How this VC firm plans to invest $150m in African start-ups
Maurizio Caio is the founder and managing partner of TLcom Capital, an Africa-focused venture capital firm with offices in Nairobi, Lagos and London. TLcom recently announced it has already raised $70 million of a planned $150 million for its TIDE Africa Fund II, with investors including Allianz, CDC Group, and Proparco.
The fund expects to invest in around 20 fast-growing, tech-enabled start-ups across sectors such fintech, mobility, agriculture, healthcare, education and ecommerce, with ticket sizes ranging from $500,000 to $15 million.
Caio spoke to James Torvaney about the objectives for the new fund, and shared some of his insights on Africa’s venture capital and technology space.
Tell us a bit more about your new fund.
TLcom has now been operating for more than 20 years. We launched our first venture capital fund focused on Africa – the TIDE Africa Fund – in 2017, and invested in 11 start-ups including Andela, Twiga Foods, and Kobo360.
This second fund is not radically different from the first fund; it is more of an extension of the same strategy.
In addition to our long-standing presence in key tech hubs in East and West Africa, we believe Egypt is becoming very relevant and we are looking to learn more about that market. This fund is also twice the size of the first TIDE Africa Fund, so we have the ability to write larger cheques and to support the entrepreneurs for a longer part of their journey – from seed funding right the way through to later-stage growth.
What has changed in the African venture capital scene in the five years since you launched the first TIDE Africa fund?
The fundamental change has been that there is more capital available. On a global scale the amount of venture capital funding in Africa is still very small (last year it was roughly $5 billion out of around $600 billion globally). However, there is rising awareness and greater understanding globally of the nature and magnitude of the venture capital opportunity in Africa.
The key thing is that the industry is moving in the right direction and capital is becoming more readily available. It means that start-ups can focus on building great companies and not have to design their business strategies around funding constraints.
Shed some light on the major areas the fund seeks to invest in.
There are two broad types of businesses that fit with our investment thesis:
On the B2C side, there are a lot of consumer markets that are either underserved or completely unserved because income levels are low and willingness to pay is lower than the price it costs to serve these customers. There is an opportunity here to use technology to reduce the cost to service consumer markets, particularly in the consumer goods, energy, and financial services spaces. uLesson is an example of one of our portfolio companies that is using technology in the education space to reach a previously untapped market.
On the B2B side, there are many verticals that are stagnant as a result of structural inefficiencies, particularly in the supply chain. Twiga Foods is a great example of one of our portfolio companies that has used technology to fix a fragmented supply chain. These kinds of businesses require a lot of innovation but, in comparison to the first area, it requires innovation of the business model, as opposed to the technology itself. This can still be high risk, but the nature of the risk is very different.
You’ve mentioned your investment in Kenya-based Twiga Foods, which connects farmers to retailers through a B2B e-commerce platform. Talk about the trends you see in Africa’s agriculture industry and your investments in this area.
As infrastructure develops across Africa and technology allows better access to markets for agricultural producers, this will push farmers to consolidate and the average farm size will increase. Not everyone might want to hear this, but it means that larger farms will win out in the long-term. There are a lot of opportunities for players that can help build these better linkages between producers and their consumers.
Twiga Foods saw that 90% of food was bought from informal merchants. When they looked at the supply chain, they found that there were often six or seven intermediaries along the way. What technology allowed them to do was to aggregate supply and demand, and to redesign the supply chain to only involve one or two intermediaries. This reduced prices, and also increased the quality of the produce because there were fewer opportunities for it to deteriorate along the journey.
The consolidation trend that I mentioned earlier is going to take years and years to play out, so we still see a lot of opportunities in serving smallholder farmers in the meantime. For example, we invested in Pula that offers agricultural insurance to smallholder farmers. It’s an interesting example, because insurance companies really want to sell to farmers, and farmers need the insurance but they don’t have the money to pay for it.
Pula’s innovation was to realise that there are a lot of third parties – such as providers of agricultural inputs as well as governments and NGOs – that have money and also have a vested interest in the farmers to be insured, because they depend on the farmers being able to survive through variations in yields. What Pula did was to get these third parties to cover the costs of farmers’ insurance – the cost of the insurance premium is less for them than the potential cost of the farms failing or not being able to buy more seeds.
Again this is made possible by technology because it allows Pula to insure thousands of farmers, and to use data to measure the reality of each specific farmer against climate data gathered for their area, and assess which farmers get paid at the end of the season.
Discuss the potential for ecommerce in Africa.
Ecommerce is going through a very interesting phase. The first phase was digitising trading. The second phase is where ecommerce platforms are branching out into different directions, and in some cases completely changing their business models. For example, there is a trend for the financing component of ecommerce businesses to become more relevant.
An example of this is Autochek, another company we invested in, which is now in Nigeria, Kenya, and Ghana. The company was born out of an entrepreneur’s horrible experiences buying vehicles. It was initially created as an online live auction platform to buy and sell vehicles. But the team realised that if they wanted to provide a seamless experience, they couldn’t just provide a trading platform. So the business evolved to provide services such as vehicle registration, insurance, and financing. That was the key because, based on that market feedback, the financing of the vehicles has become their core business, which is very different to the original model. It is a good example of an entrepreneur taking a very old-fashioned business – automobiles – and doing something very new.
Do you think we are going to see a lot more of this ‘financialisation’ of non-financial services businesses?
Yes. ‘Embedded finance’ is a term we are hearing a lot. Because of the low penetration of banking across Africa, there are a lot of voids that can be filled by players entering the financing space from different verticals.
SeamlessHR, another one of our investments, is a similar example. They are an enterprise management software company that provides companies with HR management and automation tools. But now they too are adding a financing dimension. They have a huge amount of data on salaries, payment timings, and other information that allows them to provide loans. Because of the richness of this data, they are able to differentiate themselves in the consumer lending space, by providing larger loans, and longer durations.
As venture capitalists, our job is to be good at picking entrepreneurs, not at picking sectors. We don’t know exactly which verticals we will be investing into with this fund – we invest in entrepreneurs and often they lead us into different industries than was originally envisaged.