Financing African Startups

Last week I was privileged to attend a panel discussion about how to make capital available to startups and entrepreneurs in Africa. The fact that this conversation took place is further recognition of a burgeoning ecosystem of startups with a desire to use commerce to change their societies for the better. While innovative new businesses are emerging in many places a few major cities have emerged as centers of innovation:

  • Nairobi, Kenya – where a technology district is being built and where Google has an office,
  • Johannesburg, South Africa – the commercial hub of the most developed economy on the continent,
  • Accra, Ghana – which is also contemplating an innovation zone, and
  • Lagos, Nigeria – the commercial hub of the largest national market in Africa

 

Here are 6 key observations from the conversation:

1. Foreign investors are interested in investing in African startups. Speakers in the panels included the director of a prominent US based angel investment group exploring opportunities in Africa as well as a couple of beginning angels. Others in the gathering also had ties to investor networks.

2. Investors are looking for startups that can scale—and they are difficult to find. Although they are prepared to do smaller deals, they are not interested in microfinance. Investors as do all of us in this community are interested in making meaningful change. Companies that can scale not only provide attractive returns.  They also have social impact in the form of job creation,  human capital development, and integrating African business into the global supply chain.

3. The startups that scale and that are attractive to investors tend to be in innovation-intensive industries–IT/telecom, green business, life sciences—or are in some ways participants in these industries. Their founders tend to be well educated with ties to universities in their countries and abroad.

4. There is also a need to fund grass roots businesses whose owners may be more locally oriented and not well connected to global capital or global commercial networks.

5. The US investors in the room recognized the difficulty investing and managing a portfolio from a distance. Even domestically they generally maintain the 4 hour rule by which they invest only in company’s within 4 hours drive. One of the key challenges for the African startup ecosystem is to overcome the distance factor.

6. The answer was potentially in the room—Africa-based investors who invest in African companies. If one can get comfortable with these companies—in their ability to vet companies and to support and mentor the entrepreneurs in their portfolio, then foreign investors can finance these investors. Two such investing companies were in attendance. We will monitor their progress with great interest.

 

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