East African SMEs need to do more to meet the expectations of foreign investors
East Africa has in recent years received a lot of foreign investors looking to invest in upcoming SMEs, but many entrepreneurs still cite access to funds as their biggest challenge. How we made it in Africa’s Dinfin Mulupi caught up with Walter Lamberson, a partner at Nairobi-based Open Capital Advisors, a strategy consulting and financial advisory firm that offers SMEs support and prepares them for funding, among other things. Lamberson talked about the opportunities in East Africa, the high expectations of risk averse investors, untapped potential in Kenya’s health sector and what entrepreneurs need in order to become investor ready. Below are excerpts.
A lot of the investor traffic into East Africa is not resulting in actual investments. Why is this?
I think it is a fair criticism that we see a lot of capital being raised but we don’t see a lot of investments. Fund raising is outpacing investments. We are hoping to change that. That is what Open Capital is about. We see a landscape where, on the one hand, you have a lot of investors who have raised a lot of money and want to invest in SMEs in East Africa. On the other hand, you have a lot of companies that everyone believes could be the engine for economic growth in Africa that have great needs for capital, but you don’t see deals happening.
Part of the reason is that SMEs need more than just capital. They need to be more prepared to meet the expectations of international investors. They need to have clear growth strategies that are thought through rigorously and methodologically.
What do SMEs struggle with?
Management is the biggest constraint in Africa. We love to work with SMEs that have a great manager because we can give them a great strategy. I am not so interested in a bad manager with a really good idea, but I am really excited when I meet a good manager with an idea that can be improved. That is where we are most valuable. We can build an executable strategy. Unlike a lot of consultants, we focus on making recommendations that are implementable and action-oriented.
So what should entrepreneurs do to become investor ready?
It is hard. There is often a misunderstanding of investors’ expectations. I think they are actually quite high; investors are quite risk averse even though they have brought their capital to what many perceive as a risky economy. Entrepreneurs need to show very specifically what their plan is. They don’t just need capital; they need capital to do something very profitable for their company and investors. What kind of capital do they need? Do they need equity or debt? Are they expanding all operations or focusing on a specific business line? How much can they expand operations? How big is the market for that particular product? How is it changing? An entrepreneur needs to demonstrate that they have thought through the details such that an investor is going to trust them with someone else’s money. I mean, it’s a big responsibility being an investor. You don’t just hand out money unless you really believe that the person you are giving it to has a clear plan and you know what they are going to do with it.
There are also a number of entrepreneurs who say they want nothing to do with investors. What is the reason behind this thinking?
Some people just want to preserve a lot of equity in their company. I understand that, that’s true everywhere. That is a human problem. It also depends on the capital intensity of the business. There is a lot to be said for bootstrapping; some people don’t need much capital. Sometimes the best advice we provide to our clients is: ‘don’t take that deal, don’t take that money, you can do better on your own’. I think entrepreneurs should be pickier and they should demand more from investors. I wish entrepreneurs worried less about equity stakes and interest rates and more about what an investor can do for them beyond writing a cheque. Investors should worry about this too.
Name some of the challenges investors face when they come to East Africa.
They are attracted to this place because they have seen a lot of other funds get raised, some apparent success stories and they think it is going to be easy but it is not easy. Often these fund models have very limited staff and they are investing in a marketplace that is very time intensive, especially on the pre-investment side.