Corporate South Africa is going ahead with a plan to help create a more thriving venture capital (VC) sector in South Africa. But without the state's help its impact may be limited.
In a press release last week the CEO initiative, which is being driven by top companies to help the country avert a ratings downgrade, announced that the SA SME Fund had been incorporated as a private unlisted company.
Commitments of R1.5 billion ($108,000) have been made by several of the country’s top listed companies and the plan is to scale this up to R10bn, Discovery chief executive Adrian Gore (pictured above) told Business Day.
The fund will act as a fund-of-funds and invest into accredited funds which in turn can use the allocations along with their own commitments to invest in high-impact small firms. The first allocations are expected to be deployed from January, says the CEO initiative.
Elsewhere in the world – most famously in the US and Israel – the state has helped propel a VC sector. Much of this has been through the state co-investing with the private-sector.
In Malaysia, the state’s Mavcap has made over RM1bn (over $240m) in 160 investments since its inception in 2001. Chile’s small business agency Corfo and 46 VC funds had invested $530.5m in 221 firms between 1998 and the end of last year.
While South Africa’s Deputy President Cyril Ramaphosa earlier pledged that the government would match the R1.5bn pledged by top companies, there’s been no official word yet on whether the state will indeed invest in the fund (see this post).
An announcement might be made next month during the treasury's Medium-term budget policy statement, which maps out the spending that the government plans to make over the next three years. But the CEO Initiative says they won’t be waiting for the government to come to the table and that the fund will be private-sector driven.
State pulling out
South African entrepreneurs badly need access to more venture capital (VC). A 2013 EY report ranked South Africa second lowest among a number of emerging economies and below the average of other G20 members, when it came to the percentage of entrepreneurs who reported that access to VC had improved.
A 2015 SA Venture Capital Association (Savca) report notes that while there had been an increase in the number of viable deals and in the number of investment fund managers (with R1.87bn invested in 2015 in 187 deals), the state is now making fewer VC investments.
The survey showed that private sector fund managers collectively have overtaken the government as the primary source for VC deals. Between 2011 and 2015 in all 81% of deals were made by the private sector. This is up from about half between 2009 and 2012, shows an earlier report.
The government's Technology Innovation Agency (TIA) and Industrial Development Corporation (IDC) are less involved than they were before in such deals.
Could do more
While a matched allocation to the SME Fund by the government will boost the capital available in the fund, the state could help in other ways too, namely:
Key will be whether to prioritise the funding of thousands of black entrepreneurs or leave the decision on which firms to fund purely to the market.
To incentivise investment in black-owned companies Gore and his team have proposed allowing fund managers that invest in black-owned firms to be able to draw a larger fund management fees from such transactions.
That may be a wise way to go. The state will likely want the fund to aim more at promoting high-impact black entrepreneurs, of which the country has very few. Yet addressing the many other issues might also better prepare the market to support such entrepreneurs.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a