survey' report, which was launched during a webinar on September 17, with the findings presented by Venture Solutions senior management consultant Stephan Lamprecht.
This is the body’s seventh consecutive 'Venture Capital Industry Survey' report, which provides analysis of the South African VC industry over the previous year.
The survey provides an overview of the VC landscape, the characteristics of the companies that form part of the current ecosystem and how it has changed over time.
The latest data shows that 38 exits were reported for 2019 – more than double the previous record for yearly exit activity, and just over triple the nine exits reported in 2018.
Also speaking on the findings, Savca CEO Tanya van Lill noted that this record exit activity boded well for the development of the industry.
“Notably, of the 38 reported exits, 50% were reported as profitable, with R830.5-million returned to investors. Trade sales remains the most prevalent exit route, followed by exiting to other investors,” she pointed out.
Further to the record exit activity, 2019 also proved significant when it came to investment activity, with 2019 VC investment showing the highest activity recorded to date, both by value and by the number of deals.
This was the second consecutive year that the total value of VC deals exceeded R1-billion, with deals in 2019 having amounted to R1.23-billion.
Van Lill explained that this continued the upward trend in investment activity that started after 2015, when changes were made to Section 12J.
“Independent VC fund managers continue to comprise the largest share of active portfolios (38.1%), with captive government funds and increasingly captive corporate funds playing a more significant role to fuel the growth of early-stage investments in South Africa.”
Of note, for the current survey, Savca introduced additional data attributes to more accurately differentiate between deals that involve secondary assets (for example, investments into buildings and land), as well as deals defined as “venture leasing”.
“In both instances, investors are able to hedge investment risk by relying on the underlying value of the asset and, even if the actual business ceases to operate, the original capital invested into such assets can be recovered.
"For this reason, survey respondents were asked to reclassify their investment portfolio to ensure the Savca VC survey captures traditional early-stage investments. In future studies, we may start reporting on these numbers, given the significance it has in financing startups,” Van Lill stated.
Lamprecht noted that, from a geographic perspective, the investment landscape remained dominated by activity in two provinces, namely Gauteng and the Western Cape, with the latter leading.
While funding into Western Cape-based businesses grew by 21.8% in 2019 compared with 2018, he notes that Johannesburg was still listed as the head office location for most VC fund managers – marginally higher than Cape Town.
In terms of funds under management on a sectoral level, manufacturing accounted for the largest share of active deals (13.8% by value), followed by the food and beverage sector (12.7%) and business products and services (10.9%), despite deals in the food and beverage sector receiving most of the investment in 2019 (14.2%), followed by agriculture (10.9%).
Agriculture does not typically feature among the top sectors of VC investments, but recent investment activity by a number of VC fund managers into an agritech business had raised the profile of the sector, Savca pointed out.
Despite the challenges facing the industry at present, Van Lill said she was encouraged by the significant growth of VC investors and early-stage deal activity reported for 2019.
“There is no doubt that the current health and subsequent economic crisis will reflect in [the 2020] results; however, we can find some solace in [the 2019] results, which suggest a strong foundation and an overall positive outlook for the VC industry,” she noted.