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Tech4Africa Google Hangout with African Tech Hubs

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Venture Capitalist take a look at the challenges investing in African tech

VC4Africa was pleased to host the panel, ‘Strengthening the VC pipeline’  at the 9th Annual Conference for the African Venture Capital Association meeting hosted in Accra. 

I was joined by Yemi Lalude, Managing Partner of Adlevo, Tayo Oviosu, Founder and CEO of Paga, Karima Ola, CIO of the African Development Corporation, Mathew Boadu Adjei, CEO of Oasis Capital and Arjuna Costa, Director of Investments at Omidyar Network. The time we had was limited for getting into all of the issues we wanted to cover, actually there is more than enough content for a stand alone conference on the subject, but here are some of the points I felt were raised during our different conversations.

–       Within the emerging African focused VC space there is a inherent leaning to scalable concepts and a natural orientation toward financial services. As penetration rates increases across African countries, banking services are the first step to unlocking e-commerce activity that will drive the ecosystems development.

–       Challenges with market size remain a key constraint. Ghana at 8.4% Internet penetration is looking at somewhere around 1.2 million users compared to the 4.3 million found in Nigeria. The numbers are far less in countries like Tanzania, Ethiopia or Uganda. Innovation can come from anywhere, initially incubated and tested in Accra, Kampala or Dar, but how can a venture then find its way into bigger markets next door?

–       Operating in a country like Zambia can be extremely expensive. Sales operations might be in Lusaka, but don’t be afraid to put the back office in CapeTown. Where Nigeria is where a company might want to expand its network of merchants, the programmers and technical staff might be based in Accra.  Staff are easier to find, higher quality and therefore cheaper. And it can be as simple as the company needing better power supply and reliable infrastructure.

–       There is a need for more qualified entrepreneurs. For the organizations that can, investing into the support ecosystem remains important. Platforms like incubators are critical to developing new networks of entrepreneurs. That said, do the existing platforms successfully produce new ventures and how do we make sure entrepreneurs graduate and get into the market successfully? A stronger link to business development is needed and is a point being addressed by incubators like ActivSpaces in Buea, the Nailab in Nairobi and MEST in Accra.

–       There is a growing amount of capital looking to engage ventures at an early stage. It might not be enough, as many entrepreneurs are quick to make clear, but certainly the environment is improving. Two panelists had angels. One happened to be from the US and one happened to be Dutch.  Both offering a million USD plus. But we also met local Ghanaian angels investing in early stage ventures here in Accra and we see a growing number of ventures finding early stage support this way. No surprise we see the rise of local angel networks like the Ghana Angel Investor Network (GAIN). A challenge for many entrepreneurs is in developing these contacts and here more could be done to matchmake on a local level. At VC4A we do this via meetups brining the member base together in an informal way that sees lots of business cards exchanging hands.

–       Government does have a role to play. Legislation that helps to protect IP is critical. But also efforts like the Ghana Venture Capital Trust Fund. A facility that has helped Ghana based investors top up their funds. More success stories would give governments the opportunity to bolster these programs and expand them. In Kenya the government has gone so far as to promote the development of Konza, an entire tech city.

–       Tech is different than sectors like housing, education, agro, etc… Where the first subscribes to a culture more attune to Silicon Valley, the other, more traditional sectors, are more often family run businesses. The approaches to building a portfolio are quite different. The business model and exit plan are also adjusted. Taking from revenue might be more attune for a business when run by a family that isn’t actually looking for an eventual acquisition.

–       Average size of ventures on the tech side are still quite small in size. The economics for a pure play early stage tech fund in many cases doesn’t make sense. As a result, some investors have a carve out and allocate a % they can put into early stage technology ventures. Fitting the investments into a larger portfolio can improve a fund’s balance sheet and be more appealing to investors.

–       Costs are high. Traveling in Africa is more expensive than traveling across the US. Hotels are not cheap. Qualified staff are not cheap. Secure power and working infrastrcuture can add to the cost base. These costs stretch what can be facilitated with a traditional  managetment fee.

–       Exits were not a primary concern, although many investors question the point. That said, If you build a business with real scale, there is confidence exit opportunities will emerge. Possibly an exit within the industry as larger funds look to fill their own pipelines with qualified ventures. If you don’t have a long view, and an underlining faith in the market, you probably shouldn’t be involved.

I will look to build on these points moving forward and as always I invite your feedback, thoughts, questions and ideas. Certainly, progress is being made every day and this conference and our time in Accra was testament to that.

Innovations in finance needed to support African SMEs

Why do banks have a hard time supporting entrepreneurs? What kind of innovations are underway and what might we expect in the future? It’s time to close the missing middle and there are some promising efforts underway.

Jason Wendle, a Dalberg Associate, makes the point to VC4Africa during a recent filming, ‘The lack of collateral is the biggest challenge. Banks see the SME market as attractive, but they have difficulty assessing the risk and there are few assets in place needed to secure the investment. SMEs on the other hand need fast loans to fill big orders.’ Gerry Monteiro, the Vice President of the Small Business Banking Network, expands, ‘Interest rates are high for SMEs. We have to look beyond lending products and look deeper at financial (and non financial) needs. Banks don’t necessarily appreciate the SME profit drivers.’ This lack of insight on the part of banks hinders the development of appropriate banking solutions. What they do offer doesn’t always meet the needs of the entrepreneurs. The lack of track record, credit history, or tangible assets that can serve as collateral, further hinder the process. As a result, the cost of lending is high, SMEs run the risk of over leveraging their accounts, and there is a need for alternative financing solutions.

Wendle Explaining the Missing Middle from Jonathan Marks on Vimeo.

There is more innovation needed if we are to close the gap. It is encouraging to see high profile organizations like GroFin continue their drive to serve a smaller business segment. With 10 offices in 9 countries they have been able to reach out to countless SMEs and offer their support. We are also seeing innovative partnerships between larger players like Safaricom and Ecobank in Kenya. Reaching out to the small saver, brings the bank closer to small business. For example, Ecobank Zambia says it now targets 50 percent of its loan portfolio to Small and Medium Enterprises (SMEs) this year. Now the job is to see if partnerships like this can be replicated in other countries. We want to see more big banks willing to service small businesses and expect these trends to continue.

Banking and finance institutions aside, we also see more organizations working to address the issue of due diligence. From research with the investor network at VC4Africa, we know that finding good entrepreneurs with qualified business ideas remains a major barrier to investing into small business. One of the reasons VC4Africa launched its own due diligence and matchmaking service that looks to help both VC4A entrepreneurs and investors. Our online profiles are becoming rich sources of information and we see an increasing number of matches being made across the network. At the same time we see organizations like Open Capital Advisors, whom we have invited for an interview, doing great work in Nairobi. They are building in invaluable service for both entrepreneurs and investors in the area.

The Harvard Finance Lab (EFL) is another organization making efforts to address this gap. They have introduced psychometric screening tools that measure future upside potential, rather than traditional risk management tools used by banks for debt contracts, which only measure downside risk. Recently they announced that Standard Bank, Africa’s largest bank, has signed an exclusive two year deal with EFL which guarantees at least 100,000 EFL credit-applications equaling an estimated $US 500-$700 million in new loan origination across the continent. This adds to their already $US 60 million lent to 22,000 applications in + 18 countries.

There are a lot of encouraging developments in the space and we expect to see more come online soon. Bottom line, small business is the engine of our economy and it is in all of our interest to service this segment. More entrepreneurs getting funding means more jobs and more taxes. We need more of both!

Opening address at Private Equity World Africa 2012 – African Investor Day

Here is my opening address at the Private Equity World Africa 2011 Conference in London.

I am pleased to be here. On behalf of VC4Africa, I am pleased to welcome you to this conference. We have a nice program today that will see us cover a lot of ground and I look forward to the presentations, the questions and conversations. If anything, today is a platform for exchanging ideas, networking and getting to know one another. So let us take advantage of our time together.

For me, 2011 was a year that ushered in a new period of change for the African continent. What started with a disenfranchised shopkeeper in Tunisia has spread into a social movement that looks to rebalance realities across Libya, Egypt, Syria, Bahrain and Yemen. But what has become known as the ‘Arab Spring’ has potentially found new roots in Sub Saharan Africa too. Maybe the events south of Cairo don’t get the same international news coverage, but we would be foolish not to recognize burgeoning movements in places like Uganda, Nigeria, Malawi and Senegal. The economic inequality, and a growing demand for access to equal opportunity, has shifted tectonic plates that have seemed immovable for decades. Bottom line, 43% of the African population is under the age of 14 and this is a demographic reality that is changing the face of the continent forever.

With the rise of technology, increasing access to Internet and mobile networks, a connected African society is empowered to take a more active role in defining the future & the political agenda moving forward. This is part of a new energy sweeping across the continent as Africa’s growing population’s aspires to rise economically. For many, gains have already been realized as a swelling middle class can now be targeted for business. If anything, African consumer spending power is real and growing. We are looking at the emergence of the very foundations that allow us to invest in the development of new economy.

At the same time, this reality is not new. If anything, Mo Ibrahim, the Sudanese founder of Celtel, was one of the first to demonstrate Africa’s potential early on. I have had the pleasure of interviewing him twice. The success of Celtel was a private equity windfall, but more importantly it laid the ground work for the type of open communication that is starting to dramaticlly transform African societies today.

Created in 1998, we have to remember that Celtel brought mobile phone service to more than 6 million people when there was almost zero land-line infrastructure. The rapid adoption of Celtel’s mobile devices wasn’t only good business, it absolutely revolutionized the way families communicated from town to town, and the way businesses interact with suppliers, customers and employees. It has transformed the way Africans learn about local health care, the way they bank (often for the first time), and the way farmers price their crops. It is this same telecommunications network that is now being used to mobilize our communities and brings them together around important social and economic issues. This is the kind of story the investment community can be proud of. Good business that changes lives.

The deal wasn’t exactly intuitive at the time. In 1998, only two million of Africa’s 950 million people were using cell phones. Furthermore, Africa’s reputation as a place to do business was almost universally negative in financial circles. After a series of “no’s” from banks who were “ruled by misconceptions about Africa,” as Ibrahim told me, he had no choice but to raise capital from private investors. It wasn’t his preferred way to build the business, but the only way. As he explained in an article for the Wall Street Journal: “We had to fund the company through equity. It is a very strange way to fund a telecom company. The equity backing required the company to endure eight or nine rounds of funding, which always involved re-upping from insiders and often slowed down the company’s hockey stick growth.” But without the investors willing to take on ‘major risk,’ Celtel would have struggled to expand so quickly into 10 African countries.

Thanks to this private equity capital, from the likes of Zephyr, Bessemer Ventures and Actis, Celtel was able to put $800 million into licenses, acquisitions and infrastructure. Revenues grew more than 100 percent each year and Celtel rode the wave of mobile adoption as more than 400 million Africans—almost half of the continent— purchased cell phones. With a revenue run rate of $1 billion (and an annual EBITDA of $250 million) Celtel sold in 2005 to MTC Kuwait for $3.4 billion. The company commanded a premium price, in part, Ibrahim has said, because of its good governance. Just as impressive, 100 percent of the company’s more than 4,000 employees are African. But again, the real impact of this company goes much deeper. Indeed, it is the very telecommunications network that now mobilizes our communities and brings them together in ways that potentially rebalance societies across the continent.

I like to think the world of Private Equity and Venture Capital works slightly different in Africa than it might in other parts of the globe. For one example, many great companies in Africa are still owned by a family. Building trust takes longer and we have to spend more time structuring a deal. Many times pieces are missing and careful analysis has to go into a plan that brings the right parts together. Does less competition for these deals allow for more meaningful exchanges? Is it this kind of patience and hard work that helps ensure better returns and greater impact over the long term? Often times holding a minority stake means we have to ‘do more’ to establish relationships with our clients. We have to prove that our insights, advice and management plans have merit based on valid historical track record. For me, these are qualities we should hold dear to our business.

Indeed, with the gains achieved through an entrepreneur like Mo Ibrahim, and the bold investments we made into transformative companies like Celtel, now is the time to welcome new colleagues to the table. Thus far, an influx of new entrants to the market may well increase competition for deals, but it has also made for some compelling exit opportunities. In recent years, the market has seen an influx of international strategic suitors seeking to enter the region by acquisition. These include not only corporations from Europe and the US, but also corporate entities from India and China. Trade exits will become more and more important. And let us not forget the deal that saw Aureos exit its entire portfolio in one fell swoop.

We have to remind ourselves, and our new colleagues, that to be successful in African markets takes time, we build on relationships and on true and shared visions of the future. Indeed, our businesses must benefit the 43% of the population now coming up and rightfully in search of their own. After all, we share the same future we have the opportunity to discuss today.

Steeds meer Nederlandse ondernemers ontdekken Afrika

Yesterday evening VC4Africa board member Jasper Grosskurth, Director of Research and Strategy at Research Solutions Africa, was featured on Dutch national news channel NOS. The report gives a nice look into Kenya and the growing opportunities in East Africa and Africa as a whole. Indeed, with N. America and Europe struggling economically, and increasing competition in markets like India and China, Africa is increasingly the investment destination of choice. Now that’s an argument I like:)

Mxit, the 800 pound Gorilla that is Africa’s largest social network

Paul Stemmet of World Of Avatar, an African focused tech investor, gave a presentation at Mobile Web East Africa (Hashtag: #MWEA2012). In addition to his launch of Shinka.sh – a mobile ad network, he clearly wanted to highlight the jewel in their crown, the obviously popular MxIt. The site now has some 50M users, supports over 3500 different mobile devices (they are planning to make it open platform), and processes round 750 million messages daily. Out of 50 million registered users, 12,500,000 are active, making Mxit truly the biggest African Mobile Social network.

It’s no surprise to see new ventures come online with the ambition to tap into a similar opportunity. One example is Saya Mobile, a Ghanian tech startup that recently emerged from the MEST program. They recently unveiled a mobile chat app they hope will rival the likes of BBM, ZiNG … and of course the 800 pound Gorilla Mxit.