How can I get innovative about funding?

How do you go about finding funding for your innovative business venture?South Africa’s venture capital ecosystem is building momentum, with the increased availability of funding mechanisms for innovation being one important driver of this growth.

Typically, entrepreneurs perceive access to funding as the major stumbling block to the bringing-to-market of their start-up businesses or ideas. And, compared with the established and thriving venture capital networks in some developed-market economies, there is indeed much work to be done in finding financial backing for innovation in South Africa.

1 Government sector

An important role-player is the state-funded Technology Innovation Agency (TIA), established to bring very early-stage ventures towards the point of viability and scalability. TIA last year announced that it would make R300m available for early-stage investment.

The Industrial Development Corporation (IDC), another self-funded state-owned entity, also plays a pivotal role in financing innovation. Its venture capital fund is mandated to enable the conversion of technology-rich South African intellectual property into a market-ready product, and ultimately its commercialization.

The Department of Trade and Industry (DTI) offers funding support for start-ups through a wide range of mechanisms, including the SPII programme, an initiative which the IDC administers on behalf of the DTI.

The DTI recently launched a dedicated website to make the selection and application for the various initiatives much simpler for entrepreneurs — a positive step in an environment mired in red tape.

2 Private sector

Compared to government initiatives, private-sector funding for innovation in South Africa is less concentrated and fairly diverse in form, and has grown substantially in recent years.Institutional investment into venture capital funds by private-sector institutions is rare: Pension funds, life insurers and banks, for example, are focused instead on funding more established technologies and businesses, usually through listed assets or private equity.

3 Venture capital

Venture capital funds rely on investment from corporate, government, development finance institutions and family offices. The number of South African funds, as well as the value and volume of transactions, is increasing. There is also substantial interest from offshore investors and funds for active participation in the local venture capital industry. Current legislation weighs on this process, though.

4 Angel networks

There has also been the establishment of angel networks, as angel investors are a critical part of the funding ecosystem and work closely with venture capital funds. Angel investors are wealthy individuals who usually are entrepreneurs in their own right, with an understanding of venturing and a passion for giving back to the start-up community.

Their backing may come in the form of allocations into a venture capital fund, in which case they do not play a role in the selection of the underlying technologies and entrepreneurs.

Angel funding in other instances is channeled directly to the entrepreneur, through regular pitching sessions held by dozens of incubators and accelerators across the country, or through the angels’ own networks.

5 Tax incentive

An amendment in recent years to the South African Income Tax Act has created a welcome inducement for individuals, trusts and companies to invest into innovation. Section 12 of the Act offers tax relief for allocations into qualifying and registered venture capital funds, and represents an important first step towards building a sensible and beneficial incentive structure for private sector venture funding.

6 Corporate investment

Corporate investing into innovation is a further exciting trend in South Africa. Where large firms in years gone by had budgets for research and development that was overseen by in-house scientists, the move now is for companies to in-source innovation by buying start-ups.

In some cases these larger companies are seeing the benefits of offering the innovators early-stage business support services to increase the likely success of the commercialization of the innovation.

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