This article is a summary of a panel discussion between angel, venture capital and private equity investors that took place on 3 March at the Lansdowne Club in London, organised by ScaleUpAfrica.
Start-ups and early-stage enterprises in Africa face many challenges and few survive. Issues range from a lack of business savviness and viable business plans to only a handful of angel investors in most markets.
Africa is certainly on the venture capital (VC) investing map. However, investors have to be patient for returns and they need to spend time on the ground to understand the market.
Corporate venture capital
Corporates have much to gain from partnering with start-ups in Africa. The need to stay in touch with innovation and on-the-ground solutions to problems has lead a wave of corporate venture capital (CVC) investments and funds across African countries. Although CVC is happening in a variety of sectors, banks are leading the way.
For international companies, CVC is a strategy to enter African markets. Google and Microsoft realise there’s a vast market for them in Africa, but there’s the need to test and understand the environment.
It doesn’t just work one way – CVCs and start-ups seem to have a perfect marriage. While the start-ups innovate, the corporates are experts at execution and bringing the products to market – skills that the young start-up founders usually don’t have.
“Dump money” and a lack of value-add that CVCs in the US are criticised for, is less of an issue Africa. Professional teams are put together, often consisting of ex private equity and VC executives.
CVCs are widening the investor pool for later-stage companies and therefore increasing the chances of an exit for angel investors. The seed investors often follow what the CVCs and VCs are looking for when choosing a sector to invest in. Banks, for instance, are creating a lot of interest for fintech investment by the angels.
In general there is strong interest in the mobile and digital industries. Although traditional sectors such as agriculture are often viewed as lucrative investment opportunities by foreigners, this hype is partly driven by the media, and in reality these sectors are complex and risky. Examples of propitious digital businesses can be found in sectors such as healthcare and insurance. For example, problems caused by long distances between a doctor and patient can be solved through technology.
There are relatively few angel investors in Africa. But more important than increasing the number of angels, is to get them together in syndicates. Evaluating many companies individually can be a challenge, something that can be done collectively. Organisations such as the Lagos Angel Network is doing just that – holding events to encourage angel investors to join syndicates or come together and form their own.
Many entrepreneurs approach banks or VCs way too early, without viable business models and no skills to execute their ideas. While there are the common routes to angel capital, such as friends and family, these investors lack the experience to properly assist the start-ups. The angel investors are to play the role of guiding and developing the entrepreneur and is to receive an exit when the VC or institutional investor comes in.
It can be a challenge to find entrepreneurs that have the right skills and profitable business models behind their ideas. A typical start-up founder is often someone young with an innovative solution to a local problem, a minimum viable product, ambition and general intelligence. But their inexperience shows itself as the idea is simply not a viable business for most investors.
Many investors are also complaining about the entrepreneurs’ poor communications skills – conveying their exact idea and business model. On the other hand, sometimes you have entrepreneurs that are good communicators but don’t have the innovative solution. Some also lack the courage and ambition to try and expand their enterprises abroad.
Bertrams Lukstins is a market insights consultant providing research services on emerging African markets. Please see a report Investing in Nigeria by Bertrams and visit Lukstin.com or contact [email protected] for more information.