Discourse around the Fourth Industrial Revolution (4IR) is emerging in South Africa, and everyone seems to want a piece of the pie. Nationally, there is the 4IRSA Partnership, established by President Cyril Ramaphosa’s government, which seeks to stimulate and facilitate the national dialogue around 4IR. It also aims to complement other national activities in this space, including the Presidential Commission on 4IR.
In the private sector, there are a multitude of tech start-ups emerging across the continent and country. Examples include Naked Insurance, which utilises Artificial Intelligence (AI) for customer engagement. Luno, one of the biggest cryptocurrency exchanges in the world, was born and bred in South Africa. WhereIsMyTransport uses Big Data analytics to advise on transport planning in developing cities. The list goes on.
The unprecedented convergence of our digital, physical and biological worlds is increasingly becoming a focus for business and government. There has been rapid growth of 4IR-related businesses in South Africa, but this growth has been constrained due to the necessary investor pool lagging behind. Many 4IR start-ups rely on investment from existing institutions in their field, traditional finance sources and international pools of funding.
While Naked Insurance received funding from South African-based private investment group Yellowwoods and local insurance major Hollard, both Luno and WhereIsMyTransport relied on international investors, including UK-based Balderton Capital, Dutch firm Goodwell Investments and the Global Innovation Fund. This gap between funding-deficit 4IR start-ups and South African-based investors presents a growing opportunity for the investment industry.
As it stands, 4IR investment has primarily been a focus of venture capitalist companies (VCCs) due to their appetite for risk. These types of investments are incentivised through Section 12J of the South African Income Tax Act, which offers tax benefits to investors who allocate funds to selected VCCs that qualify and who are registered with the SA Revenue Service. The aim of Section 12J is to incentivise investment into smaller, high-risk companies so they can grow into small and medium-sized businesses that can contribute to South Africa’s economic growth.
According to Section 12J’s criteria, eligible investors should be licensed financial services providers who, at minimum, allocate 80% of their expenditure to investee companies. Each investee company must hold assets with a book value not exceeding:
- R500 million in any junior mining company or
- R50 million in any other qualifying company
While not all South African Section 12J VCCs are explicitly 4IR-related, there is an emergent trend of 4IR investment. Firms playing in this space include Kalon Venture Partners, Sanari Capital, Knife Capital and Growth Grid Venture Capital Partners and Lion Pride Agility Fund, among others.
Other than Section 12J VCCs, there are a number of other VCCs, angel investors and seed companies being established to fund 4IR start-ups in South Africa. 4Di Capital, an early stage venture capital company has a number of 4IR-related investments, including Aerobotics, an award-winning South African company which uses drones to capture and monitor farms.
There are a handful of other 4IR investors in South Africa helping to plug the local start-up funding gap, with several listed below.
While VCCs are currently dominating 4IR investment in South Africa, 4IR Equity Traded Funds (ETFs) have emerged across the global landscape. 4IR ETFs provide a more diversified, risk adverse and accessible platform for 4IR investment. The majority of these ETFs have been established fairly recently, from 2015 onwards, and their long-term performance is yet to be definitively determined. However, for some, their change in Net Asset Value (NAV) has been positive, most notably the Global X Robotics and AI ETF, which has experienced 15.39% growth since its inception in 2016.
Other leading 4IR ETFs include the Horizons Industry 4.0 Index ETF, and the iShares Exponential Technologies ETF, the details of which are illustrated below. South Africa is catching up, with Sygnia establishing the IRTIX 4th IR Global Equity ETF in December 2017, which is benchmarked against the Kenso New Economies Composite Index. It has R376 million (~US$ 24,6 million as of August 2019) in net assets with a 3% rise in NAV since inception.
While it is evident there are a variety of options for 4IR investment, the golden thread which connects them is what they invest in: blockchain, robotics and Big Data, as detailed below.
Previously, there has been doubt regarding the viability of business models that stress these technologies in South Africa and elsewhere across the continent. However, the narrative seems to be changing as success is being achieved by start-ups utilising these tools to solve social problems relevant to their local context.
At this point, if you are a South African firm or individual wondering where to invest within the 4IR sector, there is an abundance of options available. These range from individual investments in 4IR ETFs and VCCs, to financial institutions funding 4IR adoption through debt financing.
It’s critical to remember that investment decisions should be strategic and well-informed. They should utilise the opportunity gap for domestic investment in South African 4IR adoption in a manner suitable to your asset portfolio, appetite for risk and involvement, and desired outcomes. You’ll need to acquire or outsource key capabilities when setting up a 4IR fund, which include fund management, 4IR technology expertise, business incubation and development, as well as digital opportunity identification and oversight.
There are real opportunities to invest in South African 4IR. If you or your organisation seeks to leverage these opportunities, Letsema has a range of service offerings to equip you or your company with these capabilities, unlocking value along the way.
For more information on how Letsema can help you with your approach to 4IR, click here.