A new R300-million fund has been launched to invest seed capital in promising tech start-ups in South Africa. The Seed Fund of Funds is backed by the Department of Science & Innovation, its entity the Technology Innovation Agency (TIA), and “impact investor” partners. The fund will exclusively provide early-stage capital funding to local start-ups.
It aims to fund at least 50 technology-driven startups through experienced fund managers, with a focus on innovation and transformation in South Africa. Ketso Gordhan, CEO of the SA SME Fund, stated that seed funding is the “cornerstone of entrepreneurial success and the lifeblood of innovation without which many great ideas would never see the light of day.” He emphasized that South Africa has an abundance of brilliant minds and that the fund aims to ensure that more of these minds have the resources they need to succeed. The founding parties highlighted that early-stage funding is a significant gap in South Africa, where the venture capital ecosystem has historically attracted the majority of investment into start-ups.
TIA acting CEO Patrick Krappie said, “Governments across the globe play a crucial role in fostering innovation ecosystems, and South Africa is no different. The partnership with the SA SME Fund aims to bolster funds towards start-ups and SMMEs through a fund of funds approach.”
Krappie added that the Seed Fund of Funds will catalyse a wave of new start-ups by enabling them to transition from ideas to viable enterprises. This presents an opportunity for the fund to play a catalytic role in developing the country’s seed-stage funding ecosystem.
Seed fund backs South African startups
The amount of venture capital available within the South African tech ecosystem is set to increase in the coming years as innovative de-risking models attract more institutional investment into the space. Investors speaking at a panel during last week’s SA Innovation Summit agreed that institutional investors, such as pension funds, have historically avoided the VC asset class in South Africa given its inherent risks.
Rory Ord, head of private markets at 27four Investment Managers, said that raising a venture capital fund in the country is a challenging endeavor. Pension funds will raise issues around risk J-curves, and those approaching the pension fund market know there is no familiarity with what it means to be an investor in the early-stage space. There is a need to create tailored offerings to “smooth the path,” and a few funds are doing just that.
The SA SME Fund and Fireball Capital have adopted a “fund of funds” model, disbursing capital into multiple VC firms with multiple approaches in order to spread risk. Fireball Capital is set to close its ZAR1 billion (US$57 million) fund soon, said investment manager Justin James, indicating that plenty of money will soon be flowing into the ecosystem. However, he noted that in South Africa, the allure of risk-taking is different from what is happening overseas, and there is a lack of liquidity.
With firms like Fireball working to de-risk venture capital to make it more akin to the private equity asset class, and thereby attract more institutional investment, liquidity is improving. James concluded that from a PE perspective, the mandates are changing, and institutional investors are coming, although it is taking a bit longer.
- TechCentral.”R300-million seed fund launched for tech start-ups in South Africa”.
- TechAfricaNews.”South Africa’s Tech Startups to Benefit from R300 Million Seed Fund Initiative”.
- DisruptAfrica.”More VC funding heading for SA ecosystem as innovative models attract institutional capital”.