VC investment into South African ICT startups rises

South Africa's venture capital (VC) sector showed resilience in 2023, and total capital flow to startups grew year-on-year to reach R3.28 billion (US$178.8 million) for the first time, with investments into ICT companies almost doubling compared to 2022.

Those were some of the key highlights from the new Venture Capital Industry Survey from the Southern African Venture Capital and Private Equity Association (SAVCA) and research partner VS Nova.

Holistically, since the inception of the survey in 2010, the South African VC asset class had R10.73 billion ($585 million) invested in 1,106 active deals.

Total assets under management increased 17.8%, or R1.62 billion ($88.3 million), between the end of 2022 and the end of 2023.

Stephan Lamprecht, founder of VS Nova, said that in 2014 the industry only saw a total investment of R273 million ($14.9 million), whereas in 2023 there was a total investment of R3.28 billion ($178.8 million), a significant upward curve.

Value of SA deals per year, ZAR million

(Source: SAVCA Venture Capital Industry Survey)

More was invested in local startups in 2023 compared to 2022, but there was an 8.2% decrease when comparing the number of deals made in the year. The number of entities receiving funding slowed down, with more investments going into the same companies.

"This kind of data allows us to continue answering the important question of whether VC capital is available to entrepreneurs in South Africa. The answer is definitely yes, but in terms of the number of businesses receiving capital, which sat at 94 in 2023, there is still much work to be done," Lamprecht added.

In 2023, there were 184 VC deals in South Africa, compared to 195 in 2022 and 186 in 2021. But the 2023 number was higher than the pre-COVID levels of 162 deals in 2019.

Speaking on the survey's results, SAVCA CEO Tshepiso Kobile said the VC industry must continue to play a pivotal role in supporting high-growth startups and early-stage businesses, whilst also enabling innovative solutions to South Africa's unique challenges as a country.

"Across the continent, we have seen VC gain popularity as an investment strategy. Our economy depends on this sustained investment into our entrepreneurs and into innovative solutions that can help leapfrog South Africa into a more competitive and inclusive economy," Kobile added.

Funding winter bites across Africa

Despite the growth in South Africa shown by the SAVCA survey, across Africa the impact of the global "funding winter" was felt by startups in 2023.

Disrupt Africa's "African Tech Startups Funding Report 2023" showed that investment into tech startups dropped by almost 28% year-on-year to $2.4 billion in 2023.

The decline came after a strong 2022 for African tech startups, in which total funding increased beyond the $3 billion mark for the first time on record.

Similarly, data from "Africa: The Big Deal" showed that startup funding dropped 39% in 2023. However, the split across the regions improved as West Africa's dominance waned and Southern Africa recorded growth of 6% year-on-year.

ICT dominates capital flow

In line with the global trend for VC type investments, South Africa's ICT sector – which combines several active sub-sectors such as fintech, edtech, software, e-commerce and the online market – continued to outweigh the investment activity in other sectors during 2023.

ICT as a primary sector almost doubled in number of investments compared to 2022, amounting to 87.6% of the total, compared to 48.1% in 2022.

Percentage of deals done in 2023, per sector(Source: SAVCA Venture Capital Industry Survey)

Fintech remained the frontrunner when it comes to total assets under management, making up 14.8% of deals and 18.3% by deal value; software followed with 9.8% of the total number of deals and 6.7% by deal value.

E-commerce accounted for 4.5% of the total number of deals and 5.3% of deal value, which was a significant jump from 2022 levels – showing a continued uptick in online shopping during and after the pandemic years.

When it comes to the size of all VC investments in South Africa since 2010, the largest category overall was deals of between R1 million ($54,520) and R5 million ($272,590), comprising 41.3% of all active deals.

This is a significant change from the previous survey, where the same category contributed only 8.8% of all deals. Over 25% of deals entailed individual rounds of more than R20 million ($1.1 million).

Deals of more than R50 million ($2.7 million) have become more prevalent in recent years, with 15 such deals reported in 2023 alone. Six of these were over R100 million ($5.5 million).

Size of VC deals in SA in 2023

(Source: SAVCA Venture Capital Industry Survey)

SAVCA said a noticeable feature of the survey was the growth in co-investment activity, demonstrative of corporations and foreign investors investing alongside early-stage fund managers.

In terms of the types of fund managers engaging in active deals, independent funds led the charge in 2023 at 66.2% of the total number of deals in the active portfolio of VC investments – up from 61.8% in 2022. This was followed by captive corporates at 34.3%, with angel investors making up a small proportion of active deals at 7.1%.

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Interestingly, however, the average deal size of VC transactions by angel investors amounted to R6.15 million ($335,280) which researchers said is a relatively large value when compared to the average deal size coming from independent funds, which currently equates to R7.47 million ($407,245).

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*Top image source: freepik.

— Paula Gilbert, Editor, Connecting Africa