Why should family offices look at investing in Africa?
In short, venture capital in Africa is booming. As Partech points out in its latest report on African Tech VC, disclosed equity rounds over $200k on the continent are up ~6.5x over the last 5 years. And while the total amount of funds deployed decreased to $1.43B in 2020 (as the COVID-19 pandemic made on-the-ground due diligence more difficult for international investors), the number of equity funding rounds increased by 44% implying a growing and healthy venture ecosystem with more investors, investing more often. Yet, many investors struggle to put money to work in Africa because they see the world through a Western lens.
To many, Venture capital is like Formula 1 racing. Venture capitalists provide high octane fuel in the form of cash as well as technical assistance and other resources.
All of which enable daring founders – who we worship like the F1 drivers of the 80s – to scale businesses at frightening speeds and win the races for market dominance. VCs like to back drivers that have been around the circuit before, and they themselves have fine-tuned their race strategies through previous market cycles.
But Africa is not a racetrack.
It does not have massive addressable markets, high customer LTVs to justify aggressive customer acquisition strategies or even the digital infrastructure to serve those customers effectively. It lacks liquid capital markets and large tech companies to exit to and has a smaller pool of advisers who have successfully founded and scaled businesses before. Africa does not have a smooth surface, long straights, and a pit lane.
Venture capital in Africa is more akin to an off-road race – a Dakar rally if you will. The race is longer, covers treacherous terrain (did someone say election cycles, currency devaluations and regulatory hairpin turns?) and is raced at a slower pace. Funding rounds take longer to close and fuelling stations are spaced further apart. Accordingly, founders must adopt different race strategies. Without sources of seemingly abundant capital, African founders must focus on their fuel gauge over their speedometer.
And while there are many brilliant venture builders in Africa, the incentives are stacked against them. If you are the first person in your family to graduate from university, why would you start or join a new business for little (or zero) pay? Founders and early employees do not have the same financial security from savings and previous exits that many of their Western counterparts have. And there is no big tech product manager role waiting for them if they fail. The founder’s dilemma is acutely different in Africa.
Founders are also constantly crossing rivers with no bridges. How do you build an e-commerce business if most people do not have formal addresses? How do you assess a borrower’s creditworthiness if they do not have a credit score? (The answer: using alternative data sources such as their airtime purchase history and social media profile). And so African businesses often find themselves solving other problems to enable their businesses to run. Yoco, the South African payments processor is a great example of this. Their handheld point-of-sale devices have revolutionised how small businesses and sole proprietors get paid but they found that merchants did not have software to run their businesses. So, Yoco built that too.
Nonetheless, it is because of, and not despite these challenges that there is an incredible opportunity for family offices to invest in Africa.
Firstly, family offices are not constrained by the sow-and-reap cycles of most investment funds. They can afford to take a long-term view and build enduring relationships with founders. Secondly, longer time between funding rounds affords family offices more time to do their due diligence and get to know founders (while encouraging founders to focus on building their businesses over their cap tables). Thirdly, family offices can achieve a far greater impact per dollar invested in Africa than anywhere else; for every job a new venture creates, it supports many other lives that are dependent on that breadwinner.
As a final point, it is important to remember that Africa is not one homogenous region. Africa is the most ethnically and linguistically diverse continent on Earth – between countries and within them – and I have risked generalizing to highlight the perspective shift that is required when investing on the continent. Compelling investment opportunities exist in Africa, it simply requires navigating an unfamiliar terrain with the knowledge and acceptance that it is just that – unfamiliar.