American impact investment advisory firm Renew is hoping to solve financing constraints SMEs in Ethiopia face by linking them with US-based investors. The firm works with a network of angel investors who are eager to make not just financial returns, but also have a social and environmental impact.
Since 2013, Renew has facilitated investments into four Ethiopian companies including Mama Fresh Injera, the country’s largest commercial manufacturer and exporter of fresh-baked injera (a spongy pancake-like flatbread central to Ethiopian cuisine). Its other investees are specialty coffee producer and exporter Metad; renewable energy technology manufacturing company dVentus; and emergency medical services provider and trainer East Africa Emergency Services.
Although it plans to open offices in other countries in sub-Saharan Africa, Renew’s focus at the moment is on Africa’s second most populous nation. The company is set to announce three additional investments in coming weeks. Laura Davis, partner at Renew, says Ethiopia is attractive because of the challenges and opportunities it presents.
“A lot of people had kind of looked past Ethiopia because of some of the regulations for foreign investors there, but on the other hand it has more than 90 million people and the government is eager to industrialise – and so are looking for foreign investors to help them in that process,” says Davis. “If you are willing to work with the government and work on what their priorities are, then there is opportunity for private equity in Ethiopia.”
Connecting US investors with Africa
Other than bridging local financing gaps, Davis notes Renew makes it possible for Americans to make small investments in Africa, and gradually build confidence in the continent and the opportunities it offers. Renew scouts for companies to invest in on behalf of its Impact Angel Network (IAN), which comprises of dozens of mostly US-based investors. The angels then invest upwards of $50,000 per deal.
Renew manages the investments on behalf of the investors, communicates updates, and organises annual trips for the network members to visit businesses in Ethiopia.
“Our strategy is to give a mechanism for American investors to be engaged in the continent, but at smaller levels,” explains Davis.
Investing in the ‘missing middle’
Renew targets companies that have potential to scale but face difficulties accessing financing because they are too small for traditional venture capital firms, but too big for micro-finance institutions. It facilitates investments of between $200,000 and $3m. Renew also offers the companies support in governance, financial management and marketing.
“In Ethiopia it is not that hard to position a company to be number one or number two in its sector just by doing the marketing well and consistently,” says Davis. “If we invest early in these companies that are in the ‘missing middle’ we can grow them and make them more attractive to the bigger equity coming to the continent.”
She cites the case of Mama Fresh Injera, which received investment in January 2014. Post investment, the food manufacturer set up a modern commercial factory, doubled its production capacity, established a strategic partnership with a Fortune 500 food company and generated more than $1.5m in export revenue.
Other than scalability, Renew also seeks businesses operated by entrepreneurs who are both coachable and flexible.
“When we’re trying to blend some of our ways of doing things with theirs, there needs to be flexibility on both sides. But maybe, even more importantly, we have to like the person and feel like we can kind of almost be like married for five years.”
Although Renew’s network of investors are keen on social and environmental impact, Davis says the firm is not interested in working with entrepreneurs solely focused on social impact.
“We don’t like when entrepreneurs come to us with all the lingo around impact investing and social impact. We don’t feel like an entrepreneur should go to work trying to figure out how to create more jobs. They need to be focused on their profitability, and when they do that the jobs will come,” Davis explains.
When Renew invested in coffee exporter Metad, for instance, Davis says it employed four people on its farm. Today it has 700 employees, although some are not full-time workers. The company also supports a nearby elementary school that has over 400 students.
“We didn’t ask Aman [Adinew] (CEO of Metad) to do any of that. It’s what good entrepreneurs do. Good entrepreneurs care about the environment [and] care about their employees. Sometimes, in impact investing there is far too much focus on the social outcome. We believe a good business is anyway going to have social impact.”
Long time to close deals
Although there are many opportunities in Ethiopia, local companies are not accustomed to investment.
“So it does take a long time [to close deals]. Some of the deals that we’re working to close now, we have known the family for three years,” says Davis.
“It is also challenging working across many times zones because we have staff in the US who help manage the investor network. Historically angel investors invest within 30 miles of their home, and now we’re asking them to invest thousands of miles away.”