1. Sovereign innovation fund
DST Concept note:
Sovereign innovation fund
Presentation to the:
Portfolio Committee
23 May 2018

2. The SoIF: Background and Rationale
In 2015 DST identified enduring funding gaps in the NSI for the development of technology-based firms from locally developed ideas
Further scoping and stakeholder engagements in 2016 and 2017 showed that between the portfolios of the TIA and the instruments of the dti, DSBD and EDD (i.e. including the IDC), there remain such funding gaps
The Sovereign Innovation Fund (SoIF), (endorsed by Cabinet and announced in the SONA in 2016), is envisaged to bridge these gaps and to accelerate the development of a much higher proportion of export oriented technology-based South African firms

3. Firm life–cycle, Stages and Sources of Financing
Yield
Early Phase:
Seed & Start-up
Expansion Phase:
Development & Growth capital
Stock
Market
Private
Seed:
Market focused business & product dev
Checking ideas
Market analysis
Prototype
Start-up:
Business
Start-up
Setting up operation
Further dev of products
First stage:
Start of production
Market launch
First sales achievements
Second stage:
Scaling
Market launch
Support growth in market share
Third stage:
Standardisation
Launching into foreign markets
Accelerating production
New product lines
Fourth stage:
Pre IPO
IPO preparation
Acquisition of competitors
Take Private stage:
Delisting
Under valuation
Acquisition
Profit zone
Loss zone
Company founders
Subsidies
Friends, relatives
Business Angels
Incubators
Early stage VC
Incubators
Business Angels
Strategic
investors
Venture Capital
Private Equity
Mezzanine Capital
Loans
Subsidies
Private Equity
Mezzanine
capital
Investment
bank
Diversified shareholding
Source: Adapted from Natusch (2003); OECD (2013d). Policy Lessons from Financing Young Innovative Firms (OECD, 2015).
Time

4. SoIF purpose
SoIF to be initiated in the 2019/20 FY as a separate, standalone public-private funding partnership that is aimed at harvesting and commercialising SA tech innovations
Differentiated from other funding instruments - focus on supporting tech innovation and commercialisation in high-risk tech development initiatives
Serve as new national financing instrument, involving formal equity finance funded by investments from the public and private sectors. Government funding is utilised to de-risk early stage tech development phases and thereby create opportunities for later stage investments from the private sector

5. Firm life–cycle: Stages and Sources of Financing
Yield
Early Phase:
Seed & Start-up
Expansion Phase:
Development & Growth capital
Stock
Market
Private
Seed:
Market focused business & product dev
Checking ideas
Market analysis
Prototype
Start-up:
Business
Start-up
Setting up operation
Further dev of products
First stage:
Start of production
Market launch
First sales achievements
Second stage:
Scaling
Market launch
Support growth in market share
Third stage:
Standardisation
Launching into foreign markets
Accelerating production
New products lines
Fourth stage:
Pre IPO
IPO preparation
Acquisition of competitors
Take Private stage:
Delisting
Under valuation
Acquisition
Sovereign Innovation Fund
Government funding support function/focus
Private sector funding support function/focus
Loss zone
Company founders
Subsidies
Friends, relatives
Business Angels
Incubators
Early stage VC
Incubators
Business Angels
Strategic
investors
Venture Capital
Private Equity
Mezzanine Capital
Loans
Subsidies
Private Equity
Mezzanine
capital
Investment
bank
Diversified shareholding
Source: Adapted from Natusch (2003); OECD (2013d). Policy Lessons from Financing Young Innovative Firms (OECD, 2015).
Time

6. SoIF Funding Focus
At least two concurrent investment portfolios to facilitate:
Investments in the early development and expansion stages of technology-based SA firms (including, where appropriate, SMMEs that may be start-ups and/or fledgling firms)
Follow-on financing for the full industrialisation and deployment of large scale R&D initiatives that have been initiated and funded by government, (i.e. either through science councils , higher education institutions and/or in support of improving services delivery of government and State Owned Enterprises, where appropriate)

7. Initiating the Sovereign Innovation Fund: Consolidating funding efforts across government
Sovereign Fund: Phase 1 Principal Investment Areas/Themes
Key Outcomes & Impacts
Policy coherence: coordination and integration of funding activities across government
Funding certainty for co- investment from the private sector
Increased # of sustainable tech- based firms and SMMEs
Increased # of SA technology products and services in local and global markets
Technology enabled government services delivery
Implementation of local tech solutions for local & global challenges
(other)
Investment
Portfolio I:
SA Firms
&
SMMEs
Energy
Smart Manufacturing
Beneficiation
Bioinnovation
Space based technologies
Water & waste management
ICT
Agriculture
Services
(other)
1. Modernising the
SA economy: 4th
Industrial Revolution
The
Sovereign Innovation Fund
2. Food & Water
Security
Investment
Portfolio II:
Public R&D initiatives
(SoEs, SCs)
3. Climate Change
Mitigation
National Development Plan (NDP) Phase 1: (starting in 2012) focus on intensifying R&D spending, emphasising opportunities linked to existing industries
NDP Phase 2: laying the foundations for more intensive improvements in productivity where innovation across state, business and social sectors start to become pervasive.
NDP Phase 3: consolidating the gains of the second phase, with greater emphasis on innovation, improved productivity, more intensive pursuit of a knowledge economy and better exploitation of comparative and competitive advantages in an integrated continent.

8. SoIF: Three funding functions
SoIF is an important complementary intervention to support, critical investment pipelines for other public and private investors (e.g. TIA, IDC and PIC), as well as, private equity and VC firms. To do this, the SoIF fund:
Early stage – including pre-commercial, seed, start-up, fledgling companies support, and/or larger scale R&D technology development initiatives.
Market development and launch - to enable the expansion of formalised business activities including launching into new markets.
Growth and expansion - support for scaling large industrialisation activities, such as accelerating production, the development of new product lines, launching into international markets and support for IPO listings.

9. SME Innovation Fund
The 2018 State of the Nation Address and 2018 Budget Speech commit government to establishing a “SME Innovation Fund specifically focusing on start-ups.”
National Treasury has set aside funding of R2.1 billion over the MTEF to support the Fund.

10. Small Enterprise Innovation Fund
SME Innovation Fund Concept
Small Enterprise Innovation Fund
Focus on start-up and early-stage formal SMMEs
Provision of debt and equity finance as well as grants
Mobilise intermediaries – networks, capabilities and co- funding
Fund of Funds
Objectives:
Reduce cost of finance
Increase risk appetite
Enhance scale – reach, amount of funding and SMMEs served
Improved SMME survival rates

11. Fund Distribution Model
(work in progress)

12. Target Market, Products and Channels (work in progress)
It is envisaged that the SME Innovation Fund will address the “early stage” funding functions of the SoIF

13. SME Innovation Fund Actions
(work in progress)
Establish a new Fund in government that will allocate funding to selected intermediaries (partners) for disbursement as either debt, equity or grant funding .
Establish governance and technical evaluation structures to guide and manage the Fund
Establish a PMO to support the operations of the Fund
Established systems and processes to support the Fund
Apply competitive proposal call processes (concept and full proposal) in funding allocation decision-making
Resolve:
a) The institutional location of the Fund
b) The public financing commitment period
c) The minimum funding values

14. SoIF Way Forward
Finalisation of business case, (in consultation with NT, GTAC and the DSBD)
Identify and secure sources of government, and private sector, funding partnerships to enable the initiation of the SoIF in the 2019/20 FY
Parallel to the finalisation of the SoIF business case development, support the work of the DSBD towards the establishment of the SME Innovation Fund in 2018/19 in order to maximize opportunities and leverage funding across the NSI
Stakeholder engagements
Cabinet input and approval
SoIF operationalisation

15. Thank you for your attention
Questions / Comments?