Savca’s Tanya van Lill on big investors missing the start-up boat
Institutions letting rich pickings die on vine, says investment body
● Institutional investors need to wake up to the opportunities offered by start-ups and small businesses and support SA’s venture capital sector, says Tanya van Lill, CEO of the Southern African Venture Capital and Private Equity Association (Savca).
“Institutional investors need to realise that they can get good returns as well as make a phenomenal impact on the South African economy,” she says.
Savca has just released a survey of the venture capital sector showing that in 2020 74 venture capital (VC) fund managers invested R1.39bn into 122 start-ups and small businesses with long-term growth potential. This is the highest capital amount deployed in this sector since Savca began surveying the venture capital industry in 2010.
This could easily be doubled, says Van Lill. The opportunities are out there.
“The venture capital sector is maturing and ready to take advantage. The problem is not enough capital is investing into the sector.”
VC fund managers are battling to raise funds. What funds there are come from high net worth individuals, families and some corporations, but not from institutions.
“Institutions are holding back because it’s such a young asset class in South Africa.”
This is beginning to change, but very slowly.
“We’re starting to see more development finance institutions injecting capital into African, not just South African, venture capital,” says Van Lill.
The Mineworkers Investment Company has been investing in a venture capital fund and is starting one of its own.
The biggest player that has shown institutional interest is the SA SME fund, which has been a big catalyst for growth in venture capital in the past few years, she says.
But most entrepreneurs in SA have to come up with their own funding initially.
“There’s a lot of bootstrapping happening in the early stages. Even debt funders are not prepared to take a risk on an early-stage company.”
Most venture capital funds are investing in one of every 100 opportunities they look at. This is no reflection on the quality of these opportunities, she says.
“They have limited amounts to invest and small teams, so there are a lot of good opportunities they’re missing out on.”
When the start-up companies they’ve selected show a lot of growth, the venture capital funds don’t have enough to make followup investments.
“The entrepreneurs look offshore and a lot of times we lose these companies. They no longer look and feel like a South African company after attracting offshore investors.”
Among them is a company that uses artificial intelligence to optimise complex manufacturing processes. They recently raised R100m from an international investor to go global. Local venture capital funds are typically between R150m and R200m at best, she says.
“If we start attracting more institutional capital, even just 0.5% or 1% of their allocation, and give it to reputable VC fund managers with track records, you’ll see a surge of VC fund managers that are able to support growing companies and we won’t lose them to offshore investors.
“There’s still a lot of negative perceptions among institutional investors about the risks of VC. There’s a lot of education that needs to happen.”
Van Lill says she believes this will change as more diverse and younger VC fund managers come to the fore.
There is no lack of good entrepreneurs with good ideas out there, she says.
“There are interesting innovations coming from South African entrepreneurs which are not just good for South Africa but scalable around the world.”
Investment in them leads to more innovation and job creation — 450 tech start-ups in Cape Town now employ more than 40,000 people — and increases SA’s competitiveness as a country in terms of what it can deliver, she says.
She cites Aerobotics, an agritech start-up that has developed drone technology to improve crop yields and is expanding very quickly.
“It’s from our own back yard. It’s amazing to think that our entrepreneurs have come up with such amazing solutions.”
Thanks to local funding from the Naspers investment arm, Aerobotics is still in the country.
Van Lill says SA can learn from German pension funds that invested in venture capital, which was also very slow to take off in that country, and how they have made it work for the German economy.
“Our institutional investors are missing opportunities and need to start thinking about it or at least start asking the right questions about venture capital and looking at some of the really good case studies that are coming out.
“A lot of times these entrepreneurs are solving problems for the base of the pyramid, which a lot of the time are pension fund members, so that their lives can be improved.”
Examples include “all the fintech solutions coming out for people who don’t have access to financial services”.
Institutional investors give money to private equity funds that are seen as lower risk because they invest in more mature companies that are more scalable.
Venture capital invests in more innovative, early-stage companies where, Van Lill concedes, the risks are higher.
“But our venture capital fund managers do a thorough due diligence before investing. They have the skill and know-how to work with entrepreneurs in the early stages, and support, guide and mentor them so they can grow and create more jobs and capacity.”
She says regulatory constraints make it difficult to attract investors and grow startups. They also make it hard for entrepreneurs in terms of ease of doing business, how long it takes to register a business, and the time, cost and effort of having to go through the same tortuous BEE verification that big established corporations have to.
Savca is working with industry players on a project called the SA Start-up Act to highlight some of the challenges that stop highgrowth entrepreneurs from growing.
Van Lill, who joined Savca in 2017 after 10 years at the Gordon Institute of Business Science, where she graduated with an MBA and was director of academic programmes, says the idea is to produce a start-up bill for consideration by parliament.
“Supporting start-ups is not just about job creation, it’s about a bigger tax base for the country as these companies grow,” she says.
The entrepreneurs look offshore and a lot of times we lose these companies … after they attract offshore investors Tanya van Lill