How we made it in Africa’s Nairobi correspondent Regina Ekiru speaks to Eelco Benink, investment manager of venture capital (VC) firm InReturn Capital.
What sectors does InReturn Capital invest in?
All sectors except for primary agriculture and speculative real estate (and some excluded sectors such as tobacco). We currently focus on investments of between US$0.5 million and $1.5 million in Kenya, Tanzania and Uganda.
Explain your investment criteria?
The first thing is the quality of the management team: what they have done before; how do they present themselves; how well can we relate to them, etc. Secondly, we assess the feasibility of the business case and the growth potential of the company. For us, the ideal company has unique competitive advantages in a fast growing market and is managed by good entrepreneurs. We see a good entrepreneur as someone who has been successful in the past and can demonstrate a good knowledge of the market. One other important thing we look at is how we can grow the company and make a successful exit in three to seven years.
Which are some of the companies you have financed?
Our recent investments include the Eagle Eye Laser Centre, a high end eye laser and eye surgery center in Nairobi; Vipingo Stone Mining, which is a producer of construction stones in Kilifi; a hydro development company in Nairobi; and Equator Shipping Line, a cargo shipping company in Uganda. We have been working closely with all of these companies to professionalise them and to provide them with hands on coaching in the field of strategic, human resources and financial management.
SMEs still list access to financing as one of their biggest challenges. What is the problem?
In many cases these SMEs don’t get financing simply because their plan is not good enough, either in contents or in form. VC firms typically receive hundreds of plans each year. If the management team or business case does not look strong on paper the company has little chance of even triggering the initial interest of a VC firm. Banks will typically turn down an application if there is no good collateral available, especially when there is no existing relationship. The simple consequence is that a company that does not have good collateral or a solid plan has little chance of attracting financing. Therefore the company has to address the things they can improve. This can be done by engaging a consultant who can assist in addressing the weaknesses of a company and writing a good business plan, or by hiring people who can bring the required additional expertise. VC firms often like to deal with people who have had international exposure, as these people understand the professional standards and communication style most international VC firms are used to.
Why the sudden interest from VC firms in Africa?
Africa in general is growing and developing rapidly. Many African countries are amongst the fastest growing in the world. Furthermore many trends and economic fundamentals in Africa are favourable: the relatively young population; the increased political stability; an increasingly wealthy middle-class; abundant natural resources, land and labour; and government policies aimed at market liberalisation. Compared to other countries in Africa, people in Kenya are well-educated and the infrastructure is good. For that reason many funds are choosing Kenya as their investment destination or as a hub from which they serve the region.
Do you believe some VC firms take advantage of desperate entrepreneurs?
The shareholding a VC firm ends up having is a result of the investment amount and the agreed valuation of the company. Each entrepreneur should carefully assess the impact of having a VC firm into their business. There is no such thing as a standard percentage for a “good deal”. A deal can be called a good deal if it is fair to both parties and it puts the right incentives to perform in place. This means that the entrepreneur gains the most when the company is doing great and vice versa. A VC firm will try to make relatively high returns on an investment, but they can only make these returns when the company is doing well. And the VC firm will add a lot of value to the business. Secondly, you should not forget that the VC firm is stepping in because not a bank or other financier is prepared to step in. That means that the VC firm is taking a risk that no other financier is willing to take.