Business Maverick

Business Maverick

Fintech start-ups rack up venture capital cash

It’s too early to suggest SA’s tech industry is coming of age, but there is more money around than ever before and the ecosystem is showing signs of good health.

South Africa’s venture capital (VC) industry has kicked off 2022 with a bang. In January, Africa’s biggest games publisher, Cape Town-based Carry1st, announced it had raised $20-million in early-stage funding from one of the rock stars of venture funding, Andreessen Horowitz, with participation from Avenir and Google.

Not to be outdone, TallOrder Solutions, which develops cloud-based, point of sale solutions, announced it had secured a further R47-million in local funding, bringing its total funding to R80-million; Wamly, the one-way video interview software start-up, announced it had secured a second-round investment from South African venture capital firm Knife Capital; and on-demand pay provider Floatpays secured just under $4-million in an oversubscribed seed funding round to help it expand across Africa.

“The year has definitely got off to a bang,” says Fabian Whate, MD of tech investor Naspers Foundry. “We have a number of deals in the pipeline which we are hoping to close by the first quarter.”

This is a continuation of activity levels seen in 2021, adds Keet van Zyl, co-founder of Knife Capital. “The ecosystem is definitely heating up.”

Last year, South African start-ups attracted more than $800-million, up from $200to $250-million in 2019 and 2020.

These included the likes of TymeBank, which raised a hefty $300-million; Yoco, which raised just less than $100-million; mobile payment gateway MFS Africa, online payments company Ozow, policy and claims admin software business Genasys, and payments processor Adumo.

As far as investing in early-stage tech companies goes, South Africa is not alone. Across the continent, more than 740 technology start-ups raised close to $5-billion last year as US investors recognised that local companies are developing solutions tailored to the needs of the continent’s tech-savvy population. Africa is in the midst of a massive generational shift and with it a technological revolution. A young, middle-class, and rapidly growing population — 1.3 billion people with an average age of 19 years — is in the driver’s seat.

Similar to other emerging markets like India or China, this generation is mobile-first, relying on their mobile phones for all aspects of their lives — from work, to finance, to socialising and entertainment.

Nigeria attracted the most funding, followed by South Africa, Kenya and Egypt, according to Briter Bridges’ latest African Investment Report.

Almost 60% of this is going into fintech. “The fintech sector was initially dominated by providers of payment processing solutions,” says Christoff Pienaar, head of the technology, media and telecommunications practice at law firm Cliffe Dekker Hofmeyr.

“This led to the development of mobile wallets, fund transfer services, microlending, and payment products like Yoco, SnapScan and Zapper.”

Rapid development and use cases within the crypto space are also driving innovation, supported by South Africa’s regulators, who have kept a close eye on the technology’s development but have not hindered it. Beyond the fintech market, insurtech, telemedicine, e-learning, e-commerce, and ride-hailing businesses are among those attracting investor interest, he says.

A notable shift last year was that almost two-thirds of the continent’s top 20 largest deals involved foreign investors, a turnaround from the past where almost all investment was local. For instance, Bezos Expeditions and Andreessen Horowitz made maiden investments into Africa. And companies such as Endeavor Catalyst and Ribbit Capital took part in at least three deals each, according to Briter Bridges.

“Africa is underserved from a financial perspective,” says Mark Taylor, capital raising specialist at Mazars in South Africa. “But this is not news to Africans. We have been dealing with complex challenges that Silicon Valley has not had to deal with – bandwidth, access to smartphones, customers who can afford to pay, access to good coders, and tech skills. We have less, so we are resourceful and solve problems. This has resulted in interesting and vibrant fintech markets and international investors are waking up to this.”

Silicon Valley accelerators, such as Y-Combinator, have also turned their attention to African start-ups. Aside from an initial investment of roughly $500,000 in a start-up, the accelerator works intensively with the company and its founders for three months, to get them into the best possible shape and refine their pitch to investors. Each cycle culminates in a Demo Day, when the start-ups present their companies to a carefully selected, invitation-only audience.

“You cannot underestimate the importance of someone like this opening doors for you,” says Simon Ward, founder of Floatpays and graduate of the accelerator. “They can open doors you could not even think of knocking on.”

South Africa, which has the additional benefit of sophisticated banking and telecommunications infrastructure, has other catalysts too, says Van Zyl.

One is the role of the SA SME Fund. Established by members of the CEO Initiative, the SA SME Fund, which funnels its funds into established and diverse VC firms with a track record, has pumped R1.3-billion into South Africa’s venture ecosystem over the past one to two years. “Within a short time, it became the biggest backer of VC ever! It shows how quickly something like that can make a difference,” says Van Zyl.

Slowly, some companies in the investment community are becoming aware that this is an asset class worth backing. Aside from committing $10-million to Knife Capital’s African series expansion fund, the Mineworkers Investment Company launched MIC Khulisani Ventures last year. This is a R150-million early-stage investment vehicle targeting black-owned innovative, highgrowth businesses in SA.

Local banks, aware that their business models and margins are under pressure, are also embracing fintech companies and are building ecosystems that support the development of disruptive start-ups.

Underpinning all of this is the success of disruptors such as Yoco and software firm Aerobotics, which came behind pioneers like Clickatell and Thawte Consulting.

High-profile exits like those of GetSmarter, PayFast and Luno provide the reassurance to investors that there are options when it comes to exiting their investments.

“People are cautiously optimistic about the future,” says Whate.

“But to keep the money coming, investee businesses must perform to expectations. At the end of the day, the guys that put in money need to know that they can make money.” DM168


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