Foreign companies and entrepreneurs need to stick to what they know and do their homework thoroughly when investing in Africa.

So says Micha van Winkelhof, managing director of Tanzania-based Newport Corporate Advisory. The firm advises companies on best practices in investment throughout east and central Africa. One of Newport’s most recent projects is the restructuring of a tobacco business in the Democratic Republic of Congo (DRC).

Van Winkelhof explains that foreigners frequently have a ‘know-it-all’ mentality and think they can make a success of any venture in countries where they have no experience, often only to see their businesses collapse. “They come here and find a product or service missing from the market, they have no prior experience in that sector, they don’t even know where to source it. But because they are educated, they think that they are better than everybody else. Arrogance creeps in.”

He says that many Western business people would probably be more successful in their projects if they made an attempt in the developed world, rather than in Africa, merely because they would be more “realistic” about it.

“For example, if you have a project or an idea and you want to invest specifically in Tanzania, the first thing that I suggest is that you look at the wealthy African and Asian communities living in Dar es Salaam, and ask yourself, ‘Why hasn’t someone else done it yet?’ Certain communities have access to a great deal of capital that doesn’t involve banks, there are no stringent investment criteria and therefore they can take advantage of opportunities quickly. So taking a deeper look into why someone else has not invested in the project you are interested in, could save you time in the long run. Generally, there are three reasons why others have not invested. First, they have tried and failed; second, they haven’t tried because they knew it would have been too difficult; or third, the margins available do not justify the risk.”

“Don’t make the assumption that a product is transferable just because it is not available locally, this could lead to disappointment,” says Van Winkelhof. “Turn the equation on its head, think to yourself, how could the West and Asia benefit from Africa in terms of products, services or investment opportunities?”

From investment banking to flowers

Van Winkelhof grew up in Tanzania, but left the country to work in the financial sector in the UK and US. Before he returned to Tanzania’s commercial capital Dar es Salaam in 2006, he was an investment banker for nine years at NatWest and JP Morgan Chase in London.

He is no stranger to making business mistakes in Tanzania. “I came out of investment banking and thought I knew everything. My parents started a flower farm and I jumped in there thinking we were going to make lots of money selling flowers to Europe. By the time we were half-ready, 2008 came along and the global flower industry collapsed.”

A dabble in the biofuels industry also didn’t work out as expected. Van Winkelhof blames these failures on the fact that he became involved in an industry he didn’t understand. “How did I think that an ex-banker could come to Africa and start farming?”

Understanding the market

Companies and entrepreneurs need to make sure they understand the unique workings of the markets in which they wish to do business.

Van Winkelhof uses the example of someone that wants to open a clothing outlet in Dar es Salaam. “There are not many formal clothing shops here. Someone might think, ‘I’m going to import clothes from Europe and my shop is going to be successful’. But when you look at it more deeply, the reason why there are few shops, is that in most of the various communities there are one or two people that import clothes and other goods. They will then sell the clothes informally at house parties, etc, which means they have small overhead and working capital costs and they get their money back within two months. Some of these people bring in two containers a month. Not to forget the thriving second hand clothing markets, which sell practically new clothes at cheap prices. So if you didn’t know about this, you would have opened a shop and wondered why nobody is coming.”

Small middle class

He notes that although Tanzania’s middle class is growing, it is still fairly small compared to Kenya or South Africa. “The only people that you could classify as middle class here are the ones working for themselves, the telecoms companies, the mines and the NGOs. Although growing fast, there is still a lack of discretionary income. If you are testing a product or a new idea in Africa, you really need to think about that.”

Local partners

Foreign investors often ponder whether they should take on a local partner when investing in an African country. Unless it is a legal requirement, Van Winkelhof reckons that local partners – who can include Tanzanians as well as other nationalities living in the country – may be unnecessary. “Looking at the number of times that local partners and foreign investors have fallen out – I would suggest not partnering. If you hire a good accountant, auditor or other consultants, they can get you whatever you need. Having said that, if a potential local partner has a competitive advantage or specific local niche or knowhow; then it should be something that needs to be seriously considered.”

“The reputation of Africa is that it is a difficult place to do business, certainly there are issues which need to be addressed, but a lot of the time the blame is ill-founded, based on lack of planning, research and proper due diligence,” he adds.