ICT gets lion's share of venture capital funding

Mergers, Acquisitions and Financial Results

THE information and communications technology (ICT) sector attracted the lion's share of venture capital funding in the three and a half years to July, according to data released this week.

A survey by specialist advisory firm Venture Solutions, on behalf of the Southern African Venture Capital & Private Equity Association, showed the ICT sector accounted for 32% of the total deal flow in the period.

This rose from 23% in the previous survey to July 2010. ICT outpaced the life sciences (biotechnology, health technology and medical devices) sector, which previously accounted for 41% of total investments.

ICT received around R265.6-million as venture capital investments reached the R830-million mark. The researchers said numbers could be close to double that because the research did not take into account certain deals not disclosed to the association, including enterprise development activities and "angel" funding.

Adrian Dommisse, a corporate finance attorney at Dommisse Attorneys, said the ICT sector attracted the most funding deals because of the potential it held for fast growth.

"Venture capitalists require returns over a shortish time frame relative to other investors," said Dommisse. "There is often good potential in ICT to achieve a faster return and exit, which is the sweet spot for venture capital investors."

Venture capital firms backed by government were the most active, accounting for 51% of deals compared with 46% of deals executed by private-equity players.

"Government-backed investors were the most active during the period under review, despite [the Technology Innovation Agency or TIA] making considerably fewer equity investments following its incorporation, than when operating as seven separate entities," reads the survey report.

"This was due to limitations on the TIA's ability to conduct equity-type investments post amalgamation. The agency did however conclude a substantial number of loan-type transactions, about R100-million, during the period."

The TIA was formed through the merger of the Department of Science and Technology's Innovation Fund, Tshumisano Trust, Cape Biotech Trust, PlantBio Trust, LIFElab, BioPAD Trust, and the Advanced Manufacturing Technology Strategy.

Though venture capital fund managers were reluctant to indicate how much they made on exiting their investments, the overall figure is estimated at more than R1-billion. But this figure was skewed by the mega-acquisition of mobile financial services provider Fundamo, whose investors walked away with $110-million from global payments company Visa.

"South Africa's high-growth entrepreneurial system is producing notable exits, such as Visa's acquisition of Fundamo, as well as a spate of recent start-up acquisitions, many of which are based in Cape Town," said Stephan Lamprecht, Venture Solutions's CEO.

Justin Stanford, founding partner at 4Di Capital, which provides early-stage venture capital to technology start-ups, said the ICT sector would continue to be very attractive to investors because it was easily accessible.

"This is one of the sectors that is democratised globally due to wide availability of free tools and education, broadband internet, and cloud infrastructure, meaning that there aren't any geographical or other barriers or advantages, really, any more, which is allowing many 'secondary' markets like South Africa to tap this sector on a global basis and compete internationally," said Stanford.