The global economy is on the edge. South Africa, which is already operating under a severely contracted economic environment, is also feeling the tremor.

Companies are downsizing to cut costs and boost profits. Investors are jittery and cautious. They are thinking twice before putting their money where their fingers are likely to burn up.

However, it would seem that one class of investors is prepared to stand the heat of the kitchen. And they are none other than the  venture capital (VC) people.

The current value of VC in the world stands at US$12.8 billion. This includes 53% share of investment into VC-backed companies in the Americas. The largest Bitcoin-Blockchain VC-backed company globally by funding value is Coinbase. The figures are from  Statista.com.

In South Africa, VC business seems to be growing despite tough economic conditions.

Robust growth

The South African VC industry continued to experience robust growth in 2018, with 181 new VC deals reported last year. It represents an increase of 13.8% from the 159 deals reported in 2017.

This is according to the 2019 Venture Capital Industry Survey. The Southern African Venture Capital and Private Equity Association (SAVCA) released the report this week.

There is a substantial increase in the overall value of all deals, up from the R1 billion (US$67 million) invested in 2017 to just over R1.5 billion (US$100.5 million) in 2018.

SAVCA CEO Tanya van Lill says it is especially encouraging to see the continued industry growth in the face of a tough economic climate. “The continued expansion in VC activity over the past decade is evident when comparing the average of 129 deals per year from 2014 to 2018, to the average number of deals per year from 2009 to 2013, a meagre 26.”

Start-up capital

Van Lill highlights that, of all the new deals reported in 2018 (by value), 41% were categorised as start-up capital.

“If taken by number of deals, this proportion jumps to almost half of all deals reported (47%),” she explains.

“Likewise, the total number of active deals invested through seed or start-up capital amounts to almost 60% of all deals to date. This highlights the increasingly important role that venture capital continues to play in South Africa as an essential source of funding for scalable start-ups.”

The report provides valuable insights for fund managers, investors, entrepreneurs and policy makers about the South African VC landscape. It was carried out in collaboration with research partner Venture Solutions, and features data gathered from 56 fund managers as well as other industry investors.

Venture capital

The two words usually send the chill down the man on the street’s spine. Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. This is according to Investopedia.

Venture capital people include rich individuals to financial institutions and investment banks.

“I can ery well be that man on the street because I never really understood what it means until now,” says Claire, a 29-year-old sociology graduate. “Attending university does not mean that you know each and everything that’s going on out there,” she adds.

Dorothy, 26, personal assistant, was once asked the meaning of venture capital by a schoolboy. “I brushed him aside as I didn’t know what to tell him,” she says, laughing.

“Frankly, I used to wonder where in heaven’s name is this capital venturing into. It’s a risky business, I can’t do that even if I have a lot of money.”

Gamble

“I think they are taking a gamble because it is an uncharted territory where you don’t know what will bite you once you reach there.

Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff, says Investopedia.

The main downside is that the investors usually get equity in the company, and, thus, a say in company decisions.

“I was expecting someone to tell me that. It is a huge downside. But then again, this is the result of founding your business out of nothing, or with less resources. Well, you don’t have a choice. Money talks,” says Claire.