Venture Capital Spend in South Africa Climbs as Deal Size Drops

  • Digitization, e-commerce projects require fewer funds to start
  • Rebounding investment still a third of pre-crisis levels

Venture capital spending in South Africa, the continent’s most developed economy, is increasing from a low in 2013, while the average deal size is shrinking because new technology companies require less money to start, an industry survey shows.

The investments, mostly in high-tech companies with potential for rapid growth, are on pace to reach 146 million rand ($11 million) in 43 transactions averaging 3.4 million rand this year, according to the Southern African Venture Capital and Private Equity Association. That compares with a low of 109 million rand two years ago in 18 deals that averaged 6 million rand. 

“The value of transactions concluded reflected global trends for deals involving digitization, online enablement and e-commerce, which typically require smaller amounts of funding,” Erika van der Merwe, the association’s chief executive officer, said in the report released Wednesday in Johannesburg. Start-ups “achieve rapid market uptake by using available technologies and adopting lean operations with shorter development cycles,” she said.

The addition of venture-capital fund managers and their promotion of start-up incubators and accelerators to advance projects is helping the industry expand in South Africa. Banks and mobile network operators are embracing innovations that combine finance and technology, while tax incentives and an average 20 percent annual compound return on investments are attracting investors.

The venture-capital industry had 1.87 billion rand invested across 168 active deals as of July 31, the survey shows. Even if spending reaches this year’s projection, it would be less than a third of the 551 million rand in 2008, the most in the past decade.

The sector remains a niche part of the country’s fund-management industry, which had assets of 1.8 trillion rand at mid-year, according to the Association for Savings and Investment South Africa. Challenges include risk-averse government agencies, currency controls limiting foreign investment and a lack of skilled entrepreneurs, Wednesday’s study shows.

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