An exploratory study to determine if the venture capital schemes framework can be introduced to South Africa.

Abstract

The South African government has indicated that the National Small Business Act of 1996 had failed to get the small business sector working successfully as engine for growth. Thus, government policy measures, using an institutional network alone, to create a thriving SME economy, has not succeeded. The Minister called for small business and other institutions to develop suggestions for inclusion in a new business strategy document. One such strategy, as proposed by this thesis, involves the introduction and implementation of the Venture Capital Schemes (VCS) Framework. The purpose of the dissertation is to conduct an exploratory study of the VCS framework and to determine if the VCS framework is worthwhile pursuing in South Africa, following its successful introduction in the United Kingdom. To achieve effective implementation of the VCT framework, specific issues to the various components and key players require addressing: • Are there potential high-growth SMEs that are being overlooked? • Is there a definite 'equity gap' to satisfy the needs of potential SMEs that is not being serviced? • Are there sufficient investors who can be attracted to fund this 'equity gap'? • Are there sufficient rewards for the private sector financial institutions (venture capitalists and associated network) to be willing to manage and drive the VCT framework? To obtain the required information, a discussion / interview was conducted with Business Partners Limited - East Fund (a leading South African venture capitalist who is involved in both 'pure' venture capital funding as well as having integral ties with SMEs). The Venture Capital Schemes Framework, in theory, appears to be a viable option. However, the response indicates that the larger venture capital / private equity firms will not be willing to drive the VCS framework, since it requires an adjustment to their investment philosophy. The response has also indicated that a RFI with a iv reasonable network of resources, operating as a private company, will be in the best position to drive the VCS framework. It will also be able to attract competition from the smaller venture capital/private equity firms, accounting firms and business advisors, to create a vibrant VCT market (industry). Hence, a thriving SME economy could become a reality.