Eight reasons why foreign investors aren’t funding African entrepreneurs

5. Deal size is typically small

Causey said the average fund size in the US for venture capital funds is roughly $200m.

“If you look at the KPMG report that just came out in South Africa – which is the economic superpower of this continent – I think it was like R1m for seed [funding], and the average investment was about US$1m. These are relatively small transactions so you see how that makes a difference.”

6. Perception

Another reason cited by Causey is the perception and ignorance foreign investors have of Africa.

“How many people who have travelled overseas get the strange questions about Africa,” asked Causey. “Like, ‘what if a tiger eats me?’”

7. The African story is the future, not the present

“The cold fact of the matter is investors are interested in Africa for the future return that can [happen],” explained Causey. “It’s kind of all based on the McKinsey report of what may happen in the future. So if you look at a company like Nike… it’s the 136th largest US company and the revenues of Nike are the same as total US exports to the African continent.”

If you look at this from a US investor’s perspective, said Causey, investing in Africa is really about the potential it has for returns in the future, not at present.

“The current state of [US] Africa trade is the same as our 136th largest company,” he continued. “Africa trade is one tenth of 1% of the US GDP. Even if you double our US Africa trade, the US is looking at one fifth of 1% of the US GDP. It’s not a huge difference. So everybody is looking at this [Africa investment] for the future impact but it still hasn’t been proven that it actually works.”

8. Difficult regulations

“Some of [South Africa’s] regulations are difficult to understand… and if you do want to make a debt investment, which most Europeans do want to do… every time the interest payments are made from the South African venture to the foreign investor, it’s got to go through all these controls and all this red tape. It’s really a joke and it makes debt funding, which Europe likes to do, almost off the table,” Causey said.

He added that another problem is the intellectual property (IP) tax. “So if you develop a company in South Africa and then you want to sell that company or list it on a foreign exchange, you have got to pay massive IP tax on the current valuation of that company,” he explained.

“So what you are finding is that a lot of European and US firms that are making investments have pulled that IP out of a country and put it in a country like Mauritius or the Isle of Man. And they are growing that IP outside the country of South Africa. So South Africa is losing IP partly for these reasons. It’s really bad and even the major banks [in South Africa], they have run all their international transactions out of Mauritius.”