Investment firm 88mph reveals what it looks for in African tech start-ups
How we made it in Africa talks to 88mph's Sylvia Brune and Kresten Buch about investing in African tech start-ups.
While there is a blossoming scene of young, African tech and mobile start-ups, these entrepreneurs face a number of challenges, such as financing and skills.
88mph funds mobile web start-ups that are targeting the African consumer. The company launched in Kenya's capital Nairobi in 2011 and have since raised three funds to invest in 23 start-ups, with the last fund being introduced in South Africa at the beginning of this year. According to Sylvia Brune, 88mph’s programme manager in Cape Town, there is considerable opportunity to invest in African tech and mobile start-ups.
“It’s really exciting. Of course we are here because we think that this is where our time is best spent in this day and age. This is where we think investors’ money is best spent – where they can expect a much larger return on investment in markets that are growing at 7% a year, over markets like the US and Europe growing at 1.2% to 1.5% a year and where you already have insane saturation of products and services. I mean, there is nobody growing. How many more Twitters and Facebooks can you introduce into that system?”
The African Development Bank (AfDB) estimates that the continent’s mobile penetration was at around 65% in 2011 and that the mobile industry contributes US$56 billion to the regional economy, around 3.5% of total GDP.
“I mean Africa is the mobile generation,” she continued. “They leapfrogged the laptop and everything that sort of came between the microprocessor and the mobile phone, they just kind of skipped over all of that and just went straight to the mobile phone.”
Kresten Buch, founder of 88mph, told How we made it in Africa that the decision to launch the start-up accelerator and investment fund in Africa, and Kenya specifically, was due to the fact that he lacked confidence in the traditional developed markets.
“During the very early-stage, you have to have a long term perspective of 5-10 years... And I just don’t have a lot of faith in Europe or the US in a 10 years perspective, and I think that there is not a lot of opportunity,” he explained. “And of course there are more investors in the US and Europe than there are obviously in Africa, so if you are starting out as a seed fund or as an early-stage [investor] it actually makes sense to go where there is growth and less competition.”
It was Google that approached Buch with the idea of expanding to South Africa, after 88mph had launched in Nairobi. “They sponsored us with a generous sum of cash in order to help our expansion into this market and then they sponsored both the space in Nairobi and the one [in Cape Town], enabling us to, of course, invest in a lot more start-ups than we would have otherwise been able to invest in,” said Brune.
Buch is looking into expanding 88mph to Nigeria, which he said is the next logical step. “The economy is just too big to [ignore]. I mean if you want to be in Africa, I think you need to be in Nigeria.”
The challenge of financing tech start-ups in Africa
Services, like M-Pesa, have proven that companies can benefit considerably from developing solutions specifically for an African context. However, Brune added that financing remains a major challenge for these start-ups, mainly because they lack the business skills and experience that investors are looking for.
“Funding challenges exist and when we have been going around talking to VCs and talking to people who want to fund start-ups, they tell us the problem is not the money… the problem is the talent,” highlighted Brune. “So the problem is that there is a lack of experienced executors, creators, builders in this market.”
After investing in the first batch of start-ups in Nairobi, Brune said that the company decided to introduce their three month accelerator and mentorship programme to the companies they invest in. This was designed to help them prepare their product for the market faster, and groom the start-up for further investment.
“We saw there was a need to not just invest and kind of leave them alone, but to invest and kind of follow them and help them because there is just not a great high level of experience in building mobile web companies and tech start-ups in this market,” added Brune. “So the batch that we invested in Nairobi that went through an accelerator programme, I mean you can see a significant improvement on the progress and speed in which they brought products to market.”
After three months of assisting start-ups with the necessary market research, product testing and teaching them how to pitch to financers successfully, 88mph introduces their start-ups to their network of potential investors. Last week they introduced their Cape Town start-ups to around 100 investors who came to hear the pitches.
“That increases the likelihood that they will get funding enormously because otherwise the start-up will usually have to email or cold call investors, send in their business plans, try to get introductions through friends and family and then hit them up one at a time to do the pitch,” explained Brune. “I mean, this saves an insane amount of time, and you get 10 start-ups, 100 investors, I mean something with a good amount of follow up afterwards from our side... something is bound to happen.”
Applications for 88mph’s third round of investment in Nairobi will open on the 1st of May. Brune and Buch said they are looking for entrepreneurs who can offer a solution to a problem in Africa using mobile web technology. “We don’t invest in single people, we invest in teams and these teams should be diverse. So there should be a tech person, and a hustler… or a sales person,” said Brune.
She added that start-ups will be more attractive for investment if they can show they have also invested in themselves and said that this was exactly what 88mph did as a start-up when they were looking for funding themselves.
“I think a good indicator is that you always put money into people who themselves have skin in the game,” advised Brune. “If they stand to lose a lot, and then this doesn’t work, it’s a good bet that they are going to try as hard as they can to make it work, and those are the kind of people that you want to put money into. For Kresten and for some of the other guys here, they have their own money in the fund, and they started off being the lead investors. It helps build trust.”
“So this is a way of convincing people,” added Buch. “You have got to put yourself at risk here.”