A comparative analysis of the Southern African Venture Capital and Private Equity Association (SAVCA) surveys from 2023 and 2024 reveals an encouraging turnaround in fortunes for the asset class so critical to powering high growth scale-ups in South Africa. There are also some strategic shifts that are poised to shape the future of the country’s innovation ecosystem.
A year of recovery and growth
The 2023 SAVCA survey painted a somewhat bleak picture, with a contraction in the value of deals. The total capital invested dropped to R1,12bn in 2022, down from R1,31bn in 2021. However, this decline was counterbalanced by an increase in the number of deals, with 195 investment rounds reported – up from 186 the previous year. Co-investments emerged as a significant trend, reflecting a collaborative approach among VC players to mitigate risks and pool resources.
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Fast forward to 2024, and the landscape looks markedly different. The total capital invested into start-ups surged past R3bn for the first time since the inception of the SAVCA surveys. With R3,28bn invested in 2023, across 184 investment rounds, the average deal size increased significantly, indicating larger and potentially more impactful investments. This recovery was driven by a robust increase in corporate co-investors and a substantial pool of unallocated committed capital, totalling R0,92bn, promising further investment growth in the near future.
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Sectoral shifts: the dominance of ICT
The sectoral analysis reveals a doubling down in investment preferences for technology. In 2022, the information and communication technology (ICT) sector, particularly fintech, dominated the VC landscape, accounting for 48.1% of all active deals. Healthcare also garnered significant attention, aligning with global trends in health tech innovation.
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By 2023, ICT’s dominance had only strengthened, encompassing 58.7% of deal value and 48.8% of the number of deals. Fintech remained the leading sub-sector, followed by software-related investments. The ongoing focus on ICT highlights the increasing importance of digital transformation and technological advancement in South Africa’s VC market. Health-related start-ups continued to attract investment, supported by innovative models and public-funded intellectual property from universities and science councils.
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Geographic distribution: a tale of two provinces
The geographic distribution of investments offers further insights into the evolving VC landscape. The 2023 survey highlighted the Western Cape and Gauteng as primary hubs, with Western Cape-based companies receiving 54.3% of all deals by number. Cape Town and Johannesburg emerged as major centres for investee companies.
The 2024 survey, however, shows a slight decline in the Western Cape’s dominance, with 49.0% of deals by value, though it remained steady at 55.6% by deal volume. Gauteng accounted for 30.4% by value and 32.6% by number. Notably, there was a significant increase in deals involving non-South African companies, underscoring the growing importance of international co-investments and partnerships. This shift suggests a more interconnected and globalised VC market, with South African start-ups increasingly attracting foreign capital and expanding their reach.
The role of fund managers
Independent fund managers have consistently played a crucial role in South Africa’s VC ecosystem. In 2022, they accounted for 61.8% of all active deals, reflecting growing confidence in independent fund management. This trend continued in 2023, with independent fund managers handling 66.2% of all active deals. The public sector’s direct involvement declined significantly, primarily due to the closure of the Industrial Development Corporation’s (IDC) VC unit. However, the IDC remained active through co-investments, and the increased participation of corporate co-investors introduced a diversified and resilient funding ecosystem.
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Exits and returns: a cautious optimism
Exits in 2022 returned R318m to investors, with an average return of 3.85 times the money invested, showcasing strong performance despite economic challenges. In 2023, exit activity was subdued compared to pre-COVID levels, with seven profitable exits totalling R91,4m. Trade sales remained the preferred exit route. While the lower exit values reflect a cautious market, the ongoing investment activity and growth potential suggest a positive long-term outlook for the VC market.
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The strategic shifts observed in the SAVCA surveys signal a promising future, where digital and technological advancements, coupled with a robust and diversified funding ecosystem, will help drive the country’s gazelles. It remains to be seen whether the recently formed Government of National Unity can provide the macro tailwinds to spur growth further. Still, it’s heartening to see that VC investors continue to back local entrepreneurs to seize what opportunities are available in the market.