If you’re the founder of a fast-growing technology start-up in South Africa, then a relocation to London, Amsterdam, New York, Singapore or San Francisco might be the best way to secure your business’s success.
Start-up companies and investors alike agree that South Africa is a tough environment within which to raise large amounts of capital to grow a business into a global player.
Over the past two years, a raft of international companies and investors have signed bigger and bigger cheques over to South African start-up businesses that show promise for high growth and future returns.
In 2001 Koos Bekker, as CEO of Naspers, gave $32m to a small Chinese tech company called Tencent. Fast-forward two decades and that investment has made the Cape Town-based group the most valuable publicly traded group in Africa and a top 10 technology investor, alongside Facebook and Google.
That is the venture capital dream.
But for now, that dream seems out of reach for would-be Jeff Bezoses in South Africa who are relying on local funding to take their businesses to the next level.
The discussions that we need to have, significantly, next year is how do we grow the venture capital market in the country
— Khumbudzo Ntshavheni
The problem of being in South Africa
The problem, it appears, is simply being in South Africa. Whether it’s regulations that hinder real investment or simply the stigma associated with being located in Africa, a number of local founders find themselves living abroad, creating away-from-home perches from which to establish a global business, while attracting much-needed capital.
“For the purposes of simplifying these transactions, it’s important to have an offshore structure in place,” venture capitalist Llew Claasen tells IM. Claasen is a founder and managing partner of Newtown Partners, which has invested in companies including Aisha Pandor’s SweepSouth and Nigeria’s Flutterwave.
“In the South African context, the challenge that we have is that … there are regulations that limit the movement of capital and IP [intellectual property],” says Claasen.
“I’ve been engaging with the various bodies involved with these regulations for a very long time. They are relics of apartheid, carried forward. They were there to protect our currency and to retain our IP.
“The reality is that they are counterproductive. As much as they make it harder for capital and IP to leave South Africa, they also make it harder for it to come in.”
Africa has four main start-up centres that attract capital: Nigeria, Egypt, Kenya and South Africa. The capital flowing to those countries, particularly to Nigeria, far outstrips that coming to South Africa. Despite having the most developed economy in Africa, South Africa is said to have taken in a mere 16% of an estimated $5bn in venture capital invested on the continent in 2021.
This is not to say that the government is not aware of these issues and the missed opportunities.
“The discussions that we need to have, significantly, next year is how do we grow the venture capital market in the country. Because if we can’t, then we won’t move and how do we attract that [capital],” Khumbudzo Ntshavheni, minister of communications & digital technologies, said during a Naspers event this year.
“We should be taking the lion’s share of that [$5bn] … [in fact] I don’t mind us not getting the lion’s share … but we must grow that pie.”
If you’re close to those people you can build a relationship where they get to know you, have coffee … it makes a big difference
— Andrew Watkins-Ball
International capital creeping in
Unsurprisingly, the largest capital raises over the past year or so have been led by international investors who seem to have woken up to opportunities in the local market.
While many small and medium businesses in South Africa have found it difficult to attract funding, financial services platform Jumo has drawn in piles of cash from around the world.
The largest local capital raise in 2020 was for Jumo, which received $55m from investors. That followed a $52m raise in 2018, led by US investment bank Goldman Sachs, helping the company to expand to Asia. Prior investment rounds have included Leapfrog, Finnfund, Proparco, Vostok Emerging Finance and Brook Asset Management.
Jumo founder and CEO Andrew Watkins-Ball, who is based in London, says proximity to large international capital pools is the way to go.
“I think it’s prudent [to have an international base] because the scale of capital in those markets, if you’re close to those people you can build a relationship where they get to know you, have coffee … it makes a big difference in people’s ability to have confidence and take a bet on these founders and management teams to raise the substantial amounts of money that are needed to compete.”
In late 2021, the South Africa- and London-based fintech start-up topped its previous record, raising $120m through an investment round led by Fidelity Management & Research Co — a unit of one of the world’s largest asset managers, with more than $4-trillion under management. This represented Fidelity’s first investment in emerging-market fintech, with other investors including Visa.
The latest round brings Jumo’s total funding raised so far to about $200m.
“Until we see more development in the capital markets in Africa, specifically in the funding of earlier-stage businesses that are trying to find product fit or scaling, it’s just very difficult for those businesses to find the type of capital willing to take risk in that stage of life,” Watkins-Ball says.
Even South Africa-based funders find it hard to back early-stage businesses. Many have accused local venture capitalists of operating more like private equity firms as opposed to being true early backers.
In 2021, the Competition Commission took Naspers to task over its policy of investing only in established businesses through its R1.4bn South African venture fund, Foundry. The criticism during an inquiry on the state of e-commerce markets in South Africa was that Naspers did not have a mandate in place for investing in early-stage businesses.
“Capital raising is challenging all over the world,” says Tinashe Ruzane, co-founder and CEO of FlexClub, which has its headquarters in Amsterdam.
FlexClub, a technology-backed start-up that allows people to subscribe for a car in South Africa and Mexico, attracted a further $5m in equity and debt funding in 2020, bolstering the $1.2m it had already raised in 2019.
The company has investors that include Kindred Ventures, an early backer of global technology businesses including Uber, Postmates, Virgin Hyperloop and Coinbase.
“But what you do see in other parts of the world is a willingness to build or back a global business,” says Ruzane. “If you have global ambitions, what liquidity and exits look like for investors outside is very different from what it is for local investors.
“It can be more expensive to raise in South Africa than it is to raise outside. But obviously you must have a more ambitious story to tell. There are exceptions to the rule, like Yoco.”
In 2021, fintech start-up Yoco raised $83m through a Series C funding round. One or more of its founders is said to now be living in Amsterdam, with the company headquartered in Cape Town.
If you want to raise $5m or even $10m, you might be able to get it in South Africa. But … there are few funds in South Africa that can invest $20m or more
— Tinashe Ruzane
Not only a small-player problem
From big companies to those only starting out, access to funding is top of mind, so much so that a growing number of South African tech firms with international operations have looked to exchanges outside this country recently to attract greater pools of capital and better valuations.
In 2021, shareholders in vehicle recovery and fleet management group Cartrack approved a plan to roll the company into its founder’s investment vehicle, Karooooo.
The complex deal was done to open up Karooooo to larger pools of capital on offer in the US market. On listing on the Nasdaq, the group raised $33.8m.
Former Altron subsidiary Bytes, a software, security and cloud services specialist, listed on the London Stock Exchange in December 2020 with a secondary inward listing on the JSE after a demerger that created R13bn in value for Altron’s shareholders.
Altron had argued that the true value of the UK business was not fully reflected in its share price. Since the listing, the company’s stock is up 31%, its market capitalisation having grown to R21.2bn.
Naspers, by far the biggest listed tech company on the JSE, is valued at R1.04-trillion. It opted to spin out its international assets under Prosus, along with an Amsterdam listing, because it had become too large for the local exchange.
The case for policy reform
Those providing funding or looking for funds think policy reform is needed.
“It comes down to the amount you want to raise,” says Ruzane. “If you want to raise $5m or even $10m, you might be able to get it in South Africa. But the minute you go beyond that, there are few funds in South Africa that can invest $20m or more. The mindset is different.”
Claasen says he would love to be involved in finding ways to help the development of the local capital markets.
“I’ve spent some of my career doing that. Back in 2005, we were doing institutional buyouts, bringing international capital in and trying to get local participation. But those developmental issues are not straightforward and they require policy support, investment from the government, they require co-ordination. That’s difficult territory.”
Until something changes, he says local policies don’t do much to attract investment into South Africa.
“If you have a world full of start-ups, and a small country at the bottom of Africa that says ‘We have different rules, we are special’, investors will say: ‘I can find high-quality transactions anywhere else in the world. Why should I bother to jump through hoops for a small little country where the opportunities are no different from elsewhere in the world?’
“We end up with a situation where the local pools are limited to local capital sources. This means venture capitalists raise their funds from local sources like family offices, high net worth individuals [and the like],” he says.
Having already raised funds locally, however, Ruzane is more hopeful about the local market.
“The depth of the capital markets in the US or Europe is thousands of times larger.” Nevertheless, “some of those funds are getting to R300m or R400m, which is not bad for South Africa if you’re investing at the early stage”, he says.
“I never want to discount South African capital”.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.