Investment in African startups doubles as Kenya South Africa Uganda & Nigeria shine
Online funding platform VC4Africa found that the total capital investment in African startups made through the organisation in 2014 was more than double the previous year’s figures — with Kenya, South Africa, Uganda and Nigeria being the key investment destinations —thanks to the high growth opportunities that Africa offers, particularly in startups from the fields of e-commerce, clean technology, e-health and financial services.
African startups have recently seen a spate of funding rounds and, most significantly, in acquisitions, bearing testimony to the bright future of the continent.
The overall numbers for capital invested in Africa last year are probably close to USD 500 million when huge rounds of funding for e-commerce companies like Takealot, Jumia and Konga are taken into account. And, the first half of 2015 offers no evidence that this growth in available funding is going to slow down.
For VC4Africa founder Ben White, this growing willingness to invest in smaller African businesses is linked to both the quantity and quality of the continent’s entrepreneurs.
“The number of venture applications on VC4Africa has grown 640% in the last three years,” he stated.
“More important than the increasing number of ventures coming up is to recognise that their level of seriousness and overall quality continues to improve. The increasing scope of investable opportunities has resulted in an increase in investments,” he added.
Interestingly enough and boding well for the future, these investments are coming from well diversified sources. Mobile operators are playing a part, with Millicom, Safaricom, Airtel and Orange all launching investment funds of sorts. Additionally, private equity firms in the US and Europe – such as Helios Investment Partners – are beginning to see Africa as a priority too.
Meanwhile, individual ‘angel’ investors who invest smaller sums, but earlier in the process, are active, especially in South Africa, while investment networks are also more common. The African Business Angels Network (ABAN), for example, is made up of the likes of the Lagos Angels Network (LAN), Cameroon Angel Network (CAN), Cairo Angels and the Ghana Angel Network (GAIN).
White says this plethora of investments is increasingly attracted to the high potential, high growth opportunities Africa has to offer, particularly with startups in the fields of e-commerce, clean technology, e-health and financial services.
Country-wise, Kenya, South Africa, Uganda and Nigeria are the key investment destinations currently, according to VC4Africa’s research.
A demand for higher yields is partly responsible for VCs switching at least part of their focus to Africa, according to Tomi Davies, who runs ABAN.
“There is an increasing demand by patient capital from the West – and also the East in some cases – to find higher yields than the sub-5% coming out of Euro-Asia in the last few years. With Africa’s now common-knowledge growth of between 6-8%, the challenge for VC funds has become finding great deal flows in Africa,” he noted.
Justin Stanford, co-founder of 4Di Capital, which has angel invested in a number of South African startups, says investors are looking to future opportunities even more so than existing ones.
“In the developed world, things are very saturated and quite settled, and what gaps exist are heavily competed for by many startups with lots of funding,” he highlighted.
“It is quite the opposite in Africa. Markets are undeveloped and unsophisticated. There is little investment capital in tech companies. Yet there are billions of people who are becoming consumers and lots of growth. Technology and the internet haven’t yet penetrated deeply at all. This creates a lot of opportunity for those brave enough.”
“In South Africa, investor confidence in government and the exchange rate is waning. Also, government policies are preventing foreign investors from actively backing South African startups in a meaningful way,” says Lingham.
According to White, the problem of the so-called “missing middle” persists in terms of funding, though the gap has narrowed. He explained: “Especially in leading markets like Kenya and Nigeria, founders increasingly succeed in raising the first USD 100,000.”
“The challenge now is to reach entrepreneurs operating in other markets, (and), at the same time, help the companies grow to a size where they become viable prospects for the larger venture capital funds, impact investors and SME financiers,” he added.
White believes growing the number of business angels is key to this, with investment networks such as ABAN and LAN working to connect and strengthen angel investors.
“These are important interfaces for engaging early stage, high-potential companies, to build up their track records and get them into markets where they can achieve their full potential,” he highlighted, adding, “Through co-investing opportunities we look at ways to make it easier for high-net-worth individuals to get involved, and to connect entrepreneurs with the mentor capital they require.”
For White, fundraising success is all about density of an entrepreneur’s networks and the quality of their teams.
“Having one or two financing options is not enough for entrepreneurs starting out. The more channels they have to tap into, the greater number of companies we will see achieve scale as a result. Entrepreneurs should focus on the quality of their management and team to attract investors. This point is the most important factor for investors deciding in which ventures to invest. ‘Team’ is followed by financial performance and market size,” he concluded.
In spite of these hindrances, and the lingering idea that Africa is a risky place to invest, a positive trend seems to have emerged. Success stories like those of Jumia, Konga and Hotels.ng will only help to continue this trajectory. And those ahead of the curve and already funding African startups are confident they have made the right call.
Source: African Business Magazine