In 2022, investors in South African venture capital saw $17 million in returns from exits, achieving a 3x return. However, the number of deals incurring losses still exceeded those yielding returns.
According to the Southern Africa Venture Capital Association (SAVCA) 2023 survey, exits in the South African ecosystem yielded around R318 million (approximately $17 million). This was a 3.8x return on the R83 million (about $4.4 million) invested in these deals.
Yet, the overall losses from exits were about R80 million (roughly $4.2 million). Additionally, this downturn in exit returns marks a trend over the last few years, with returns consistently declining since 2017. The only year without a net loss in exit activities was 2019 when profitable exits equaled the number of loss-making ones.
Throughout the years, South Africa has established itself as the continent’s exit hub, consistently outperforming other African venture capital hubs. There are several factors contributing to South Africa’s notable dominance in the realm of mergers and acquisitions (M&A). These factors encompass active capital markets and banking systems, as well as mature companies that can acquire startups, among others.
As more information comes to light, it’s apparent that a majority of exits have resulted in losses for investors. One theory suggests that exiting prematurely could be a reason why such transactions may not yield the anticipated outcomes for the parties involved.
Keet van Zyl, a co-founder and partner at the venture capital firm Knife Capital, acknowledges some merit to this theory. Van Zyl points out that occasionally, there’s a mismatch between the growth capital required by startups and what’s accessible, making selling a more viable option than pursuing additional fundraising. On average, van Zyl notes, startups in South Africa exit following three to four funding rounds.
Van Zyl conveyed to TechCabal in May that despite the rise in deal flow, a notable follow-on financing void persists for rapidly growing local startups with established traction. Consequently, during attempts to secure growth capital, these startups often resort to strategic investors, who, recognizing the potential, extend full acquisition proposals.
Van Zyl, however, doesn’t view this pattern negatively. He posits that it facilitates a higher frequency of smaller exits, thereby channeling capital back into the ecosystem, as opposed to a lengthy journey toward achieving unicorn status, which can result in a liquidity shortfall for investors.
Come August, an expansion fund amounting to $50 million was unveiled by van Zyl’s Knife Capital. The fund is poised to back B2B enterprises that are bringing South African technologies onto the global stage, along with seizing opportunistic investment ventures across the wider African terrain. The primary emphasis will be on growth and expansion-phase ventures, specifically during the Series A extension and Series B funding epochs.