Author, Alexander Mann
Africa was a continent unknown. Having returned from a 2-month sub-Saharan stint, I find the assumptions I had made, the prejudices baked inside to be almost completely incorrect. To be sure, sometimes for the worse, but also often for the better. Western eyes often regard it as a homogeneous block, as if ‘Africa’ is some vast united continent of people and culture. That could not be further from the truth. The differences between peoples and tribes, often more relevant than national affiliation, are vast, complex and stretch back aeons. But what is unmistakeable is that this is a continent, once riven by conflict, that is finally beginning to realise some of its potential. Nairobi in particular has real energy and there is a palpable sense of possibility, with entrepreneurs engaged and committed in tackling ‘real’, non-trivial, meaty problems. Nothing in Africa is frivolous and from a European Venture Capitalists eyes, that is refreshing indeed.
The continent is set to be a real battleground for the 21st century. There is just too much latent potential in the market for it not to be so, with astronomical population growth rates and the vast majority of the citizenry still living on a pittance outside of major metropolis’s, private investors will be lured into seeking the riches on offer as disposable income inevitably rises. But nation states will too duke it out, as the West, tentatively led by the Americans, take on the much more purposeful Chinese for control of hard infrastructure as well as Hearts & Minds.
This note will summarise some of our key findings relevant to venture or otherwise, highlight some major macro themes at play across the continent and try to identify some pitfalls as well as opportunities for venture investors in Africa. The macro impacts the micro here like none other as institutional bodies outside national ones are almost non-existent. The direction of any given country therefore is extremely sensitive to macro trends, despite the poor state capacity of virtually every jurisdiction, and so the major themes at play become vital to understand.
It strikes me that there are 4 primary types of venture investments to be made across the continent.
- African tech for African problems
- World class tech
Copycat businesses, or those that have taken established (usually Western) models and tried to roll them out across the continent are numerous. These are usually the most attractive for non-African based investors to fund as well, as the models are familiar and lacking a sophisticated understanding of the market, they assume it will work. Sometimes it does, sometimes it doesn’t. In the case of Jumia (Amazon clone), it’s been harder than expected. Beware B2C in particular as logistics is still a nightmare. A lack of traceability, no formal addressing system, awful infrastructure – these are the obvious problems. It’s also the most obvious place for dollars to flow and so tends to valuations tend to be expensive and divorced from the reality on the ground.
Much has been made of ‘African tech for African problems’. The more you get into the continent, the more you realise that there are some very specific problems facing it. Think detention rooms for mothers and their newborn children in Nigerian hospitals should the family not be able to pay the bill for delivery. The problem here is more often than not the markets are just so small. Disposable income is super low right across the continent and even in the larger economies (Nigeria, Kenya and South Africa) the markets on the B2C side are in no way venture sized in most cases. On the B2B side however, things look slightly different. Augmenting established players and providing a new layer of sophisticated infrastructure to lower costs and increase market access can be very attractive. However, beware the ‘protected industries’. On the face of it, logistics and supply chain looks like an inviting vertical. It’s one of the few venture sized markets across the continent, it’s fragmented, expensive and it offers a woeful service to the end client. Problematically though, its often a protected industry, by which I mean subject formally or informally to extensive government interference and ownership. Trace back the companies operating in the space far enough and you’ll often find links to government officials. Cut these middlemen out at your peril. Entrepreneurs have been shut down or even killed pursuing such goals. Many of these companies are also meritocracies in any way, they are run by a closed circle and admittance to that circle is not easy. Start-ups selling into them without a well-connected founder are at high risk.
World class tech emanating from Africa is harder to find, but it does exist. Many Africans have been educated at the world’s best universities, worked at the world’s most prestigious companies and then returned to build companies in their native countries. Taking of advantage of labour arbitrage opportunities, these businesses are then primed to scale internationally. However, they rarely do so without opening up significant operations abroad as the depth of the talent base just is not present in many of these markets. Valuation arbitrage opportunities do exist though, as many investors struggle to believe that an African business can compete on global playing field. Look in particular into sectors where Africans may have an inherent advantage – micro finance, agriculture, telecoms and so on.
There is no doubt that impact dollars distort the market. Often it can be non-dilutive capital and focused on areas like healthcare, education and energy, so investments in spaces like these need to be treated with caution, at least until the impact investors are flushed out. A venture backed start-up will find it difficult compete with a competitor with ready access to impact dollars.
Now of course, there are some high-profile African venture stories, both historical and present. Asking around informally though will lead one to seriously wonder about the sustainability of some of these models, let alone their valuations. Big money has been poured into a select few companies, without the investors in some cases even visiting the companies in question – ‘after all, who wants to go to Lagos?’ is unfortunately an oft-repeated phrase. It would appear these investors have made assumptions that are just not justifiable, some of which we try to highlight below.
THE PROBLEMS WITH AFRICAN VENTURE
The market sizes are just small. And smaller than your intuition would lead you to believe. SA, Nigeria and Kenya are the largest and so a presence in at least one of those is essential. Outside of that, in Sub-Saharan Africa, there are some fast growing and business friendly locales like Ghana and Rwanda, but the addressable markets are practically non-existent.
It means building a consumer-focused business is very tough because the relevant consumer base is likely to be tiny. When running the numbers, you have to take into account preferences by tribe, race, gender, nationality and income level. Only some of which apply when thinking about western markets where preferences can be more homogenous
Disposable income across the continent is small on an individual and absolute level, despite the sheer number of people. There is high affinity for established western brands at the upper end of the market and so penetrating this segment is challenging
Distribution is tough. A patchwork of family owned stores fragment the landscape and are closest to the customer and so often your business will rely on getting into these stores. Tech companies have begun to augment these stores across the continent, but it’s still early and most will have little technical capacity whatsoever.
Markets are informal in nature and by that I mean not registered with authorities. For example, only c. 5% of Kenyans have bank accounts, money instead flows through m-Pesa and is outside of government control.
The consequence is that any given business must be able to service markets outside of their home country. Some more canny companies seem to try to push this angle (most common; we’ll move into Latin America after completing our next round) because they know the domestic African markets just aren’t big enough to justify venture valuations. Quite often, it’s just a bit too early.
B2B focused businesses are better, but it’s hard to pick which sectors are ready. Africa is not a meritocracy outside of the main multinational institutions and so founders must be well connected to sell into larger and often family run organisations
Many markets are protected. Government links into businesses are rife, especially in logistics and so taking on these interests can be fraught with danger. In Nigeria it’s said to be almost impossible to obtain a banking license without knowing someone in the government intimately.
Regulatory differences across the continent are vast and of course differ country by country.
Cultural differences are relevant by tribe and country, depending on the jurisdiction. Supposedly ex-communist states clamped down on tribal differences with the result being to spur fervent nationalist rhetoric, whereas countries like Kenya and Zimbabwe are divided totally along tribal lines. These tribes vote together, and the largest ones often determine electoral outcomes. In the case of Zimbabwe, the largest tribe, the Shona led by Mugabe, decided they no longer liked the minority (c. 20%) Sindebele and so began that country’s slide into genocidal chaos. These conflicts are echoed in almost every country, Kenyans won’t work with Nigerians as they find them too aggressive whilst Nigerians and South Africans have been physically trashing each other’s stores over the past year.
These societies can often feel violent and immature, life is cheap and populations are easily riled.
The obvious consequence is that one never feels truly safe. Parts of cape town feel like Monaco and rarely as a tourist will you have problems, the issue is that when you do, there is nobody to help you. Car-jackings in Joburg are still all too common and in Nairobi, terrorist attacks on westerners do occur frequently enough to be of concern.
The opportunity cost of being an entrepreneur is very high for a skilled, well-educated individual. Familial expectations are of course to get a high paying job at a multinational organisation and to use the paycheck to support the wider family. Moving away from a prestigious job and a regular income is an opportunity cost few can bear.
There are significant business practice differences. In Egypt for example there said to be 3 types of books – those for the management team, those for the government and taxman and those for the investor. It’s supposedly not malicious, just an ingrained cultural practice
Due to their overbearing influence, it’s worth thinking about the role of the following parties in particular when evaluating an investment;
- The Chinese
Particularly in the form of the handset manufacturers like Transsion. And Opera, the most used web browser.
The African featurephone market by units sold is still larger than the smartphone market (127m units sold vs. 91m in 2019), but the latter is fast catching up. The declining price of data coupled with rising disposable incomes makes it inevitable.
Transsions market share dominance is largely thanks to their ultra-cheap handsets.
Finally, the exit environment is still somewhat unproven. Jumia was probably the more recent great hope of African tech, but since its listing in the US, the stock performance has been less than stellar. It’s lost close to 90% of its value over the last year.
THE FINAL FRONTIER – EAST VS. WEST
The Chinese have been buying mines and building the infrastructure to get the mined resources out of the country, think roads, ports and airports. If they don’t own the assets directly, they’ve provided the loans that enabled their construction. This has been done on a massive scale. Between 2011 and 2017, Chinese investment in Africa doubled to $43.3bn whilst US investment in Africa shrank by 12% to $57bn4 and by some accounts up to 1/64 of these Chinese loans are secured by commodities. Not content with just supplying capital though, the Chinese also provide the machinery, technical knowledge and even raw labour for all the construction projects they fund. Often, they’ve simply emptied out the jails on mainland china, stripped these individuals off passports and shipped them to Africa. The Chinese here can no longer leave, ever, and so these countries are left with a largely male, formerly criminal, working age and indentured population. As you can imagine, it’s causing significant social problems.
It would be wrong to paint Chinese influence as only nefarious in intent, it’s simply essential as seen from the lens of Chinese demographic change. Their working age population is decreasing and by 2045, 1 in 4 people in the world will be African4. It’s a vital source of labour for their companies and to that end, Huawei trains 12,0004 Africans per year across the Congo, Kenya, Angola and Nigeria in high value jobs. This can only be seen as a step forward and hopefully a catalyst for growth in the industries of the future. But, as China gains geopolitical influence through trade, others get nervous. India, for examine, is beginning to feel encircled thanks to the 2017 launch of a military base at a chokepoint on the Gulf of Aden in Djibouti, from which the Chinese will project power into the Indian Ocean. Surely not by coincidence, the base is next door to a US military facility.
Russian presence is also increasing as the rush for precious metals and rare earth minerals increases. You’ll find them across various frontier markets, usually in the form of the Wagner Group and led by a chap known as ‘Putin’s chef’. He literally used to be Putin’s chef but since graduated to running a paramilitary organisation. They’ve recently got themselves in trouble trying to take on insurgents on behalf of various African governments in exchange for access to mineral deposits (usually Uranium). The French too are fighting across francophone Africa, taking on Islamist groups but apparently without much success and in the face of a popular backlash. This fight though has been more about protecting mainland France than raw material conquest.
So, whilst China ‘owns’ much of value producing Africa, the west has cultivated a far more active presence through deploying ‘aid’ budgets. USAID and DFID, as well as a variety of private organisations have been deploying capital actively in the region for decades. USAID is linked expressly to US interests, whilst DFID is not so for UK interests whilst both deploy seemingly at will and across asset classes. In Venture specifically, the Chinese are becoming more active both as an LP to funds but also in terms of direct investing. The vast majority of founders though are Western or at least Western educated and negative connotations do surround taking Chinese money. Which brings us on to a wider point, the Chinese are certainly not winning the battle for hearts and minds, at least not yet. The Chinese just don’t do cultural exports and so Africa is far more aligned with Western sensibilities than Chinese ones. The music in the nightclubs is Western, the people speak English, they watch Western shows and aspire to purchase goods from Western brands. The infrastructure though, well, that is Chinese, including the phones. Transsion is the largest phone seller in Africa.
Africa is perhaps the last frontier continent and the world players are all present in varying degrees, deploying different strategies to try and carve out influence. As a western venture fund, positioned in geographically convenient London, we’re in prime position to take advantage. An affinity for the west and a lack of experienced venture capital give rise to high demand for a Concentric like entity.
UNDER THE MICROSCOPE
To suggest South Africa to be a country of extremes does it a disservice. Cape Town is undeniably beautiful and if you have money, there can surely be nowhere better to live. Look under the hood though and it becomes a little more sinister. Start with race and politics, it’s impossible not to. The ruling party of the Cape is the DA, the Whites and the Coloureds vote for it in mass as it’s seen as less corrupt, less racist and more competent than the ANC, the party of Mandela, Zuma and most recently Ramaphosa. Cape town is very much a bubble, insulated from the rest of Africa and the DA helps keep it so, that’s why they have the votes of the white majority population.
It’s hard to say the ANC has been anything but a disaster for the country. Power cuts happen from between 2-10 hours every day across the country and have done for years, there is often water restrictions and law & order is non-existent. The more structural problem is that people vote along racial lines and so the ANC are seemingly guaranteed a monopoly on power. The apartheid government was obviously bad; however the country has replaced a white oligarchy with a black one. The latter is more protected from criticism too, they trade on their race as a shield. The result is that you do feel a sense of apathy throughout the country, especially if you’re outside the wealthy elite. If you’re white and you have a foreign passport, you’ve probably left. If you’re white, middle class and still there, it’s probably because you have no choice. Empowerment legislation makes it hard for you to get a job, or get your kids educated and a party that is not openly hostile to your interests will probably never get elected at the national level. It’s a tricky spot to be in. The black population have meanwhile seen the ruling party squander the opportunity post-apartheid. There is astonishing incompetence at every layer of the state.
All this adversity does though breed resilience. The Afrikaners are a frightening bunch, bred to survive in harshest Africa and they now dominate the sporting scene. In business they are equally as resurgent, but whilst they may look like Europeans, they certainly differ from Anglo-Saxon norms of doing business. They build some great stuff, but they’re less straightforward to deal with.
Kenya is an equally distinct country. Nairobi in particular has a real energy about it and entrepreneurial activity is high, in fact 3X higher per capita amongst the young than SA. Outside of Nairobi though and there is little economic activity whatsoever, let alone tech based entrepreneurial activity. The tech community here is small as well, seemingly dominated by Western (particularly American and British) founders and all found in the Westlands, a suburb of Nairobi. It is a key spot for deal hunting and easy to build a network as the sense of camaraderie between founders makes referrals frequent.
A VENTURE STRATEGY
The same macro trends that make venture attractive and are apparent outside of Africa, of course operate inside of Africa too. A surging population, hungry for a better quality of life and new services mean that enormous businesses that fit the venture profile of capital light, but quick to expand, will be built. A narrow cross-section of African society is skilled enough, has appetite for and has access to a network that make such stories possible. There is also a deficit of venture capital, let alone skilled venture capital right across the continent. The risks are numerous, but risks always are and besides it keeps away the competition. The key is to understand the risks in as much depth as possible in order to mitigate against them. Hopefully this note is the first step on our journey of doing just that.
To operate in Africa, one must spend time there and remarkably very few western venture funds do. There are not many markets to cover at all (Nigeria, Kenya, SA and Ghana), they are easily covered from London, whist the tech community in these locations is small and pan-continental. Encouragingly it’s possible to penetrate and western VCs are well received. The right people can significantly influence your market coverage too. It’s also possible to get into most deals, even those that are perceived ‘hottest’ – if one has the right references. That said, those ‘hot deals’ can often be overhyped and overvalued and in Africa, given the market sizes, overpaying is a real concern. Valuation discipline is vital on the continent. The businesses are also what one would consider ‘proper’, there is no triviality and it’s refreshing to see but founders must be well connected within their ecosystems, or they just will not get very far at all. In terms of sector focus, well, B2B, informal sector focused and infrastructure plays seem most likely to succeed. Once a business has scale in Africa, it can be easily leveraged to expand into other sectors and as human capital is scarce, there are increasing returns to scale due to limited competition.
Africa will never be the focus for Concentric, but we will keep an eye on it and deploy capital in small amounts when the circumstances are right. There is opportunity here for sure, reputationally as well as economically. It’s an open playing field and so it offers the opportunity to build a differentiated brand name for relatively little cost that is synonymous with adventure and risk taking, as a venture fund should be. Unlike most, it won’t be talk either. Deploying capital, even in small amounts will mean that down the line it will be a signal to the best African founders that they should raise capital with us and after all, it is inevitable that the continent will spawn tech giants.
If we do what the market does, we will get market returns. If we want to beat the market, we must try new strategies where they make sense. He who dares…
As an aside, it is becoming increasingly clear that there is a cogent story to be told around Venture Capital funds investing in Emerging Markets. Few single EMs are large enough to sustain the dedicated focus of a venture team, but many share the same characteristics and collectively they are large enough. The story could be something like;
- Innovation is not confined to the same old geographies anymore, as the thesis behind Concentric 02 highlights. The returns to being an entrepreneur have never been greater and entrepreneurs can operate from almost anywhere
- Britain and indeed Europe must export more and we should export influence and capital, not just goods
- We have a world class venture ecosystem to leverage and all the process knowledge that comes along with building one over decades
- Concentric, for example, has a venture platform (front and back office) that can be expanded to other sectors and geographies
- The value-add approach of a fund like Concentric is rare in Europe, let alone outside of Europe. This approach is globally resonant and desired by entrepreneurs
- Additionally, learnings from abroad (best practices, new tech … etc) can be imported to domestic markets
- There will be network synergies, think of British firms trying to access new markets. Said fund will have the relationships to help them in say, India
- It’s a way to cultivate a network of, for example LPs, in Africa, a place with plenty of family wealth whom make little inward investment into Europe but would like to
- Throughout many EMs, but in particular the commonwealth you now have;
- Western educated founders returning home. Typically, they have a high affinity for the west
- A lack of experienced venture capital to guide new business formation and growth
- A commonality of law, language and institutions left behind from colonial times
- London is truly a world hub, every culture is represented here and almost anyone who ever does anything notable spends time here at some point. Whilst, London/ Madrid/ Amsterdam have excellent transport links to the furthest reaches of the globe making these cities a perfect base.
1) International Data Corporation
2) International Data Corporation
3) Yahoo Finance