DEPENDING on how one measures it, venture capital represents between less than 1% and 4% of assets under management in this country’s private equity industry.

Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (Savca), says this is far from unusual in a global context as venture capital tends to make up a small percentage of the asset class.

There are exceptions, though, such as markets like the US and Israel which have produced large and thriving venture capital industries.

"Venture capital activity in South Africa is focused on obtaining funding via angel investors (high net worth individuals) who are attracted by the potential high returns venture capital can provide; and who have a clear understanding of the risks and characteristics of venture capital," says Ms Van der Merwe.

At this stage institutional investors do not invest in venture capital and private individuals who do need sufficient funds so that their venture capital exposure forms part of a well diversified portfolio; with perhaps 5% being placed in venture capital assets.

She says the association has fewer than 10 venture capital fund members, illustrating the relatively small size of this investment arena in South Africa. "Nevertheless, our venture capital members are enormously energetic and devote much of their time finding ways to develop the industry through training, networking and lobbying. Many South Africans are risk averse and there is limited understanding as to what venture capital offers."

Venture capital fund managers operate on the basis that out of every 10 carefully selected startups, some will fail, others will deliver only mediocre returns but the one or two that really succeed will more than make up for the rest.

"Venture capital in the true sense refers to hi-tech, high-growth, very scalable enterprises," says Ms Van der Merwe.

Gerrie van Biljon, executive director at Business Partners, says venture capital is normally associated with investment into large, high growth businesses and not so much the smaller ventures.

However, there is a growing need for venture capital among entrepreneurs who require smaller investments to get their concept to market or move their business to the next level.

He says finance for these types of business is not readily available in the local industry. Instead, smaller venture capital projects are often either funded internally with personal funds or with loans from family or friends and are seldom funded by angel investors.

"SMEs still regard access to funding as the most inhibiting factor to starting up a business or expanding their enterprise. To cater for this specific market Business Partners has recently launched a R400m venture fund to finance deals with market-ready products or concepts up to R10m."

Although it is a risky industry for financiers and investors, there are lucrative deals to be financed.

Mr Van Biljon says over the years South African entrepreneurs have invented and developed outstanding products and services.

"They have the ability to think out of the box and are innovative and practical. Unfortunately, so many innovative products never hit the market, despite the potential that they have, and entrepreneurs often get despondent because they have put in so much time and effort, but cannot take it any further due to financial constraints," says Mr Van Biljon.

Important players in the chain of events include universities, which have initiatives in place where products are developed, incubators and the government’s Technology Innovation Agency.

"There are also specialists that take concept or product to market, but do not offer finance to the entrepreneur who created the concept," says Mr Van Biljon.

Venture capital is often associated with new products or concepts but he says venture finance should include all business concepts with exceptional growth potential, which includes existing businesses and well known and well established products.

"There are so many entrepreneurs who deserve a chance in the market and lack the capital, but this should not prevent a dream from coming true.

"South Africa is in desperate need of SME growth as this sector is a significant job and wealth creator. Efforts should therefore be made to encourage more entrants to the local business arena.

"Although there are many investors and funds that cater for the larger projects, few focus on the SME market. To grow the SME market in South Africa we need to focus on providing venture capital to the smaller players in the market too," says Mr Van Biljon.