SA SME Fund has closed R600 million of a R1 billion VC fund. Here is how it will be deployed

A dialog with Ketso Gordhan, CEO of the SA SME Fund, in regards to the R1 billion VC Fund of Funds (VC FoF) which lately had its first shut of R600 million.

This week, the SA SME Fund formally introduced that it had secured the primary shut of its R1 billion (~$51 million) Venture Capital Fund of Funds (VC FoF) at R600 million (~$30 million) in opposition to an preliminary goal of R500 million (~$25 million).

Through the raised capital, the SA SME Fund intends to deploy the capital in enterprise capital companies which can be backing revolutionary startups constructing options which handle South Africa’s most urgent issues.

TechCabal had a sit down with Ketso Gordhan, CEO of the SA SME Fund, to study extra in regards to the rationale behind elevating the fund, the influence of such a fund within the nation’s enterprise capital trade and innovation usually, in addition to the following steps in deploying the raised capital.

TechCabal: Please inform us a bit extra in regards to the SA SME Fund and the current closing of the R600 million fund.

Ketso Gordhan: The SA SME Fund was established about 5 years in the past as an initiative of a group of CEOs from the personal sector. Initially, 50 firms contributed R900 million, the Public Investment Corporation (PIC) utilizing the Unemployment Insurance Fund (UIF), and Compensation Fund (CF) cash, contributed R500 million, that means we had a fund of R1.4 billion. 

With that fund, we did personal fairness, enterprise capital, and debt investments in SMEs through intermediaries. Based on that have, we realised that the 2 issues we needed to proceed doing had been debt and enterprise capital. So final yr, we raised a comparatively small R300 million debt Fund, with the Gauteng authorities offering us with R100 million of first-loss capital, the Industrial Development Corporation added R100 million and we added R100 million, and we added R100 million. The fund primarily went to township companies within the Gauteng district as debt to SMEs.

Over the final two years, we’ve got been attempting to lift one other fund centered solely on enterprise capital. We had been lastly capable of obtain our first shut of it a few weeks in the past, at R600 million. We hope that by the top of the yr, we might have closed the complete R1 billion we got down to elevate, if no more.

The purpose we determined to lift this fund is that we realised the worth and energy of enterprise capital in driving innovation, financial progress, and discovering options to some of our nation’s urgent issues. Also, we realised that there is a scarcity of capital in VC and needed to assist plug that hole. With this new fund and the final one I discussed, we are actually the most important institutional investor within the VC sector.

TC: What function do you assume the fund will play in making capital obtainable particularly taking a look at the truth that we’re at the moment in a VC downturn?

KG: All cash we will be capable of elevate by this fund will be allotted to at the very least 10 or 11 VC funds. We consider that’s going to considerably, and in a optimistic method, influence the VC panorama in South Africa as a result of these funds having extra property below administration by our contributions means they’ll put this into revolutionary startups. As an trade, enterprise capital in South Africa has been doubling in measurement during the last three to 4 years and I believe we’re going to repeat that development one or two extra instances.

Much more institutional capital is prone to come into VC and we’re additionally very proud that we had been the primary to persuade a pension fund to allocate capital to a VC fund. The Consolidated Retirement Fund contributed R250 million of the R600 million that we introduced and we’re very proud of that as a result of it is a wanted growth within the progress of VC in South Africa.

We expect at the very least another fund, if no more, to partake within the subsequent elevate of fundraising. It will take one other yr or two or three for this development to mature however ultimately, we will see bigger quantities of capital flowing from establishments into VC and we’re proud to have contributed to kick beginning this development.

TC: How necessary are private and non-private sector partnerships in rising the VC trade in South Africa?

In most international locations the place enterprise capital has taken off, the federal government has performed a main function in offering both first-loss capital or cheaper capital, and likewise incentivising different buyers into VC. In South Africa, sadly, we haven’t actually seen the federal government play that function. But the SA SSME fund has successfully stuffed that hole. Last time round, we allotted cash to 9 enterprise capital funds, 5 of them had been first time fund managers, so 5 of them had by no means run a enterprise capital fund earlier than. 

This time, sadly, we will nonetheless do some first time fund managers, however a lot fewer, most likely about two or three, as a result of this time, we’ve got pension fund cash, and we have to be a lot extra cautious with how we make investments pension fund cash. But nonetheless, we might have contributed to help first time fund managers coming into the VC area during the last three to 4 years. So I believe these are crucial sorts of partnerships the place authorities, company and fund or fund managers like ourselves, give a chance to first time fund managers to return into the VC trade.

TC: In phrases of the deployment of capital, the place will the funding be allotted?

KG: We don’t do any sector-specific VC funds. Most of the funds we allocate cash to are generalist funds, however I can say that we will positively be doing biotech. This is as a result of it’s an necessary space of analysis in South Africa. We at the moment have put cash into one such fund, which is South Africa’s solely biotech fund, and we plan to proceed to spend money on that area.

We will proceed to spend money on {hardware} and we’ve got already allotted capital to Savant which invests in African {hardware} and deep expertise firms which can be underpinned by science and engineering improvements. And then final time, we did one thing which we take into account really revolutionary. We created the primary ever University Technology Fund in Africa, the place we assist the colleges like UCT (University of Cape Town), University of Western Cape, Wits University, and Stellenbosch University to commercialise their IP. 

We’re going to be protecting just about all of the areas wherein expertise is starting to be utilised and there are startups which have options to necessary issues, as a result of the last word purpose of VC is to assist construct companies which will resolve issues and consequently, enhance individuals’s lives.

TC: Now that the primary shut has been achieved, what’s the following step?

KG: We are positively not sitting nonetheless. With the R600 million, we’ve already been to our Investment Committee, have approval in precept to allocate cash to 5 enterprise capital funds, and throughout the subsequent two or three months, these VCs will have entry to cash to begin doing offers. I can’t provide the names as a result of we nonetheless don’t have the ultimate approval and haven’t signed agreements with them however sure, we will have 5 enterprise capital funds utilizing our cash throughout the subsequent few months. 

Our second focus is to lift extra money and we’re in conversations with different pension funds and establishments. I’m optimistic that we will shut the fund by the top of the yr at both R1 billion or barely above R1 billion. We will then have extra capital within the second half of the yr to begin allocating to perhaps one other three or 4 VC funds, which we hope to do by the top of the yr. So by the top of this yr, fairly a bit of that cash will be hitting the bottom and doing offers.

TC: Relative to tech hubs on the continent, VC in South Africa has been struggling to maintain up over the previous couple of years. With these current developments, the place would you say the nation’s VC trade is headed?

KG: Like I mentioned earlier, I believe VC is going to double in measurement in phrases of rands invested in South Africa, yearly for the following two or three years. I count on that subsequent yr will be a yr the place we most likely make investments over R2 billion into offers. That would be the primary time we exceed the R2 billion mark in a single yr and I count on that to occur subsequent yr, which suggests the next yr, we should always be at about two and a half to R3 billion going into VC offers. So I believe we’re rising extremely quick. It won’t proceed eternally, however at the very least for the following two to 3 years, I see us doubling the dimensions of investments annually.

Another growth I believe will go a great distance in fostering innovation in South Africa is commercialising the IP that comes out of universities and science colleges. The VC trade will go a great distance in facilitating this and I’m joyful that by our little contribution because the SA SME Fund, we’re successfully creating an implosion of changing what is IP sitting on a shelf into actual companies.

*Interview has been edited for readability and size.