The SA SME Fund, in partnership with the Technology Innovation Agency (TIA) and E Squared Investments, has launched a R300m fund earmarked for investment in early-stage start-ups, to help entrepreneurs access venture capital.
Risk appetite in SA for early stage start-ups has tended to be low and funders typically shy from putting money into ideas or getting businesses off the ground, unlike markets such as the US that have historically made large and sometimes risky bets on unproven business models.
Businesses that attract funding in SA tend to be those that have come up with an idea or identified or gap in the market, developed a product or service, entered the market, found a fit and are growing.
This state of affairs has earned local venture capital the dubious reputation of being more akin to private equity.
The SA SME Fund’s new vehicle aims to invest in at least 50 technology-driven start-ups through experienced fund managers, with a focus on innovation and transformation.
The fund says it is addressing a critical gap in SA’s venture capital ecosystem, where later-stage investments, such as series A and series B, have historically attracted more funding.
In essence, series A funding helps a start-up refine its product and gain traction, whereas series B is designed to push rapid growth and market share.
Seed funding is the first stage of external financing for a start-up, whereby a business validates an entrepreneur’s idea and creates a basic version of the proposed product to showcase and cover initial expenses.
The shareholders of the SA SME Fund are 52 of SA’s largest companies, including Absa, Telkom, Discovery, FirstRand and the Public Investment Corporation (PIC). The fund was started with R1.4bn and invests mainly in black entrepreneurs.
SA SME Fund also has a R300m debt fund for small businesses with the Gauteng provincial government and the Industrial Development Corporation as investors. It also has a “fund of venture capital funds” of R795m, which focuses on series A and series B investments.
Ketso Gordhan, CEO of the SA SME Fund, said the role of seed funding is a cornerstone of entrepreneurial success.
“Seed capital is the lifeblood of innovation and entrepreneurial growth. Without it, many great ideas would never see the light of day. By injecting capital at this critical early stage, we are not just funding start-ups — we are cultivating the next generation of industry leaders,” he said.
“SA has no shortage of brilliant minds, and this fund will ensure that more of them have the resources they need to succeed. Our goal is to make sure these companies have a fair chance at success and scale in the local and global markets.”
The fund’s partners believe that supporting entrepreneurs and small businesses will help create jobs, as evidenced by the US where one in five jobs has been created by tech companies in recent times.
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