The South African government will not match the R1.5 billion ($112m) that a number of large companies have committed to the SA SME Fund, the National Treasury said.
The country’s deputy president Cyril Ramaphosa last year said that the government would match any contribution made by the private sector.
However the treasury’s director-general Lungisa Fuzile (pictured above) told Ventureburn, an online publication on start-ups, this week that no commitment from government would be made.
Fuzile, who sits on the fund’s board but who leaves the treasury at the end of this month, said it wasn’t clear from a fiscal point of view if more money is needed.
He said the government will instead look to improve coordination between the state and private sector, while stepping up its existing funding and business support to small businesses.
Fuzile has a point as the state allocates about R15.5 billion across departments according to MPs, to fund and support small businesses (see this post).
In 2013 the country's Technology Innovation Agency (TIA) which invests in innovative businesses, put a planned R100-million fund-of-funds on hold after a government review.
No funds disbursed
The SA SME fund has yet to deploy any money and has not accredited any fund managers yet, its chief executive Quinton Dicks said. He hopes to begin doing so in the second half of this year. So far 48 large companies have made commitments totalling about R1.5bn.
The fund will invest in funds which will then invest in high-growth small and medium-sized enterprises.
But Dicks said the fund would focus on small and medium-sized firms that are already profitable and had demonstrated the ability to scale. Start-ups would not be the focus.
In addition he said the fund had not been set up to support the venture capital (VC) sector, but to rather to support existing scalable businesses to grow further.
This is concerning. As the country needs to build its nascent VC sector and invest in early-stage firms, rather than existing, already profitable firms that should be able to tap funds from banks.
The state should play a greater role in nurturing the country’s VC sector as it does in country’s such as Malaysia and Chile (see this post), as well as in the US and Israel (see this post).
The government's Technology Innovation Agency (TIA) and Industrial Development Corporation (IDC) are less involved than they were before in VC deals.
No start-up incentive
In addition the state’s VC tax incentive has taken off since April 2015 when amendments to the incentive took effect. Under section 12J of the Income Tax Act individuals, companies and trusts can get a tax deduction if they invest in a venture capital company (VCC) that in turn invests in a qualifying small business for at least five years.
Currently over 50 funds have been approved by the SA Revenue Service (see the list here).
However few of the funds focus on real venture capital investments, opting instead to invest in existing run-of-the-mill companies such as rental of compressed air or photovoltaic cell installations (see this earlier post).
Without government involvement private investors will opt to put their money in safe bets – more private equity than VC investments. This will do little to boost struggling start-ups.
The best the state could do is commit an initial amount to the SME Fund and recraft the VC tax incentive to incentivise angel investing. SA doesn't need more private equity.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a