The South African startup ecosystem ended 2023 on a high note. Demonstrating the resilience that has become a hallmark of the industry, the venture capital (VC) sector’s performance defied the downward trend in annual deals observed since 2020. The local information and communication technology (ICT) sector once again captured investor interest, underscoring its leading role in economic development and innovation.
These insights were highlighted in this year’s SAVCA VC Survey Launch 2024, an annual research initiative by the Southern African Venture Capital and Private Equity Association (SAVCA). The survey was unveiled last week at an event held at the Westin hotel in Cape Town.
Speaking at the launch was SAVCA CEO, Tshepiso Kobile, who shared her ongoing conviction that the VC industry must continue to play a pivotal role in supporting high-growth startups and early-stage businesses, whilst also enabling innovative solutions to our unique challenges as a country. “When we launched this survey in 2010, we opened with the question: ‘is there opportunity for VC in South Africa?’
“The need to continuously reflect on this question and keep a close eye on the development of the sector is why research like the VC survey is so critical. Today, equipped with the most recent data, I am proud to answer that yes, VC is alive and on a positive trajectory in South Africa – both in terms of active and sizeable deals,” she said.
The state of VC in South Africa
This year saw total capital flow to startups reach over R3 billion for the first time since the launch of the survey 14 years ago. Holistically, since inception of the survey, the South African VC asset class had R10.73 billion invested in 1,106 active deals.
Activity by number of deals has remained stable, with a slight decrease in 2023 as the number of entities receiving funding slowed down, with more investments going into the same companies. Notwithstanding the decrease in number of deals in 2023 (184 compared to 195 in 2022 and 186 in 2021) deal activity remains higher than the pre-COVID levels of 162 in 2019 and 167 in 2020.
Commenting on this, Kobile stated that: “Across the continent, we have seen VC gain popularity as an investment strategy. Our economy depends on this sustained investment into our entrepreneurs and into innovative solutions that can help leapfrog South Africa into a more competitive and inclusive economy.”
Similar to the previous year, a noticeable feature was the growth in co-investment activity, demonstrative of corporations and foreign investors investing alongside early-stage fund managers.
ICT dominates capital flow
In line with the global trend for VC type investments, the ICT sector, which combines several active sub-sectors such as Fintech, EdTech, Software, eCommerce and Online Market, continued to outweigh the investment activity in other sectors. ICT as a primary sector almost doubled in number of investments compared to 2022, amounting to 87.6% (48.1% in 2022).
Fintech remained the front-runner by value (18.3%) and number (14.8%) of deals, followed by Software at 9.8% of the total number of deals (6.7% by deal value). eCommerce made a significant jump from 2022 levels – a testament to the continued uptick in online shopping that was seen and rapidly developed during and after the pandemic years.
An expanding and diversifying fund management pool
In terms of the types of fund managers engaging in active deals, independent funds led the charge in 2023 at 66.2% of the total number of deals in the active portfolio of VC investments – up from 61.8% in 2022 and 57.8% in 2021.
This was followed by captive corporates at 34.3%, with angel investors making up a small proportion of active deals at 7.1%. Interestingly however, the average deal size of VC transactions by angel investors amounted to R6.15 million – a relatively large value when compared to the average deal size coming from independent funds, which currently equates to R7.47 million.
Weighing in on these findings was Stephan Lamprecht, the Founder of VS Nova, SAVCA’s long-standing research partner, who echoed Kobile’s assertions that research of this nature plays a vital role in informing all stakeholders on the progress of the industry. “The results of the survey clearly show how far VC has come over the last decade. Lamprecht highlighted that accurate data particularly helps inform VC industry leaders when considering and implementing initiatives that can potentially play a significantly larger role in the transformation of the economy, allowing many more startups to grow into global icons.
“In 2014, the industry saw a total investment of R273 million. Now – 10 years later, we’re seeing a total investment of R3.28 billion, which is a significant upward curve.
“This kind of data allows us to continue answering the important question of whether VC capital is available to entrepreneurs in South Africa. The answer is definitely yes, but in terms of the number of businesses receiving capital which sat at 94 in 2023, there is still much work to be done,” he said.
A new feature in the 2024 survey was a look at the composition of Funds Under Management and teams, depicting that 70.8% of respondents reported being rated B-BBEE Level 4 or higher, notwithstanding the very lean investment teams (average team size of five or less professionals), One in five of the respondents had a female CEO, and 41.7% of the respondents had at least one black founder.
