SAVCA VC Conference 2023 highlights

The 2023 edition of the SAVCA Venture Capital (VC) Conference took place last week at the elegant Hazendal Wine Estate in Stellenbosch, bringing together an industry-leading panel of speakers and guests to unpack this year’s overarching theme of ‘Resilience’ in the Southern Africa VC sector. The conference highlighted the sector’s agility and its ability to bounce back from extraordinary market challenges. The MC for the day was Rajiv Daya, well-respected Pan-African Investment Professional, who along with insightful, meticulous, and heartfelt commentary throughout his time on stage, welcomed Tshepiso Kobile, for her first official opening address at the conference.

In her opening remarks, Kobile shared her insight into the correlation between resilience and grit, and the fundamental role these two characteristics play in the sector. “Grit and resilience underpin this amazing industry that we are all here today to support. Grit speaks to the sustained and ongoing effort that we as industry stakeholders commit to when building this asset class, and in the same vein, resilience speaks to our ability to recover from the many setbacks and headwinds that we face on an ongoing basis. Despite the very apparent challenges currently facing us, we have all gathered here today to identify how this asset class can assist us in finding solutions to the many social and economic challenges that the region is facing. We’d like to thank you for being here today and for your unwavering support in helping us continue to build this asset class. We hope you find today’s various discussions impactful and walk away with new ideas on how we can strengthen this ecosystem in the future.”

First up, we had a keynote address from Ebrahim Fakir, Political commentator and Senior Research Associate at the Centre for African diplomacy and leadership (CADL), University of Johannesburg. In this address, Fakir shared scenarios of where South Africa could possibly be post-next year’s national elections. Starting with the context, Fakir highlighted that SA is inherently democratic. “Given the unpredictability and sentimental nature of humans, it is difficult to predict what next year’s voter turnout is going to be, and this turnout will determine the outcome of the process. This fact makes it difficult to paint a clear picture of where South Africa will be after our 7th national democratic election. However, something we can all agree on is that we live in a time of social abnormality, where trust in public institutions is rapidly declining, with predatory politics, and levels trust in the Independent Electoral Commission have dropped rapidly.”

Despite this unpredictability, Fakir provided a breakdown of the many possibilities that could result from next year’s elections. “Naturally, our political landscape is bound to be more unstable next year. This calls for counter-intuitive behaviors, as it will become very important to find ways to close the existing wage differential”. A strong and resilient private sector, which invests back in the economy, will help to bolster it during times of political turmoil and instability.

Panel Discussion: VC investment landscape – African overview:

The first panel discussion of the day focused on an African overview of the VC investment landscape and the challenges facing it. Sharing her thoughts on the topic was Maryanne Ochola, Managing Director at Endeavor Kenya. “For me, the downturn that we are currently experiencing has made a clear distinction between investors who were here opportunistically, and those who are in for the long haul. As Pan-African investors, we need to be true partners to founders – we need to change the narrative that this downturn is a bad thing. We need to acknowledge that these challenges are a reflection of a contraction in valuations and multiples, and not necessarily an issue with the companies we are investing in on the continent. For early-stage businesses, the downturn is an opportunity to take key learnings and build a robust business model right from the beginning.”

Building on this conversation was Keet van Zyl, Co-Founder & Partner at Knife Capital, who provided his thoughts on what needs to be done to improve performance in a difficult environment. “In an environment of scarcity, we need to carefully determine how we can turn investment into revenue and how to extend runway. We also need to pay close attention to the working capital cycles, the conversions of market access and how to support growth strategies in other countries on a lean budget. In these types of environments, we also need to pay close attention to team incentivisation. When bonuses are frozen and salaries are cut, how do we keep middle-management incentivised to keep going?”

Providing insight into the regional characteristics, Ochola applauded the Southern African region for its deep domestic capital markets, which provides resilience to founders during downturns. Speaking more broadly to other regions on the continent, Ochola expressed confidence in East Africa’s ability to manage volatility and remain resilient due to its ease in generating in international funding. She also touched on the West African market and praised its robust and large consumer market.

Concluding the panel, both Ochola and van Zyl shared their response to a critical question: How are you supporting portfolio companies today, considering the difficult environment? As Ochola explained: “for later-stage businesses, which is where we have seen most of the difficulties when it comes to capital raising, mentoring has been crucial. We have also been focused on how we can access alternative sources of capital, more local currency working capital and leverage the value chain more efficiently. This has involved looking into commercial introductions – finding innovative ways to help our companies extend runaway – facilitating peer to peer learning between portfolio companies and doubling down on follow-on funding for promising companies.”

For van Zyl, collaboration has been key. “A particular focus of ours has been increasing collaboration between our portfolio companies and bringing experts in (venture partners) on a long-term incentive basis to help our businesses with targeted advice. We’ve also explored business model re-engineering, doubling down on follow-on funding and supporting in terms of runway extension and figuring out how we can generate traction to optimally raise capital for businesses that are not firing on all cylinders.”

Investor perspectives on allocation to VC as an attractive asset class

Next, our panel members shared their insight into what the VC sector can do to support economic growth in South Africa. For Paula Mokwena, CEO at Fireball Capital, research has shown that VC is a significant driver of economic growth and development. “Our country has a critical need for innovation-led growth. We are losing a lot of manufacturing capacity, and with that, the loss of jobs. In this context, VC is a ‘holy grail’ of economic development. Not only does it serve as a contributor to the real economy in the form of job creation – but it also assists us in commercialising the innovation, technology and science that is being developed inside our country.” Mokwena further highlighted co-investment opportunities that can be explored by institutional investors to leverage existing skills.

Echoing this sentiment was Themba Ntini, Investment Manager at IDF capital. “In SA, VC is still quite a new concept – especially when you compare it to more developed markets. However, the opportunity to support economic growth is huge. We have so many good examples from the likes of Knife Capital and how they have succeeded in the space. Even throughout our own various funds at IDF, we have multiple success stories of job creation and bolstered manufacturing capabilities coming out of our portfolio companies.”

Touching on the need to address risk and for investors to take a risk-adjusted view of VC investment was Kagiso Makhele, Portfolio Manager at EPPF. “For us, manager selection is crucial in mitigating risk. If we are selecting and working with top-performing managers, we have done our due diligence, and know we can trust them to yield returns for our investors while mitigating any unnecessary risks.” Makhele highlighted the crucial need for VC to continue to build track record of exits.

A showcase of Resilience: Portfolio companies

Our next panel discussion was an opportunity to showcase some of the most respected investee companies in the VC sector. In this panel, Sam Hutchinson, Founder & CEO at Sendmarc; Spencer Horne, Founder of Cloudline; and James Ross, Co-Founder of BixBio, introduced their business journeys and how the VC sector aided in the sustained growth of their ventures. A key outcome of this panel was insight from the entrepreneurs to fund managers about what they should be doing more or less of, to better support them in their endeavours to prioritise the needs of the businesses.

Kick-starting this feedback was Horne: “From the start-up perspective, we need to touch on the need for more local investment capital. The bulk of our investors are international. At Cloudline, we’d love to bridge this gap with local fund managers and investors.” For Ross, fund managers need to move away from the paternal relationship that is common between founders and fund managers and move towards more of a collaborative relationship that is mutually beneficial for both parties. We also need investors to be more willing to support us during our research and development (R&D) processes, before expecting immediate returns overnight.”

Reflecting on what he would do differently looking back on the journey of his business was Hutchinson, who concluded the discussion: “For us, international expansion was incredibly difficult. Looking back, we would definitely look to diversify and strengthen our international expansion strategy. Knowing what we know now, we’d also be able to achieve what we’ve achieved in half the amount of time.”

All three entrepreneurs emphasised the need for capital, given where they are in their growth trajectory.

Strengthening the ecosystem at early stage to improve the quality of the pipeline

The fourth panel discussion of the day sought to uncover what quality pipeline looks like, and what can be done to address the gaps in early-stage funding. Initiating this conversation was Catherine Young, Managing Partner, Grindstone Ventures: “Pipeline is a continuum. It starts from very early stage to late stage. Across this continuum, these businesses have very different needs. What is critical, is that we need to classify the start-up businesses we work with into the various different categories so we can determine exactly what they need, and how we can support them.”

Building on how the different types of capital have evolved over the past few years was Janice Johnston, CEO, Edge Growth: “Looking back, a lot of phenomenal work has been done to distinguish seed capital from pre-seed capital, and seed capital from series A capital. If we look at the entry point of this pipeline, it all comes back to the founders – and the number of businesses the ecosystem is able to provide a service to – be that a growth service or access to markets service.”

Touching on some of the key challenges that early-stage businesses in South Africa face was Alison Collier, Managing Director, Endeavor: “We need more angel investors to get connected with our early-stage founders to address the lack of capital flows to early-stage businesses. This will help them to establish stronger relationships and will enable them to start feeling more comfortable with one another, so that the investors are more willing to take risks. When you’re investing in Series B or later-stage businesses, they’ve been de-risked, whereas early-stage businesses have not. So, establishing those relationships between founders of early-stage businesses and angel investors is crucial in improving the capital allocations to this underserviced side of the continuum.”

The changing face of business: futuristic and disruptive technology trends that will impact business

The audience was treated to an insightful keynote address unpacking how AI is set to revolutionise industries across the economy and transform the way businesses operate as a whole. Leading this address was Johan Steyn, Human-Centered AI Advocate, International speaker, one of the Top 50 global voices on AI (Swiss Cognitive), Founder of AIforBusiness.net.

Clarifying the most effective use cases of AI as a tool in businesses, Steyn shared: “AI can gather data and make accurate predictions of the future, learn by itself, and optimise inefficiencies that exist within a business’ value chain. To further showcase the value of AI to business operations, one can look to the fact that AI will show you patterns in your data that you would have never picked up through human oversight, this can help businesses to identify existing gaps or underlying errors. Finally – AI can give you answers to questions you’ve never asked. And this is a key way that business leaders can distinguish between automation and AI.” Steyn also encouraged businesses to become more adept at fully optimising the tools they have available to them, and to ensure they have a firm understanding of what processes in their business actually require AI intervention.

Concluding his thoughts, Steyn acknowledged the invaluable role AI can play in optimising business operations. However, he refuted the long-standing notion that AI will one day be able to replace the nuance, creativity and unpredictability that humans weave into the very DNA of business.

Lessons learnt on fundraising

The final panel discussion of the day brought together an established line-up of fund managers to discuss some of the key challenges encountered in fundraising. Starting the conversation was Brent Shahim, Managing Partner, Venture Capitalworks “As a first-time fund, we have experienced multiple headwinds. The capital environment we find ourselves in is extremely difficult. With that being said, we are seeing an increasing appetite from institutions for very differentiated VC offerings. The investors we have spoken to are very sophisticated and are on a crusade to build the ecosystem. They understand that VC is about capital allocation, but it’s also about building strong, robust businesses with capacity to upscale.”

Adding to this conversation, but from a more international lens was Ian Lessem, Managing Director, HAVAIC: “A countertrend we are seeing from South Africa and the rest of the continent is that the market has huge capacity to grow, with a 12 – 12.5% growth rate above what you’re seeing in developed markets. Naturally, international investors are looking at this and are realising that our local markets can potentially outperform international ones. This despite the various challenges we are facing.”

Wrapping up the panel discussion on how the ecosystem can acquire more credible managers was Brett Commaille, Partner, Hlayisani: “Speaking to the Limited Partners in the room, we would encourage you to start working with fund managers. This will help the sector to grow. But be mindful of the restrictions that you place on those fund managers by creating overly strict and hard targets. The last thing you want is for your capital to become undeployable.”

Conclusion

Concluding the proceedings for the day was Ketso Gordhan, CEO: SA SME Fund and MC, Rajiv Daya. In his comments, Gordhan expressed his excitement for the future of the VC sector in the region. “Looking back five years ago, I would never have known that we would be able to run a first-time fund manager training programme, that we would be able to allocate capital to 11 Venture Capital funds and that we would successfully raise a R1 billion VC fund of funds. But we’ve achieved it. This gives me great hope for the future of this asset class.”

Daya thanked all attendees and delegates for their continued support of the VC sector’s expansion, and for their authenticity in discussing the very real challenges and issues facing the sector now, and the challenges that are likely to come. “The only way we will truly progress, is if we are honest about where we are and the reality of the challenges facing us. As the saying goes – If not us, then who? If not now – then when?”

About SAVCA

The Southern African Venture Capital and Private Equity Association (SAVCA) is the industry body and public policy advocate for private equity and venture capital in Southern Africa. SAVCA represents more than R205 billion in assets under management through circa 204 members that form part of the private equity and venture capital ecosystem. SAVCA promotes the Southern Africa venture capital and private equity asset classes on a range of matters affecting the industry, providing relevant and insightful research, offering training on private equity and creating meaningful networking opportunities for industry players.