Investing in and financing Science and Technology innovation remains key

Nov 26, 2018

Globally, funding for innovation and technology is replete with lessons that South Africa can glean much from. Standard Bank’s Khwezi Tiya, Sector Head for Oil & Gas in South Africa, unpacked some of the intricacies around investing in and financing science and technology innovation, at the recent Science, Technology and Innovation Draft White Paper Summit, called by the Minister of Science and Technology, South Africa.

The USA’s Silicon Valley, feted as the centre of technological innovation, is home to some the world’s largest technology companies like Apple, Google, Facebook and Netflix. A combination of universities with Science and Technology research capacity, small companies generating great ideas and a strong venture capital market created the ecosystem that made Silicon Valley possible.

 “Unbeknown to many, is that the venture capital sector in South Africa has huge potential,” says Mr Tiya. “South Africa can unlock more funds for venture capital through a number of initiatives and learn from other countries as well.  For instance, in a recent study led by Roland Berger on growing the venture capital market in Germany, potential initiatives identified included, establishing a ‘Fund for the Future,’ enabling citizens to share in venture capital growth, actively communicating success stories and launching a ‘Science, Start-ups and Growth’ excellence initiative.” 

The South Africa Venture Capital and Private Equity Association (SAVCA) Report for 2017 indicates that R1,1 billion was disbursed into investments, while a total of R4,39 billion has been invested to date through venture capital.  However, among the issues that South Africa must face are whether the tax incentive scheme to invest in venture capital is sufficient and what more can be done to unlock other potential early stage and development funding.

Venture capital involves equity or equity-type investments that flow into a company at an early stage. It provides the capital that facilitates innovations and enables them to progress into commercially viable products. Venture capital investors exit once a company is successful through listing or sale to others. Well-known social media platforms such as Facebook and Twitter, and instant messaging service WhatsApp were funded through venture capital investments.

“In general, companies can access three main sources of funding, says Mr Tiya.  “This would include equity, grants and debt, for example, although for start-ups, debt does not really become an option.”  

Equity sources include private equity such as venture capital, angel investors and institutional investors, including pension funds, sovereign wealth funds and development finance institutions.   Grants or incentives are seen as a form of free equity and are usually funded by governments or international development finance institutions. Debt can take various configurations but is usually in the form of commercial bank debt that is either short-term or long-term. It can be structured according to the requirements of a project and generally requires some form of collateral or a reasonable prediction of cash flow.

However, another vital component of injecting capital into science and technology innovation is often found through public funding, usually through research grants. Publicly funded research enables the generation of ideas from resources that the private sector could not have. It plays a critical role in also developing the next generation of skills in science and technology. 

“The growing number of innovation hubs across South Africa and the continent provide further evidence of the importance of public funding as a catalyst for innovation,” says Mr Tiya.

“A combination of both public research and private sector funding provided a catalyst in the development of the US Shale Gas Revolution”, says Mr Tiya. “This combination of funding led to extensive research into the technology and tools that created efficiencies for shale gas exploration and production.” 

When looking at funding, start-ups tend to go through different phases, each of which requires a different funding model. At the seed or idea level, risk is low and incubator, grant, public funding or even own funds are suitable to develop the idea.

“Regardless of the type of funding required, the one key component is the ability to develop partnerships with both private and public sectors in unlocking the necessary resources to drive investment in innovation,” says Mr Tiya.  “In South Africa particularly, and indeed across the continent, this co-operation can only serve to be mutually beneficial for both investors and developers.”   

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