VC landscape saw record investment, exit activity in 2019
A total of 38 venture capital (VC) exits were made by investors that had signed funding deals with South African tech start-ups in 2019 – more than double the previous record for annual exit activity – with 50% of exit strategies reported as profitable.
This is according to the newly released SAVCA 2020 Venture Capital Industry Survey, conducted by the Southern African Venture Capital and Private Equity Association (SAVCA). It shows the South African VC landscape experienced both record investment and exit activity in 2019 compared to 2018.
The annual survey provides an overview of SA’s VC landscape during the 2019 calendar year and the characteristics of investment firms that form part of the current VC ecosystem, based on their insights and experience.
It focuses on all active deals in the portfolio of hundreds of VC fund managers that participated in the survey. Almost all the deals comprised investments in small and medium enterprises which specialise in the ICT sector.
The report notes that in 2019, a total of 162 new deals were reported, with an overall investment value of R1.23 billion – a notable increase of 14.8% on the deals reported in 2018.
While there was a higher number of exits in 2019 than those in 2018, 50% of exit strategies were reported as profitable, with a total amount of R830.5 million returned to the investors.
Trade sales remained the most prevalent exit route, followed by the SMEs exiting to join other investors.
VC investors primarily invest with an exit strategy in mind after a few years. Exit strategies for VC funds are mainly based on five key factors: bankruptcy; a buy-back (entrepreneurs buy back the investment share from the venture capitalists); write-offs (voluntary liquidations); trade sales (where the private company is sold or merged with an acquirer for stocks, cash or both); or initial public offering (when investors issue shares registered for public offering).
“This record exit activity bodes well for the development of the industry locally, as 50% were reported as profitable,” says Tanya van Lill, CEO of SAVCA.
“Independent VC fund managers continue to comprise a largest share of active portfolios (38.1%), with captive government funds and captive corporate funds making a close second by holding 30.1% of all deals by value.”
Angel investors surveyed comprise 24.9% of all active deals by number, with an average investment round of R2.04 million.
The 2019 VC landscape shows a continued upward trend in investment activity that started after 2015, at the same time when changes were made to Section 12J, which provides companies and trusts with a tax incentive for investing in SMEs, according to the report.
From a geographic perspective, the majority of investments are still mainly in the Gauteng and Western Cape regions. Johannesburg was listed as the head office location for most VC fund managers, marginally higher than Cape Town.
In terms of funds under management on a sectoral level, manufacturing accounted for the largest share of active deals (13.8% by value), followed by the food and beverage sector (12.7%) and business products and services (10.9%), this despite deals in the food and beverage sector receiving most of the investment in 2018 (14.2%), followed by agriculture (10.9%).
Noting that agriculture does not typically feature among the top sectors of VC investments, Van Lill points out that recent investment activity by a number of VC fund managers into agritech businesses has raised the profile of the sector.
“This is an example of how sector-based preferences fluctuate from year to year, with energy in 2019 making up a smaller share of VC focus due to the survey’s reclassification of deals involving asset leases.”
While acutely aware of the challenges the VC industry is currently facing due to COVID-19, Van Lill says she is encouraged by the significant growth of VC investors and early-stage deal activity reported in 2019. “There is no doubt that the current health and subsequent economic crisis will reflect in next year’s research results; however, we can find some solace in this year’s results, which suggest a strong foundation and an overall positive outlook of the VC industry,” she concludes.