Launching An Investment Fund: A Guide For South Africa

There are many options for funding an investment in South Africa, from self-funding to angel investments, grants, venture capital funding, and bank loans. The country is also home to several types of investment funds, including tax-free savings accounts, fixed deposits, interest-bearing flexible savings accounts, money market funds, unit trusts, mutual funds, exchange-traded funds, stocks, government bonds, and property investments.

If you're looking to start an investment fund in South Africa, it's important to understand the different options available to you, as well as the regulatory environment that governs the industry. South African asset managers, for example, must register as financial service providers (FSPs) and comply with regulations such as the Collective Investment Schemes Control Act (CISCA).

With a range of investment options and a regulated financial sector, South Africa offers a variety of opportunities for those looking to start an investment fund.

Self-funding vs borrowing from friends and family

When it comes to starting an investment fund, one of the first challenges is funding it. Two of the most common ways to fund a new business are self-funding and borrowing from friends and family. Both options have their advantages and disadvantages, and it's important to carefully consider each before making a decision.

Self-Funding

Self-funding, also known as bootstrapping, is the process of funding a business with your own money and personal savings, without relying on outside investment. This can be an attractive option for entrepreneurs who want to maintain full control over their business and avoid the risks associated with borrowing. It also demonstrates to potential investors that you are committed to the success of your business. However, self-funding can be challenging, as it requires a significant amount of capital, which not everyone has access to. Additionally, it's important to consider the opportunity cost of using your personal savings for the business.

Borrowing from Friends and Family

Borrowing from friends and family can be a great way to secure funding with low-to-no interest rates and flexible deadlines. This type of funding, often referred to as FFF funding (Friends, Family, and Fools), can also come with the added benefit of emotional support and mentorship from loved ones. However, it's important to remember that borrowing from friends and family can put a strain on relationships if the business is not successful and you are unable to repay them. Additionally, not everyone has access to friends or family members who are willing and able to invest in a new business.

Making the Decision

Both self-funding and borrowing from friends and family have their advantages and risks. When making a decision, it's important to consider your personal financial situation, the availability of potential investors in your network, and the potential impact on your relationships. It's also worth exploring other funding options, such as angel investments, venture capital, government grants and loans, and crowdfunding platforms, to determine the best approach for your investment fund in South Africa.

Financing a business on a credit card

Starting a business in South Africa requires careful consideration of funding options. While using a credit card to finance a business is not usually advisable, it can be a good idea if you need immediate financing. However, it is crucial to use the card responsibly and make timely payments to build a good credit score and avoid unnecessary fees.

Advantages

• Fast and flexible financing: Applying for a business credit card usually results in quick approval and avoids the extensive paperwork required for a traditional bank loan.
• No collateral required: Most business credit cards are unsecured, and if you have a good personal credit score, you are likely to qualify for a card with rewards and perks suitable for your business.
• Introductory 0% APR: Many cards offer an introductory period of 0% Annual Percentage Rate, providing interest-free financing for 6 to 18 months. This is beneficial for new business owners needing time to grow their business before paying expenses.
• Lower cost of capital: While business credit cards charge relatively high-interest rates, they are still considered less expensive than secured loans as they do not require collateral.
• Welcome bonus and rewards: Many small business credit cards offer welcome bonuses and ongoing rewards, such as cash back, points, statement credits, or travel miles.
• Building business credit: Using a business credit card responsibly helps build business credit, which is essential for accessing other forms of financing in the future.
• Revolving credit: Business credit cards provide a revolving line of credit, allowing you to access the original card limit as you pay down the balance.
• Easy expense monitoring: Small business credit cards integrate with accounting software, making it easier to monitor and track business-related expenses.

Disadvantages

• Accruing balances: Credit cards are easy to use, and it is easy to spend beyond your budget or means. Accruing balances can lead to difficulty in paying off the debt and negatively impact your credit score.
• Penalty APRs: Failing to make payments on time can result in penalty APRs, which are typically 30% or higher, increasing the cost of capital.
• Adverse effect on credit score: Late or missed payments, as well as utilising the full credit limit, can harm your credit score and make it challenging to obtain funding in the short term.
• Misuse and abuse: Credit card misuse and abuse are possible, especially if multiple employees have access to the card. It is essential to monitor expenses and ensure all transactions are consistent with the intended use.
• Relatively low credit limits: Small business credit cards usually have credit limits of up to $50,000, which may not be sufficient for larger businesses or those with significant startup costs.
• Personal liability for debt: Most card issuers require a personal guarantee, which means that if the business fails to repay outstanding balances, you are personally liable for the debt. This can put your personal credit history and score at risk.

When using a credit card to finance a business, it is crucial to choose the right card, understand the fees and rates involved, and use the card responsibly, ensuring timely payments. It is also important to separate personal and business expenses to maintain organised accounting and avoid issues with tax authorities.

Bank loans and venture capital

When it comes to bank loans and venture capital in South Africa, there are a variety of options available for entrepreneurs seeking funding for their fledgling businesses. Here is an overview:

Bank Loans

Most banks in South Africa offer some form of bank financing for businesses. This can include borrowing money for working capital needs, asset purchases, or debt financing. To secure a bank loan, businesses typically need to meet certain criteria, such as having a strong balance sheet, good suppliers and customers, and a robust accounting system.

Venture Capital

Venture capital is a type of private equity funding that targets fairly new or startup businesses. These businesses are often launching innovative products or services with high demand. Venture capitalists invest in these companies to promote growth and/or assist with product development. There are various venture capital firms and investors in South Africa, including:

• Kalon Venture Partners: Invests in disruptive tech startups with a focus on high-growth tech opportunities.
• Knife Capital: A Southern African venture capital investor focusing on technology-enabled ventures for sustainable innovation, job creation, and growth.
• 4Di Capital: An early-stage technology venture capital firm based in South Africa's "Silicon Cape."
• Angelhubventures: An early-stage venture capital firm based in Stellenbosch, backed by two family offices, passionate about investing in South Africa.
• Invenfin: Invests in innovative people building world-class businesses, offering early-stage capital and strategic advice.
• EchoVC Partners: A seed and early-stage technology-focused venture capital fund active in Sub-Saharan Africa, North America, and South-East Asia.
• I/O Ventures: An early-stage seed fund that provides mentorship and support to founders in product launch and company development.

Venture capital funding can provide significant financial resources and expertise to help grow your business. However, it is important to note that venture capitalists typically seek established businesses with high growth potential and often invest in specific sectors or ecosystems.

Government grants and loan schemes

The South African government offers a range of funding options for small businesses, including grants, incentives, and equity funding. Here are some of the key government grants and loan schemes available:

Department of Trade and Industry (DTI) and its Subsidiary Agencies

• The DTI promotes economic development, black economic empowerment, commercial law implementation, and international trade.
• Funding is available through the following funds: SEDA Technology Programme, Agro-Processing Support Scheme, Support Programme for Industrial Innovation, The Aquaculture Development and Enhancement Programme, Export Marketing and Investment Assistance Scheme, and Sector Specific Assistance Scheme.

Small Enterprise Finance Agency (SEFA)

• Established in 2012 to assist start-ups and small businesses.
• Offers grants, loans, or helps entrepreneurs access funding from other sources.

National Empowerment Fund (NEF)

Provides funding between R250,000 and R75 million for businesses directly involved in their operations.

Industrial Development Corporation (IDC)

• A national development finance institution promoting economic growth and industrial development.
• Offers loan amounts ranging from R1 million to R1 billion per project.
• Supports start-up businesses, including funding for buildings, machinery, and working capital for South African businesses.

Green Energy Efficiency Fund (GEEF)

• Supports projects that provide significant energy savings and emissions reductions.
• Offers loans to businesses investing in energy efficiency and renewable energy technologies, with priority given to small and medium-sized enterprises.

Tourism Transformation Fund

• Aims to support black-owned enterprises in the tourism sector by providing dedicated capital investment.
• Collaboration between the Department of Tourism and the National Empowerment Fund.
• The grant portion is capped at R5 million per successful applicant.

Growth Fund

• Managed by CDI Capital, this fund specifically targets growing small businesses in South Africa that need financial support to scale up and create jobs.
• Open to South African-owned businesses operating within the country for at least one year, with turnover or assets above R1 million.
• Applicants must demonstrate year-on-year growth potential and be tax compliant.

Technology Innovation Agency (TIA) – Seed Fund

• Provides grant funding for individuals commercialising research conducted with higher education institutions or science councils.
• Grant sizes vary, typically ranging from R200,000 to R1 million per project.

National Youth Development Agency (NYDA)

• Offers micro-finance grants for youth entrepreneurship and cooperative grants to encourage greater youth participation in the cooperative sector.
• Grant finance ranges from R1,000 to R200,000 for individuals or youth cooperatives.

Small Enterprise Development Agency (Seda)

• Supports the growth of small businesses by providing information, advice, import and export training, business assessments, and mentoring.
• Special focus on cooperative enterprises where entrepreneurs share profits and responsibilities.

Black Business Supplier Development Programme

• Offers grants to black-owned businesses for business skills training and improving core competencies and management abilities.
• Supports promotional marketing materials, software development, quality improvement, and product enhancement.
• Eligible companies must be majority black-owned (15% or more) with significant black representation in management, earning less than R12 million per annum, and trading for at least one year.

Angel investment and private investors

Angel investors are high-net-worth individuals or investment groups that provide capital for startups and early-stage businesses. They typically receive a certain amount of equity in the business in return for their investment, which can result in a substantial return on their initial stake if the business succeeds. Angel investors also often provide mentorship and support to the businesses they invest in, drawing on their experience as entrepreneurs.

Angel investing is on the rise in South Africa, despite economic challenges such as high inflation and unemployment. Investors recognise that stimulating the economy requires more business investment. South Africa is an attractive market for innovative business ideas, and local entrepreneurs are keen to capitalise on this demand.

Angel investors are more willing than banks or other financial institutions to take on the risk of investing in high-risk businesses. They use their own funds to finance projects they believe will be lucrative and often mentor new entrepreneurs.

There are several angel investor networks in South Africa, such as the Angel Investment Network, Jozi Angels, and South Africa Angel Investment Network. These networks connect entrepreneurs with investors and help build lasting and profitable relationships.

Private equity funders, on the other hand, lend money to small and medium-sized enterprises (SMEs) and large businesses. They may invest in a private company or buy and sell a company over a few years. Private equity consists of funders or investors who pool their money and then invest in other businesses. These funders typically seek ownership and a share of the profits. They focus on aggressive growth and may require the business to restructure according to their terms.

Frequently asked questions