10 investments for unleashing the entrepreneurial ecosystem
It is clear Small Medium Sized Enterprises are the backbone of every economy: they are the engines of employment, income generation and economic growth. Yet the conversation at high level forums fails to break down beyond a discussion concerning traditional venture capital and large private equity. The word startup is hardly ever used and there is no focus on building the entrepreneurial community from the grassroots.
Doesn’t the conversation start here?
The VC4Africa community and investment firm Sovec co-chaired the Venture Capital Roundtable at the 5th EU-Africa Business Forum in Brussels. This was a unique opportunity for our 15,000 members from 159 countries to express their concerns, a common voice calling on both EU and African leaders to recognize the entrepreneurial movement coming up across the continent.
Specifically, studies indicate that SMEs account for around 80% of job creation and over 55% of employment in developing countries. Emerging African economies looking to produce quality job opportunities for their youth are no exception, and policy and public sector work should focus on achieving similar levels of contribution. It is estimated there are 2 million registered SMEs in Africa and maybe 8 million operating in the informal sphere, but so how do we better support their growth and development? How do we open the doors for others to follow? And then more importantly, how can we shift the conversation to give a much needed focus on the micro and small as opposed to the medium and large? And where we talk about existing businesses active in traditional sectors, where is the space for talking about startups at the forefront of the new economy?
The VC4Africa chaired roundtable proposes that there are a number of complex constraints that are keeping entrepreneurs from realizing their full potential: we are talking about 1) skills shortages, 2) inadequate infrastructure, and a continued 3) lack of financial resources. And where many argue capital is not the issue, the efficient distribution of capital to the micro and small enterprises (and then to scalable startups specifically) remains a critical issue … combined with the need to offer hands-on support to develop the managerial, financial, and technical skills required.
Common perception aside, private sector investors are actually willing to support early stage companies when the risks are understood and parts are in place to manage them effectively. For example we reference the USD 12 million raised by 70 ventures listed on VC4Africa. And for good purpose, because these companies are growing rapidly. 64% had revenue by their second operating year and the same set of companies generated 1800 new jobs. Furthermore, these companies have the potential to redesign our societies and bring about massive efficiencies.
Again, tip of the iceberg stuff.
The argument is not to say that progress isn’t happening, but that there is so much more that can be done. Investors hesitate to engage difficult countries, sectors or client segments because of the perceived risk of investing in these segments is too high – and they are not able or willing to absorb it. At the same time we know that investments in VC4Africa entrepreneurs could be quite sustainable and that they have a significant development impact.
Key areas where the market continues to fail:
1) There are very few investors willing to assume the high risks and uncertain returns associated with investing in socially impactful early-stage businesses, particularly in geographies and industries where sector risk is perceived to be high;
2) One of the additional reasons why investors shy away from financing early stage companies are the high transaction costs involved compared to the invested amounts. New efficient, innovative mechanisms to reduce costs are needed;
3) Lack of ecosystem actors. Too little support for building platforms essential to creating a quality entrepreneurial base, producing a steady supply of investible pipeline, and acting as a trusted interface to the investment community;
Governments have an important part to play and the roundtable proposes a number of areas where we require additional focus and support. It is critical to invest in the development of entrepreneurial networks at a grassroots level where the VC4Africa community and roundtable participants propose to:
1) invest in community hubs, incubators, and accelerators that offer front line support to entrepreneurs, connecting ideas and resources;
2) friends, family and fools aside, introduce funding mechanisms that give entrepreneurs the opportunity to develop traction at early stages. Guide and support entrepreneurs through this process to secure a compelling investment case;
3) launch a regular series of programs, business plan competitions, demo events and other platforms to inspire a culture of entrepreneurship and for showcasing the community’s best;
4) nurture mentor capital. engage local investors in supporting local startups. Support the formation of high net-worth individuals as angel investing networks;
5) look at the process for company formation, intellectual property protection, and tax legislation;
6) support the growth and development of the service sector (admin, legal, fiscal, marketing), highly specialized entities designed to support the startup ecosystem;
7) consider capital restrictions and benchmark with best practices as they exist across the continent. Consider status of the stock markets and to what extent they offer a viable exit path;
8) invest in the education of both entrepreneurs and investors to improve the understanding and dynamics of the angel investing, venture capital and private equity models;
9) introduce co-investing schemes and first loss/guarantee mechanisms to further incentivise private sector investors. subsidize transaction costs where necessary;
10) create an environment that celebrates both failure and success, maintain a long-term vision and cultivate a culture with this shared vision.
These are only a few of the suggestions that came from the EU-Africa Business Forum discussion. Please feel free to comment on these and/or make new suggestions. For example, what role do you see for micro-finance institutions or banks?
As a community we will continue our efforts to push the conversation forward and to seek out the support of both government and private sector actors.