Novastar Ventures is an Africa-focused venture capital firm with offices in Nairobi, Lagos and London. It has over US$200 million of assets under management and has invested in 26 companies across a range of industries.
Andrew Carruthers, co-founder and managing partner at Novastar, speaks to Tamara Thomas about some of the firm’s most interesting investments and the opportunities he sees on the continent.
Novastar’s next fund will be its third. Explain the firm’s goals with this fund?
Novastar was created eight years ago to use venture capital to create change, not just for the few but for the many. We have always looked at things from a mass-market viewpoint.
Our first two funds are focused on backing businesses that provide essential goods and services in new and innovative ways. Going forward we are looking at using the same tools and strategies to support planet-positive innovations and technology. We see a massive opportunity to create sustainable mass-market business models that can be exported, not just across Africa but globally.
In which industries do you see interesting opportunities?
We see the market opportunity in three broad categories:
Firstly, services that enable access-to-market and resilience in the face of climate change for 80% of the market. This includes businesses such as financial services, supply chain services, and marketplaces.
Secondly, cleantech that helps decarbonise the growth that we will see on the continent in the next 10 to 20 years. This includes clean utilities, clean construction technologies, electric mobility, smart logistics, the circular economy, alternative materials and so forth.
Thirdly, climate tech that uses the abundant natural assets on the continent to generate more opportunities for indigenous (smallholder) farming. This includes innovative business models to deploy regenerative forestry, agriculture and aquaculture, and biofuels and biochar that protect biodiversity, improve soil health and capture carbon.
We see opportunities in all three categories, driven by the clear megatrends such as immense population growth, rapid urbanisation, and the vast amount of arable land on the continent.
Has the global macroeconomic situation changed your outlook at all?
The macroeconomic situation hasn’t changed our strategy at all – if anything we’ve doubled down on it. Factors such as rising energy costs and political instability mean there’s an increasing need to put money into environmental technologies. The biggest change is investors’ propensity to fund these new technologies.
Name one of your most successful investments.
One success story is MPharma, which is one of the most exciting healthcare businesses in Africa. The company utilises a network of thousands of pharmacies to provide primary healthcare at a drastically lower cost compared to traditional healthcare options. They started by managing inventory for pharmacies but soon developed into an Amazon-like service for healthcare. They are currently practising telemedicine and providing managed care for high-value drugs that would otherwise never reach the market.
MPharma collects a wealth of high-value data and uses it to monitor buying patterns and reduce the costs of medicine and healthcare, as well as tackle the major challenges of counterfeiting and self-medication. Based on how well their business model is working in West Africa, it would likely work elsewhere in Africa, and we could see a similar model working in the global north, as it leapfrogs some of the broken practices of the National Health Service [in the United Kingdom] and the insurance-based model in the United States.
You mentioned regenerative agriculture. Can you give an example of such an investment?
GreenPath is a company which produces food products in Ethiopia that are then exported, mainly to Europe. It spent seven years working with hundreds of Ethiopian smallholder farmers and educating them on growing crops using regenerative practices. They then helped connect those farmers with markets across Europe.
For example, GreenPath taught the farmers how to build food forests by planting perennials rather than annuals, and combining crops effectively – such as planting avocado trees as shades to help retain soil moisture, and intercropping aromatic herbs and spices as natural pesticides for other crops. Varieties of perennials were introduced that could be harvested for 25 years, and farmers also created different layers of crops harvested at different times of the year to improve soil health and create a crop cycle that produces income every two weeks, as opposed to a more sporadic cash flow.
All of this increased the earning power of smallholder farmers by five to 11 times a year, and helped increase demand for products sourced via GreenPath’s platform.
Novastar has also invested in Ignitia, which provides SMS-based weather forecasts to smallholder farmers. What is the business model and appeal behind this business?
Ignitia spent more than five years in Ghana developing weather forecasting technology, because they realised that the existing freely available weather forecasting data was often wrong because it was based on satellite algorithms that do not accurately cover the tropics.
Originally, they sent subscribers weather alerts by SMS. But they quickly realised weather forecasting was not enough of a value-add. So they launched an economic aspect to the business which tells farmers things like what and when to sow, harvest, weed, and apply fertiliser.
Ignitia offers an annual subscription model where users can subscribe for daily SMS alerts or access the service via an app. They have partnered with telecoms companies so that it can be paid for using airtime rather than cash. They also provide API integrations for more sophisticated farmers, and make money by linking farmers with suppliers of inputs such as fertiliser, based on the platform’s recommendations.
Ignitia operates in seven countries – mostly in West Africa but also in Brazil – with roughly two million users, and we think it has potential to grow to more than five million users in the next few years.
You mentioned the circular economy. Can you give an example of a portfolio company that has built an effective and scalable business model using the circular economy?
Regen Organics (formerly known as Sanergy) is a really interesting business model. They take organic waste from farms and informal communities and upcycle this to use as a base for products such as organic fertiliser and animal feed.
Their first product was a soil enhancer that increased yields for smallholder farmers by 30%. More recently they have started producing insect protein – the company cleans and processes human waste, mixes it with bulk biomass, and uses it to breed black soldier flies, which they then use to create high-protein animal feed. It’s very cheap to manufacture compared to other protein supplements like fish meal.
There are a lot of complexities to the business model, which make it a hard business to reproduce, let alone at scale. Creating the right environment for the soldier flies, extracting methane from the waste, ensuring all pathogens are removed – there are a huge amount of challenges and roadblocks on the path to scale, and you need patient investors with deep pockets to keep going. But the advantage is that in Africa, since you cannot rely on outsourcing and have to build all of this yourself, once you have built the value chain you can scale virtually unimpeded.
You previously invested in Kenyan furniture manufacturer MoKo. What do they do differently from other furniture producers, and what is interesting about them from an investment perspective?
MoKo was the last investment in Novastar’s first fund, and it was slightly more mature than some of the other investments. The premise for MoKo was that one of the first big purchases made by a low-income household in Nairobi – or elsewhere on the continent – is a big piece of furniture, typically a couch where you can welcome guests. Often, when people want to make these purchases, they turn to neighbourhood carpenters. But these products are often overpriced, low quality, and vendors offer no line of credit. MoKo saw an opportunity for a mass-market furniture manufacturer – similar to IKEA but for Africans.
Mattresses were the first MoKo product, but they have since expanded to offering tables, chairs, and beds designed to suit the market. One of their innovations has been to create modular products that you can add to over time. For example, a two-seater sofa that can be expanded later on to fit more people.
The company has done very well expanding across Kenya and are keen on expanding into West Africa. The problems consumers face there are the same, but the challenge is that it is a very capital-intensive business. MoKo has done a good job of outsourcing and contract manufacturing so that they don’t have to build factories themselves, but there are still a lot of upfront costs in producing and holding all that inventory.