Archive | vc4africa.biz RSS for this section

10 investments for unleashing the entrepreneurial ecosystem

5th EU Africa

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.

Advertisements

Launch Angel Investor network in Lagos, Nigeria

The Lagos Innovation Hotspots is an initiative of the Co-creation Hub aimed at mapping hotspots representing clusters of emerging high growth and competitive businesses across Lagos. The current map, which has more than 170 listed businesses provides information on each cluster, businesses and location-based support services and illustrates exciting developments now underway in Lagos.

As the local community of entrepreneurs grows, a growing number of organizations and investors are looking to engage them. This was highlighted by the announcement of EchoVC, a Silicon Valley-based venture capital firm. The new fund aims to invest $30 Million into Sub-Saharan Africa Start-ups and the team is comprised of former Intel Capital director, Eghosa Omoigui, early-stage technology investor, Shadi Mehraein and former VC Finance at Founders Fund, Amber Fowler.

This news was followed by the recent launch of the ‘Lagos Angel Network,’ a platform that brings together individuals and organisations seeking to invest in and mentor Nigerian technology start-ups. LAN is an initiative of Wennovation Hub. Founding Partners include the World Bank, InfoDev, Tony Elumelu Foundation and Alitheia Capital. The initiative is headed by VC4Africa member Tomi Davies and currently counts 15 Angel investors. Members of the network are expected to commit at least $6,000 a year to a common investment pool.

The time to start a new technology venture in Nigeria couldn’t be better!

A startup challenge that celebrates Cameroon’s top innovators

When Bill Zimmerman (my co-founder at VC4Africa) approached me with the idea for the Cameroon Startup Challenge, it took me about 3 second to make my decision….this is just something we just have to do! The competition offers a cash prize of USD $5,000 for the most innovative web, mobile or hardware-based business venture in Cameroon. Sanaga Ventures, a joint seed stage investment company between Bill and myself, puts up the prize money.

My first trip to Cameroon was about a year ago. Bill and I were working intensively on the launch of VC4Africa and had decided to build most of the site with colleagues in Buea, a student town at the base of Mount Cameroon (or what the local techies like to call Silicon Mountain).

The trip was a chance to meet people like Helen, Valery, Fua, Mohamed, Fritz, Al, Churchill and many others in person. Much of this community was connected through ActivSpaces, an upcoming tech hub that is now the country’s leading platform for tech entrepreneurship. On this trip we facilitated a business model workshop with some of the ActivSpaces members and hosted VC4Africa meetups in Buea and Douala. Needless to say, my time in Cameroon convinced me there is talent capable of innovating on a continental (Njorku is widely claimed as the continent’s first Job search engine) and global level. See a video for an impression.

Since this trip we have only increased our activities. Now VC4Africa is for the most part developed and maintained by Zinger Systems, a local software firm. We have also developed other projects including the VC4Africa mobile website with two developers Mohamed and Ebot. And as a community (people like Al Banda, Valery, Fua, Rebecca, Bill, myself and many others) we work to support the development of ActivSpaces as the leading platform for tech entrepreneurs in the country. Finding support hasn’t always been easy as Cameroon is not often ‘on the list’ in the same way support is channeled to Kenya, Uganda or Ghana. Exceptions are enterprising organizations like Indigo Trust. But step by step, these various pieces are coming together and a lot of progress is being made. We learn of new projects and promising ventures every day. Now we have a chance to build on these foundations and to extend our efforts to new networks of entrepreneurs in the country. If anything this challenge is a precursor to what is possible and to show the world what kind of innovations are coming from this space.

See the details for the competition and we look forward to announcing the winner in July.

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!