Eight reasons why foreign investors aren’t funding African entrepreneurs

Africa has been described as having an entrepreneurial spirit. However, many of these entrepreneurs have difficulty accessing investors willing to or capable of funding their ventures.

According to John Causey, an Africa investment and business specialist, a lack of local investors means many startups are turning to the international investment scene for funding. Causey, who was previously an associate at Morgan Stanley in the US before taking up a position at African-focused investment advisory firm Clifftop Colony Capital Partners, said investing in African startups is not always attractive to international investors.

He explained that it is important to understand the deterrents through the eyes of international investors who are looking for a high return on investment, not just a social impact.

“You are not going to be able to solve the problem until you see what the problems actually are,” he told an audience at AfricaCom in Cape Town, South Africa last month.

1. Exchange controls

Capital controls are enforced to keep money in a country and in South Africa, for example, strong exchange controls make it difficult and expensive for investors to move money out of the country.

“If you invest from overseas, if you want to pull your money out, if you want to sell the company, you are going to be subject to exchange controls and taxes and all this red tapes,” explained Causey.

This year, South African entrepreneur, investor and multi-millionaire Mark Shuttleworth said it cost him less to travel to outer space than it did for him to move his money out of South Africa. He reportedly had to pay a 10% exit levy of R250m (more US$30m at the time) for moving his fortune out of the country.

2. Understanding requires time and resources

Adequate understanding and investment in an African company requires on-the-ground assistance and time, and Causey said this can be expensive to achieve.

“Compounding that, the deal size in [South Africa] and some other African markets tends to be somewhat smaller. And why does that matter? Well, it matters because if you are flying to and from Munich, if you are spending three weeks here and might need expensive hotels and then you have to shoot up to Kenya and then you have to hire local people, you have to hire local attorneys… it’s very expensive to get that understanding so that is a huge problem.”

3. Small markets

South Africa’s GDP is roughly the same size as the US state of North Carolina’s GDP, according to Causey. “Even if they say your idea is going to dominate the South African market share, [and] even if you do, you are dominating a relatively small market on the international stage.”

4. Proven track record and few assets

Another problem, he added, is that there have not been many examples of large exits in Africa.

“People treat the Fundamo exit as if it’s a big deal but internationally it’s not a huge transaction. I think it was a $110m exit, which is nice, but you need to have a lot more of those to really attract investors.”