Building the VC ecosystem through diverse and collaborative forms of capital

Johannesburg - As South African startups continue to seek new avenues for growth, a dynamic ecosystem of funding mechanisms is evolving to support them. During a thought-provoking panel discussion at the recent SAVCA VC Conference industry experts explored how early-stage companies can leverage diverse forms of capital to fuel their growth.

The panel, moderated by Ross Manton, Managing Director of Manto View discussed everything from corporate VC and private credit to revenue-based financing (RBF), grants, and co-investments, honing in on the synergies between these varied financing structures and the established VC success stories in the African region.

Driving the growth of private credit and RBF

Altesh Bajoo, Managing Director of Flow48 SA, began by noting the growing global appetite for private credit. “There’s a huge opportunity internationally for private debt, but in South Africa, there is not enough institutional capital to facilitate this structure on a broader scale. Based on the global trend and solid fundamental performance, however, we have been able to raise capital internationally to get institutional investors on board to replicate this strategy locally.

“That said, with the recent changes to Regulation 28 of the Pension Funds Act, we have begun to see slow-building interest in private credit from local institutional providers across the board, from asset managers and banks to Development Finance Institutions (DFIs),” added Bajoo.

Grace Legodi, Managing Partner of Untapped Global-SA Fund, highlighted the role of RBF and venture debt in providing early-stage companies with a longer runway for growth, reducing the pressure to immediately deliver large returns, and importantly, bridging the gap between funding rounds. “We’ve seen a shift towards more collaboration in the market, with funders working together to give entrepreneurs the space they need to succeed.”

A blended approach to capital

Julia Price, Co-Founder & Director at Linea Capital, pointed out the benefits of blending different forms of capital to foster collaboration among funders, reduce costs, and catalyse more senior investment. “We’ve built a blended financial structure consisting of both junior and senior instruments to bring down the cost of funding so that we can pass it on to SMEs who are in need of capital.”

She noted, however, that there is no local playbook when it comes to blended funding structures. “South Africa has a playbook around partnership structure, but not for a blended finance structure.” This is a trend that Price expects to see growing, helping to catalyse international capital for South African SMEs. “The impact funders both globally and locally are playing a key role to get fund managers to the $10-20million mark and attract a lot of capital into a stack. We’ve got to work on catalysing the South African institutions – family offices, corporates, banks – into our structures so that we can add that into the global pool of capital available for South African opportunities.”

Sam Tennant, Partner at Edge Growth, added that co-investments and partnerships between fund managers are now a necessity in the evolving VC market. “There is a need for a lot more capital than we can provide as a single fund manager, and as companies mature through their growth journey, collaboration among fund managers is crucial not just for raising capital, but for supporting businesses post-investment.”

Seizing collaborative opportunities in a growing ecosystem

The panellists all agreed that while collaboration across the VC lifecycle is growing, it must be founder centric. “Collaboration is great for risk management and growing capital stacks, but it has to be in the interest of the founders,” said Price, who urges investors to keep their portfolio firms at the heart of their blended structures to ensure these structures are appropriate for the stage they are in.

Legodi offered more of a top-down perspective: “It would be great to see how, as GPs, we collaborate to unlock more LP liquidity. Rather than see each other as competitors, how can we work together to educate the LPs, particularly in South Africa, to open up mandates and put more allocation into early-stage businesses?”

It is also up to South African startups to proactively tap into the increasing number of collaborative financing structures available to ensure long-term success. Manton said: “The key is to build these opportunities at the early stage, so companies can capitalise on the growth in the VC market and drive their own success.”

Price summarised the sentiment well, concluding with, “It’s not just about capital raising and deployment; we need to collaborate to make our founders’ lives easier, particularly when it comes to impact reporting and support post-investment.”