SA’s economy may have been ravaged by the fallout around the Covid-19 pandemic and years of sluggish to no growth, but small to medium-sized start ups are still springing up, especially in the technology and fintech sectors.
South African venture capital group Empowerment Capital Investment Partners, which was founded in 2015 by Anton Baumann and Mark Fitzjohn, says its investment companies Andzani Ventures, Imvelo Ventures and Thuthuka Nathi Ventures approved and placed a total of R162m into 13 local start ups between July 2019 and February 2021, adding that a further R32.5m has been “approved for placement in the coming weeks” in three new companies.
The two say that by June a total of R300m would have been made available for start-ups since the middle of 2019, adding that this could increase dramatically to a total of a R1bn and more within another 24 months.
Baumann and Fitzjohn say their group, which acts as an intermediary helping smaller startups secure funding from large corporate investors, say they are confident that they will be able to raise up to a total of R1bn or even R2bn in funding for start ups in the next 24 months.
Baumann, a German-born lawyer who moved to SA 15 years ago, says while the venture capital group is a “patient” investor into a broad variety of start-ups from those in agribusiness to the fast moving consumer goods industry, the tech and fintech sectors were “where most of the investment activity was over the last year”. Bauman says its Imvelo company, through which its fintech investments are made, enjoyed the bulk of the activity in 2020.
Fintech, or finance technology, generally refers to technology that automates financial services or at least brings a lot of functions online so that customers can transact using computers or smartphones.
The Covid-19 pandemic has accelerated this move online around the world and including SA. Even before the pandemic, the fast-growing fintech sector in SA had disrupted the financial services industry and influenced the offerings of traditional banks.
“We never started with the idea of funding tech start ups. It has developed into that and that is where most of the activity was last year. “We aim to support South African talent that solves real life problems with long-term patient growth capital, market access and business management support. We like innovative (or disruptive) ideas and it so happens that most of these are in the tech space” says Baumann.
South African-born Fitzjohn, who has a banking background including a five year stint at RMB, says Empowerment Capital sees itself as a general investor looking for “high growth opportunities” but that he thinks “the environment does favour technology companies just because technology companies have the ability to scale up”.
“There has been a rampant increase in the creation of (online) market places. I would say that is the big trend we have seen over the last year. I think the timing is right with Covid. We have invested in at least two companies that focus on on-demand shopping and one of our investees grew his revenue almost six times in the period from when Covid lockdown began from month to month. It did reduce with lockdown decreasing but there has definitely been a trend to online marketplaces.”
Fitzjohn says there is a “second aspect” to the tech sector, which counts for the continued growth of online shopping, which is that “ the expense of purchasing goods online can be cheaper than going to the store”.
“That is an international trend where if you get to that point, the market just takes off and that is what we’ve seen in SA.”
Among the start ups that Empowerment Capital, which is 55% black-owned, has helped provide funding for, is Zulzi On Demand, a delivery platform that enables customers to purchase anything within their area and have it delivered within an hour.
Some of the others include Bizzamm, which is a “digital legal platform supplying an array of blockchain encrypted legal templates and documents that removes the stress and complexity of legal processes”, MoneyWorks, which is an online platform that enables large corporates to create an “early payment programme for the SMMEs in their supply chains” and Ice Media, which offers low-cost internet access to poorer communities.
Fitzjohn says that increasingly tech start ups are emerging in townships showing how ubiquitous they are becoming.
“We participated in and sponsored a cohort of 30 township entrepreneurs recently . Most of these opportunities were tech businesses and these are township businesses. The whole market is moving towards having a technology centric approach.”
Irnest Kaplan, MD of Kaplan Equity Analysts, says the tech sector, particularly fintech, is an “exciting area” and “there is certainly a lot of activity globally in it”.
“There is a shift from cash to electronic payments, which has been in motion for a long time. Then you’ve got the whole impact of Covid, which fuels that a bit more because people don’t want to transact cash if they can help it,” says Kaplan.
“The macro issues are strongly in support of these fintech transitions. It’s a good space.”
He says this has to be tempered with the fact that the infrastructure and all the electronic systems are not really that widely available in the informal sector”.
But Kaplan also believes that the informal sector is “where the opportunity lies” for fintech to gain traction.