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South Africa Venture Capital: An opportunity for International Investors

Written by John Causey Friday, 14 March 2014.

South Africa offers international venture investors a value proposition unlike any other country in Africa. As the largest economy in Africa and the 28th biggest globally, the country leads not only in areas of economic output but also corporate governance, ease of doing business, investor protections and more. There are only two internationally ranked Universities in sub-Saharan Africa, and they are both in South Africa. For these and other reasons, this is arguably the best African country to grow sophisticated companies with ambitions to scale into the rest of Africa and beyond.

Given all that South Africa has going for it, one would expect a vibrant domestic venture capital investment ecosystem. Unfortunately, the numbers and facts don't corroborate that story. Between 2009 and 2012, according to the 2012 SAVCA Venture Solutions VC Survey, there were only 103 venture capital transactions in South Africa with a total value of around USD 83mn invested. Here are the figures of just the year 2012 from 3 hubs of innovation to put the South African 3-year numbers into perspective:


Risk capital available in selected markets in 2012:

Country Venture Capital Industry (Local Currency) Assumed Exchange Rate Venture Capital Industry (USD)  Companies   Funded
 US  $26.5bn  1 to 1   26.5bn  3698
 UK  £5.7bn  1 to 1.64  9.33bn  820
 Germany € 521mn  1 to 1.37  714.5mn  748
       36.54bn  5266

 (source:  NAVCA, BVC and BVCA databases)

Why is venture capital activity in South Africa nascent?

That answer is illusive and certainly beyond the scope of this blog posting. It's likely attributable to a combination of factors, including an unsupportive domestic regulatory environment, burdensome exchange controls, misperceptions of South Africa and its risks, and capacity of the local entrepreneurs to create globally competitive companies. I grappled with this in my research at the University of Cape Town in South Africa, and will gladly share a copy of that with anyone interested.

International investors can have a role in ameliorating the investment climate in South Africa, while benefiting all stakeholders involved.

Syndicating internationally with South African investors into South African enterprises offers a unique value proposition. The international investor receives geographic diversification in his portfolio, as well as the opportunity to invest directly into the Africa growth story. The dearth of risk capital in the local ecosystem equates to more attractive valuations and less competition for the best deals. Although the local investors aren't usually adequately funded, they are versed in the local nuances, often educated at the finest Universities, and could serve as excellent co-investment partners. A trusted local investor can offset and mitigate many of the pre- and post-investment costs which can deter cross-border investment, especially into earlier stage and riskier investments.

The local entrepreneurs and investors will benefit by having access to more risk capital, expertise, and increased ability to internationalize its current and future portfolio companies. Research shows that having a credible international investor in the mix increases revenues and future valuations, as well as improving the likelihood of a successful exit and/or growing a globally competitive company. Exceptional companies aren't built by bootstrapping and haphazardly scraping together funding rounds.

Does your firm have the necessary relationships with investors in South Africa to successfully syndicate a venture investment therein?



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About the Author

John Causey

John is a US trained attorney and MBA, with a profound interest in Africa and fostering capital flows from the developed world into certain sub-Saharan African ventures. In 2012, he was a part of the team which arranged financing for the largest disclosed tech deal in South Africa, WyseTalk. He's worked on several other M&A, capital raise and advisory transactions in SA from 2012 to now. Prior to moving to SA, John was an associate at Morgan Stanley. He's recently earned a Masters from the University of Cape Town, with a thesis dealing with the international syndication of venture capital investments into South African ventures.

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