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Activities that Qualify for the Seed Fund

The positioning of the Seed Fund relative to other venture capital resources is illustrated by the following:

  • Stages Outcome/Business Phase Innovation Fund Funding Instrument (End stage Research and Development technical proof-of-concept and bankable business plan).
  • TAP/MiTech
  • Start-up Almost no sales Seed Fund (Preferably syndicated with other funders).
  • Growth Slow increase in sales Seed Fund (Round 2 only if the Innovation Fund has previously invested and there is market failure with respect to required capital investment).
  • Expansion Rapid increase in sales IF Exits Seed Funding is intended to be provided only after proof-of-concept has been demonstrated.

Examples of activities that can receive seed venture capital from the Innovation Fund include:

  • Evaluating prototypes against customer requirements.
  • Turning prototypes or entrepreneurial ideas into pre-production products.
  • Attracting experienced management into the opportunity.
  • Developing marketing material and marketing to customers.
  • Activities leading to co-development revenues from clients.
  • Licensing of technology to manufacturers and for distribution
  • Transfer of technology for manufacture.
  • Purchase of hardware for scale-up from prototypes.
  • Supporting IP protection maintenance costs.

The Seed Fund is intended to invest in future development and commercialisation activities to promote a particular technology. In this respect it cannot provide investment that offers an equity exit opportunity for existing shareholders, and cannot be used to repay bridging finance already incurred by the company.

Summary of Seed Fund Policy

Investments in opportunities generally up to a maximum of R5 million:

  • With a strong element of technological innovation originating in South Africa (demonstrated through locally owned patents and other formal IP).
  • That are consistent with the Innovation Fund mandate.
  • That require funding for qualifying activities listed above.

The Innovation Fund will consider applications for seed venture capital with a preference for investments in the following order:

  • Opportunities that have previously received funding from the Innovation Fund.
  • SMEs with a significant empowerment or national benefit element.
  • SMEs with very promising technological innovation and having potential to meet national imperatives.
  • Opportunities that have arisen in whole or part from, and have revenue-sharing arrangements with, the state-funded research system (e.g. Universities, Science Councils, Biotechnology Regional Innovation Centres, state established incubators etc).

The Innovation Fund will only consider applications that:

  • Provide information in compliance with guidelines detailed below.
  • Have already approached at least two other venture capital resources or similar early stage funds, and have provided verifiable reasons for being turned down by same, where such reasons do not place the application outside of the Seed Fund mandate and criteria. A due diligence may be undertaken to assess the opportunity, the cost of which may be included in the investment should such investment be approved.

In addition to investment specific terms to be agreed on a case-by-case basis, where investment is for equity in the business, the Innovation Fund typically:

  • Reserves the right to appoint a non-executive director to the Board of the investment, where the investment is structured as equity in a company.
  • Requires preferential exit to BEE investors for its equity position, and requires a veto right on any share transaction that results in more than 49% of the company being foreign owned.
  • Reserves a veto right in respect of encumbering of the Intellectual Property its funding has helped to develop or commercially exploit.
  • May use its seed venture capital to support sophisticated license deals as well as investing into start-up companies.
  • Will seek commercial returns on its investments. Although equity is preferred, any of a choice of investment instruments including loans, convertible loans, royalty, quasi-equity or combinations, can be considered.