Early stage funding for businesses in Africa is still a huge problem. This is clear given the recent example of Jacana Partners to halt the fundraising efforts for its US$75m small and medium enterprise private equity fund. Jacana Partners has been one of the prominent players in this space over the last two years.
Can corporate venture capital (CVC) be the solution to plug this funding gap? CVC is the practice of a large company taking an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise. The objective is to gain a specific competitive advantage and is usually done to top up the efforts of the research and development department.
The biggest advantage is that companies invest off their own balance sheet. This can result in what is known as patient or evergreen capital because they do not adhere to the same rules as conventional venture capitalists who have to return their money to their limited partners within five to 10 years. This is the crucial differentiator and can certainly work in favour of conditions in Africa.
Well-known companies with venture capital arms include Google, Bosch, Intel, BP and Samsung, to name a few. These could all play a role in changing Africa’s funding game.
CVC investment usually depends on the company’s mandate, and it also varies from company to company. The main goal is to find strategic partners, and they tend to take about 20%.
If we compare the opportunities for corporate firms in Africa to those in Asia and Latin America, they are still relatively small. However, things are changing fast as Africa has some of the fastest growing economies. CVC can be used as a way to test the markets.
To give you an idea, 70% of CVC is still in the US, 20% is in Europe and 10% is in the rest of the world.
In conclusion, as CVC takes hold in Africa, the greatest opportunity resides with local players such as the Dangote Group and MTN making their own acquisitions and developing their in-house corporate development teams.
Africa is still a virgin territory to many CVC managers so exciting times are certainly ahead.
Sean Ndiho Obedih is the founding partner of Sobek Ventures, a pan-African M&A boutique.