From Nigeria to Egypt: Investor Eliot Pence on backing frontier market startups
Eliot Pence is the co-founder of Tofino Capital, a $10 million venture capital fund that invests in early-stage businesses in frontier markets. Tofino’s investments in Africa include Seamless HR, a human resources and payroll solution; Sabi, a digital commerce infrastructure provider; Eksab!, a fantasy football service; Lucky, a cashback rewards app; Caafisom, a medtech company in Somaliland; Adbot, an automated advertising solution in South Africa; and NiceDeer, an Egyptian health insurtech firm.
In this interview with Betsy Henderson, Pence shares his insights on investing in African startups, highlighting the distinct approach required compared to investing in US-based ventures. He also discusses his bullish outlook on the continent’s construction industry and reveals why he considers Egypt a particularly interesting market.
Tell us about Tofino Capital’s investment strategy. How do you differentiate yourself from other VCs?
Co-founder Aubrey Hruby and I have been operating in frontier markets for 20 years and we saw a number of trends – some that have been playing out for over a decade, others more recent – that convinced us that frontier markets are at an inflection point. Demographics and digital infrastructure, in particular, are starting to drive sustained growth, which is creating a new opportunity landscape for alternative forms of financing.
We’re focused on investing in “under-invested” markets. What we mean by that, technically, is places that have less than US$5 of venture capital per capita. Ethiopia and Bangladesh have less than $1 venture capital per capita, while Nigeria and Egypt have less than $5. By comparison, China has over $40 of venture capital per capita. If you make a Venn diagram of where venture capital per capita is under $5 and the market is bigger than 75 million people, you end up with countries like Egypt, Nigeria and Pakistan, so this is where we invest.
We look at macro trends that are fundamental drivers of growth in frontier markets. These include a growing middle class that creates a greater need for healthcare, and increasing urbanisation, to name a few. We then identify the entrepreneurs who we think are best suited to capture the most value from these trends and deliver to stakeholders.
In terms of company scale, we invest in early-stage companies, so seed or pre-seed level. Generally speaking, most of the people we’re investing in are second-time founders or folks that are a little bit more mature and understand the market. This isn’t a hard and fast rule, but more of a tendency. We don’t necessarily have to be the first cheque, but we want to be one of the first cheques.
Tofino Capital invests in ‘viral business models in underinvested markets around the world’. How do you identify these businesses, and what do they look like in Africa?
It all starts with the entrepreneur. The entrepreneur has to have an intense awareness of the elements on which their business relies – whether it is the broader regulatory regime, business environment or information landscape. We look for business leaders who have an almost pathogenic approach to their business, and recognise that survival of their startup depends on spreading fast. The companies we invest in tend to have rapid feedback loops from customer to product, mutual benefit for buyer/seller and a grander vision for organising something big.
It might also be helpful to describe what we don’t mean when we say “viral businesses”: to us, viral business models are not ‘features’ or ‘models’ like pure e-commerce marketplaces; buy-now, pay-later; or SaaS-this or SaaS-that solutions. We don’t use the same mental models as US-based venture investors because many of those models don’t apply, or at the very least, are very different when applied to frontier markets. In US venture capital, there tends to be an obsessive focus on the market rather than the entrepreneur; but the model is simply an abstraction or a theory about how things work. When you’re investing in frontier markets that have limited infrastructure or limited institutional capacity, it’s hard to build out those theories because so much of a business’s success is driven by the individual leader and entrepreneur. In Africa and other frontier markets, global investors tend to invest in a particular theme or market, when they really need to be fully dedicated to the entrepreneur and that individual’s decisions.
Pattern matching in venture is a lazy hack that volume investors use to build ‘synthetic’ conviction and rationalise their portfolio to their LPs.
What are some characteristics of these successful frontier market entrepreneurs?
Demonstration of past performance for sure, but that performance doesn’t necessarily have to be in another startup. I think a lot of times in the West, there’s a focus on an entrepreneur’s pedigree, i.e: “you worked at Google, then you went to Stripe, now you’re starting your own thing, therefore I’ll invest in you.”
That’s just not the case in many frontier markets, where the venture landscape isn’t deep enough yet for people to have worked at those kinds of enterprises, so you’ve got to be able to assess past performance based on sheer tenacity and other metrics.
One thing we always ask when we assess an entrepreneur is: how many problems are they solving with their business at the same time? Parker Conrad talks about ‘compound startups’ – companies with a multi-product portfolio rather than a [single] solution. The concept really resonates in frontier markets. A lot of times you’re assessing if a person can unlock one specific market or solve one customer pain point, while almost every entrepreneur in a frontier market is solving several problems and building multiple parallel products, which is the essence of a compound startup. The fact that roads, consistent power, and reliable internet are often lacking in these areas, combined with frontier market entrepreneurs’ ability to address these challenges in their businesses, is not fully understood or appreciated by global investors, and certainly not evaluated enough.
Since launching Tofino Capital last year, how much of the $10 million fund has been deployed?
We’ve invested $1.75 million across nine companies, so we’re still in the early stages, but I think we’ll have it fully deployed over the next couple years. We think there’s actually a good opportunity to capture value as markets freeze. I think we’ll see a lot of consolidation, and sometimes the best companies start in a downturn. To some degree, frontier markets entrepreneurs have always had to deal with these ups and downs. Their business models typically don’t have high burn, they don’t spend a tonne of money, they’re more resilient, and they know how to make ends meet in a way that I don’t think most western-types of businesses do.
Tofino Capital has an investment in a Nigerian digital construction marketplace startup. What trends or opportunities do you see in this industry?
Yes, we invested in a Nigerian company, Cutstruct. We see a lot of opportunity in construction. The conventional growth estimate for the African construction market is around 7%, which isn’t that interesting – except we think that massively underestimates the scale and scope of what’s going on in the market. Africa’s infrastructure gap is well known – something in the order of $100 billion a year needs to be spent just to keep up with current infrastructure. China has been willing to fill this gap for the past two decades, but increasingly we’re seeing them pull back, leaving more space for indigenous contractors to build a resume of projects.
At the same time, we see this huge trend in urbanisation across the continent; something like 500 million more Africans will become urbanites by 2035. According to a recent Yale University study on African cities, the number of buildings within a city grows with population, with roughly one extra building for every 2.6 people, and most of those buildings are smaller structures – not high rises. Based on Africa’s projected demographic growth, that’s 300 million new buildings in 25 years, in roughly 60 cities across the continent.
One third of Tofino Capital’s investments are in Egyptian startups. What are your thoughts on this market?
We’ve been super excited about Egypt for a long time. The step change in attitude, mindset, and ambition in the entrepreneurial ecosystem since 2011 has joined up with more institutional money to support the venture ecosystem. Many people don’t realise how much technical talent resides within Egypt; many global companies like Intel and Microsoft have had research and development centres located there.
What makes Egypt different is that it’s a very large market and there is a real middle class that’s connected and digitally savvy. Also geographically, it sits strategically between two worlds: Africa and the Middle East, which gives it optionality, access to capital and a fluency in how to build scale in different ecosystems.
What insights would you share from your experience investing in African startups?
As early-stage investors, we really drill down on the team and what off-sheet references say about their work. We try to come to each investment opportunity with a healthy amount of ignorance – not ignorance born of lack of knowledge, but ignorance born of self-awareness. We’re very much believers in the “map is not the terrain” analysis of foreign markets.
We also take into account that many of the entrepreneurs we work with started their businesses in extreme circumstances or operating environments. We recognise that volatility and complexity tend to drive hyper-capacity on some level, and this is often reflected in how they operate on a day-to-day basis, so we look for signs of that. We call this ‘volability’ – the ability to take advantage of complexity and volatility. We have a pretty complex method of assessing it. As a result, when we speak with entrepreneurs from places like Nigeria, Bangladesh, and even Somalia, we’re coming at the conversation from a deep learning perspective rather than trying to ‘pattern match’ what they are doing to business models from other environments.
Is there a story behind the name of Tofino Capital?
It’s a town on Vancouver Island, Canada, where I grew up. It’s unique in that it’s a year-round tourist attraction; it’s popular both when it’s stormy and when it’s sunny. So it’s anti-cyclical. It’s obviously a place close to my heart because I spent a lot of time there, but in some ways it also reflects the entrepreneurs who we’re investing in – this idea that you can be exceptional regardless of the climate, location and season.
What comes next after this initial fund?
I think our strategy is to deploy successive $10 million funds. We know the lane that we’re good at, which is early stage, and you can do a lot with $10 million.