Venturing ahead: the prospects and challenges of VC funding in South Africa

Last month, the Naspers Foundry, one of the largest enterprise capital funds in South Africa, shut down. As Foundry sunsets,  the nation’s enterprise capital market goes by what one would name a tough patch, as evidenced by its lack of ability to draw  enterprise capital funding in 2022.

As the funding information for Q1 of 2023 poured in final week, it seems that South Africa’s fortunes could be enhancing. According to funding tracker Magnitt, South African startups raised $142 million final quarter, a 22% enhance in funding, albeit with fewer offers than in the similar interval final 12 months. 

According to Clive Butkow, CEO at Kalon Ventures, a Johannesburg-based enterprise capital agency, though a decline in funding for growth-stage startups is to be anticipated contemplating the total world development, the proven fact that early stage funding can be shrinking is worrying.

“Seed investments are slowing down substantially as well, both in South Africa and Africa which is a worrying sign, because one can only get a company off the ground with that initial seed capital. Without it, it’s hard to even start,” mentioned Butkow.

The slowdown of seed funding throughout the continent can be reiterated by Africa: The Big Deal, one other funding tracker monitoring enterprise capital exercise on the continent. According to this tracker, seed funding has decreased by a 3rd in comparison with the similar interval final 12 months.

On the closure of the Naspers Foundry, Butkow believes that though it’s an unwelcome improvement, it isn’t precisely stunning contemplating the world funding setting. Additionally, there are quite a few different avenues of elevating capital in South Africa.

“There are still a lot more companies in South Africa raising capital from pension funds, development financing institutions and other entities who, prior to recently, had not been active in venture capital investing. I think this is because a lot of these institutions are realising now that venture capital is a great asset class and that you can make a decent return compared to other asset classes like stocks and equities. This is a good sign for the ecosystem,” added Butkow. 

Diversity in South African VC

Gender and racial range in South Africa’s enterprise capital ecosystem stays a troubling concern, with the majority of funding going to startups based by principally white males.

According to Will Green, programme director at Cape Town-based accelerator GrindStoneXL, who’ve a 50% gender and race mandate for his or her programmes, addressing the concern of range ought to begin at the grassroots degree.

“I believe the key to this racial and gender balance is in grassroot programmes, targets and ambassadorships. Women in Tech is a primary example of an organisation that is driving positive change in the ecosystem. I joined them on the advisory board to be the change in the world for female founders. As a father of a young teenage girl, we need to all work together to rebalance the gender ecosystem, so there are equal opportunities for all,” added Green.

Octavius Phukubye, enterprise capitalist at Microtraction, believes that though there are some efforts geared toward addressing the concern of range, there’s nonetheless a lot work to be completed to get wherever close to some extent of parity.

“There are some exciting initiatives launched recently, like WomHub to accelerate diversity but we still have a long way to go. For example, the main focus and attention is on addressing gender and racial diversity, which is good, but if you look at other historically disadvantaged groups like LGBTQI+, not much is being done to address their limited involvement in the VC ecosystem,” mentioned Phukubye.

Phukubye believes intentionality, reasonably than mere lip service, is essential to accelerating the affect of range initiatives in the ecosystem. 

“Although we have emerging fund managers programmes, training, etc, for underrepresented communities, this does not translate to significant amounts of capital being allocated to these asset managers in comparison to their counterparts. This situation does not do much to aid the funding for startups which are supposed to be backed by these fund managers,” he added.

“I think all VCs have this front and centre of their mind that they need to invest more in female founders and founders of colour. The current figures are simply not enough. Most of the VCs I’m speaking to are all looking for female and persons of colour founders to invest in and the wish is that we had more deal flow of these founders to invest in. But we know and appreciate that we have to go out there and look for them because they are out there, so that’s where the current efforts are going,” concluded Butkow.

All hope is just not but misplaced

Although the present financial local weather is lower than fascinating and the nation’s efficiency over the previous couple of years has been uninspiring, in comparison with its continental friends, South Africa stays a pressure to reckon with in Africa’s enterprise capital ecosystem.

With that in thoughts, Butkow believes that startups who’ve stable enterprise fashions and are addressing precise urgent issues will increase the capital they want.

“In the current environment, capital efficiency is key. If you’re spending a million dollars and generating a million dollars in new average revenue run rate, that’s a good multiple of one and an incredible space to be. But if you’re burning $5 million, and you’re only getting $1 million, those economics don’t work for a VC. In these times, to a VC, bottomline growth is much of a factor compared to just top line growth,” mentioned Butkow.

For Green, solely centered startups will thrive beneath the present economically unsure instances.

“Startups coming out of the next 9-12 months with a strong capital efficiency will get their asking valuations, as the pile of dry powders looks for the strongest investment opportunities,” he provides.

Additionally, Green predicts that the present power disaster will present alternatives for startups to enter the market at an accelerated charge.

“In some cases I have heard of founders based in California moving to Cape Town to help solve for the current challenge.”

As Africa’s most industrialised nation with a complicated tertiary training sector, banking methods and entrepreneurship ecosystems, in addition to  direct air entry from North America, Europe and Asia, regardless of its current shortfalls, it’s at all times sensible to not underestimate South Africa’s full functionality in attracting enterprise capital.

With numerous ecosystem growth-enabling initiatives underway, together with a startup act, South Africa appears poised to retake its place as Africa’s tech capital over the subsequent few years.