SA venture capital finds the tech exit

South African technology start-ups are beginning to deliver the result venture capital investors have been waiting for: successful exits.

New research into more than 200 investments finds that venture-backed businesses are being bought, listed or sold to new investors at values that generate substantial returns for their early backers.

The research comes from the SA SME Fund, Endeavor South Africa and the SA Venture Capital and Private Equity Association (SAVCA). One study examined 18 companies across 21 investment rounds, while the broader study covered 226 exits reported by local venture capital fund managers.

The smaller sample produced a median gross internal rate of return of 54%, with investors receiving 3.5 times the money they had put in. The median company valuation at the point of exit was about R1.6-billion.

The broader study provides a firmer test of the industry. Among deals where both the investment and exit values were disclosed, R2.014-billion in invested capital produced R4.926-billion in cash proceeds. That works out at R2.45 returned for every rand invested.

Because many transaction values remain confidential, the researchers also produced two alternative calculations. The most cautious returned R2.01 for each rand invested, while another produced R2.25.

That is significant for a market in which funding announcements have often received more attention than the eventual fate of the companies receiving the money.

An exit takes place when early investors sell their shares, usually through an acquisition, a stock exchange listing or a sale to another investor. Without exits, venture capital funds struggle to repay their own investors or raise money for another round of start-ups.

Recent transactions suggest that South African companies now have more ways to reach that point.

These include Motorola Solutions’ acquisition of emergency-response technology company RapidDeploy, Nedbank’s purchase of payments provider iKhokha, Ticketmaster’s acquisition of ticketing platform Quicket and Lesaka Technologies’ takeover of Adumo.

The studies also include Mastercard’s proposed acquisition of stablecoin payments company BVNK and Optasia’s R23.5-billion listing on the Johannesburg Stock Exchange. The deals span international and local acquisitions, along with the return of the stock market as a possible route for technology companies.

“South Africa has long had entrepreneurial talent, credible founders and strong technology capability,” says SA SME Fund CEO Ketso Gordhan.

“What has been less visible is the proof that investors can realise meaningful returns from backing these companies. These studies show that the exit market is no longer theoretical. It is starting to happen, and it is happening across different pathways.”

The results come with qualifications. The broader research relies heavily on information supplied by fund managers, and confidentiality agreements prevented full disclosure in numerous deals.

Of the 226 exits identified, 20 had no investment amount recorded. Only 131 included both the amount invested and the proceeds received. Another 43 were known to have been profitable, but their exit values were withheld. The researchers used different assumptions to calculate the likely effect of those transactions.

The studies also argue that venture capital’s effect extends beyond investment profits. The 18 companies in the case-study sample created more than 4,000 direct jobs, averaging about 230 South African jobs per business.

Financial technology dominated many of the largest deals. The report points to companies such as iKhokha, PayFast and Retail Capital, which supplied payment or funding tools to small businesses that had previously depended heavily on cash or conventional bank lending.

The next test will be whether the recent deals develop into a regular stream of exits.

More than 1,100 South African businesses have received venture capital since 2016, according to the broader study. At least 20 privately owned high-growth companies with substantial South African operations have each raised more than US$25-million.

Since venture investments in the local market are held for a median period of about six years, much of the money invested during the recent funding boom has yet to reach the stage at which an exit would normally be expected.

Karl Westvig, who founded Retail Capital before its acquisition by TymeBank, says the effect of a sale continues after the investors have collected their returns.

“The real value of an exit is what happens the day after. Capital gets recycled, and founders and teams walk away with proof it can be done here. Most of them go again, as angels, operators or mentors. That’s how an ecosystem compounds.”