Corporate venturing is nascent in Africa. Relatively few countries have hosted a corporate venture capital deal, and those that do tend to be concentrated in Kenya, Ivory Coast, Nigeria, Ghana, and South Africa – “Kings”. While capital markets and private equity are well established across Africa, corporate venture capital has lagged behind, despite having in South Africa-based media group Naspers one of the world’s largest and most successful venturing units, having backed Chinese internet group Tencent.
“Corporate venture capital is still at an early stage. Even venture capital is still at an early stage. Angel investment is still at an early stage,” according to Eric Osiakwan, who spoke at this year’s GCV Symposium and is the man behind the Kings concept. He knows Africa better than most. During his career he has crossed the continent, setting up internet service providers and tech startups in 32 countries. He now runs Chanzo Capital, a growth capital firm. Chanzo operates a “mentor financing” model, working with its portfolio companies.
Osiakwan has seen the technological development of African countries first hand, and the attendant efforts towards getting financing for that development. Putting aside state aid and state investment, which focuses on infrastructure, private equity has dominated compared with venture capital. According to the African Venture Capital Association, there were 167 private equity deals between 2010 and 2016 in anglophone east Africa alone.
Osiakwan added: “Private equity is much more advanced. It has been happening for almost two decades now. Corporate venturing is the new kid on the block, and we have seen this in two manifestations. The first manifestation is that a lot of the corporates are venturing by supporting the ecosystem. You see a lot of the corporates having accelerator programs, incubators, hackathons, and providing resources to help the tech ecosystem.
“We are beginning to see a second manifestation, where some of them are beginning to set up their own corporate venturing arms. Orange has Orange Digital Ventures (ODV), and the ODV Africa fund, Safaricom has Spark, and there are a few more, [such as telecoms operator MTN backing Amadeus Capital Partners’ $75m fund in 2014].
“What we have not seen much of, and I think this is the next manifestation, is corporates beginning to acquire companies.”
While it has not acquired an African company yet, Orange Digital Ventures is well placed. Its €50m ($58m) evergreen Africa fund, in collaboration with Google, invests up to €3m a round, targeting startups across sectors. Orange, in the words of Mark Rennard, ODV’s new CEO, is “a European and African group”.
“We operate in eight countries in Europe and 20 in Africa. I was the CEO in Africa for 12 years, so I know it pretty well. When I started my job in Africa 14 years ago, the penetration of the smartphone was below 10% as an average. Now in some countries it is 100%, like in Mauritius and Tunisia. In most countries it is over 50%.
“It is time to listen to the skills of Africa – they are not just rural, not just about agriculture, it is about fintech, about cyber, it is about connectivity.”
ODV has a dedicated team in Dakar, Senegal. Grégoire de Padirac is one of them, regularly flying out to other areas of Africa. Orange is a French company, but has a presence in both anglophone and francophone Africa.
Being able to operate in both lexicons gives ODV a significant competitive advantage. There have been much higher levels of investment in the English-speaking parts of Africa, due to closer connections with the US and the UK. According to Partech Ventures, the Europe and US-based VC firm, Nigeria, South Africa and Kenya raised a collective $299m for startups in 2016. Rwanda, next on the list, raised $16m. Ivory Coast and Senegal, the top-performing francophone nations, raised $13m and $6.5m respectively.
For de Padirac, the 350 million people in francophone Africa have been underserved.
He said of English-speaking nations: “Those countries are key because they manage to raise funds more easily than other countries. There are a lot of connections between Kenya and Nigeria and the US. You had a generation of startups with support from Y Combinator or elsewhere. Seed investment was key to starting the ecosystem. In francophone countries, they did not have the same capacity to get funds from American tech hubs. They key issue for me is seed investment, access to business contacts and an international network.
“Most of the startups have come from anglophone countries, so they were not able to benefit franco-phone areas. I think there will be a huge race between startups on two sides of the market, so we will see many things changing. It is the next place to be.”
Partech Ventures also realised the francophone markets were underserved. It launched a new African fund focused on francophone countries this year, backed by Orange, alongside other corporates and institutional investors.
Yet Parminder Vir, CEO of the Tony Elumelu Foundation (TEF) and its attendant entrepreneurship program, which welcomes tens of thousands of applicants each year, thinks there is still a difference at the ground level.
She said: “In the anglophone countries there is a much greater hunger and entrepreneurial drive then there is in the francophone countries. When I travel to Mali or Senegal, they are trying to shed the shadow of France. A lot more needs to happen – more investment from the government in infrastructure, in changing the mindset, and making entrepreneurship sexy across the francophone countries.
“There are some very innovative solutions and business ideas that come from francophone Africa, but the reality is that francophone entrepreneurs still look to anglophone African entrepreneurs for validation.”
Yet while their entrepreneurial mindset may still be developing, the markets themselves are there. Osiakwan is typically focused on anglophone markets, but Ivory Coast is French-speaking. He said: “You need to have a different approach to francophone markets. Most of central and west Africa are predominantly francophone. You cannot ignore that market.”
He cited the example of a merger involving a travel tech company in Senegal, a Norwegian-run Nigeria-based firm and a Polish-run Kenya-based company doing the same things. The resulting entity could take advantage of two distinct language markets.
“This is what I call roll-up. Take three companies that do the same things in different markets, roll them up into a bigger entity, and now suddenly it has become the preferred partner for Booking.com, Expedia, you name it.”
Beyond language differences, investing in Africa has other specificities. Emerging startups seek to address what might be seen as fundamental problems in a western country, particularly lack of infrastructure. That might explain why investors have been slow to arrive, but are now seeing opportunity, with more than enough talent on the continent.
For de Padirac, investing in Africa is not just a hype-based activity. The talent is there, now backed by rapidly growing investment.
“In 2015, Africa raised $270m, and last year $560m. There is huge traction, and more investors are based in Africa. This is good news, as the sustainable VC activity is growing. It is a long trend, and we believe that it is not just hype. It is not because there is too much money. It is because there are a lot of really good entrepreneurs.
“Comparing Africa and India, which is difficult, shows interesting things. They have the same number of inhabitants, 1.2 billion to 1.3 billion in India. The GDP is the same, but in India they have raised something like $10bn, compared with $560m in Africa. The multiple [of Indian investment to African investment] is around 17 to one. There is huge potential to grow. The entrepreneurs are already there. It is an untapped market, and they are digitising payments.”
Digitising payments is important, providing the payments infrastructure that other businesses can build on, particularly given that relatively few people on the continent have access to a traditional bank account.
Someone who knows that well is Adeyinka Adewale, who runs Kudi, a Nigeria-based fintech. Kudi recently graduated from Y Combinator and has found a successful model by solving the main issue – cash.
He said: “Most payments today in Nigeria happen in cash. For people to be able to make their payments, there has to be a way for cash to move to digital money. Most of the population in Nigeria today are unbanked. Banks do not have enough distribution. There are only about 5,000 bank branches in a country of about 56 million adults.
“Kudi partners corner shops. A customer could walk into those stores to make digital payments – peer-to-peer transfers, or they could transfer money to their own wallet and make payments through our mobile app. We have about 2,000 stores already partnering, and we are doing about $15m in payments monthly.”
Having launched in 2017, and already close to being the largest payments platform in Nigeria, Kudi is looking to expand in that country before spreading across Africa. The advantage for Adewale is that the rest of Africa is still largely a cash economy. There are rivals, but Kudi has a host of advantages. It is pre-series A, and flexible, having already shifted its business model once – previously using a chatbot – with a proven cash-to-digital payments model, and as a Y Combinator grad, has the connections to expand quickly.
Yet while a lack of infrastructure is something that Kudi can build on, it is also something that frustrates Adewale. Distinguishing the Nigerian startup scene from those in more developed countries, infrastructure becomes the differentiating factor.
“If you are building a digital payments startup in the US, or the UK, you see the challenger banks, where you have people with new banking products offered by fintechs. The difference in Nigeria is that most people do not even have a bank account yet. They have not used the legacy banks, so it is very difficult to convince that person to use a purely digital bank. There is a huge trust problem.
“There is also the basic infrastructure problem. Even something as basic as mailing a prepaid card to someone can be challenging. Over the next few years we have to build that infrastructure.”
This plays out in different ways in different sectors. One of the most obvious is e-commerce, where Adewale is unflinchingly honest.
“E-commerce struggled in Nigeria. Six or seven years ago, e-commerce companies came to Nigeria, mostly founded by Nigerians who had lived in the US, who understood how Amazon worked. The difference was that when they came to Nigeria, there were no online payments systems that worked. There was no logistics network that you could tap into. A lot of these guys spend the bulk of their early years building payments, building logistics – that slowed them down, that was expensive. A few of them failed, and some of them are still struggling. The infrastructure has to be built, then other things can happen.”
Even Jumia, which African Internet Group earmarked to receive the bulk of the funds from its recent $326m funding round, and is seen as a leader in African e-commerce, was described by TechCrunch as “a tent pole”. The idea is to stake a claim early as a market leader, regardless of infrastructure issues. Jumia is reportedly exploring expansion into financial products to serve its main commerce platform.
While de Padirac has a different take on the issue, the same fundamental problem remains.
He said: “When you digitise payments, you can build a lot of business on top of this, which is why fintechs are so hot in Africa. They can leapfrog infrastructure. More and more, startups will be able to build new products on top of this first generation. For instance, we invested in Africa’s Talking, which is an aggregator of telecoms application programming interfaces, which is the first level of technology that startups need to leverage SMS, USSD (a communications protocol for mobiles), and so on.”
Osiakwan puts things more simply. “In Africa today, online is a lifestyle, and by online, it is mobile.” That said, he knows that getting everyone there is not as simple as one might hope.
“The next step is that a lot of offline businesses will go online, but there is a big constraint there. The infrastructure is not existent. We believe that you can use software as infrastructure. That means that where you see infrastructure gaps, we look for entrepreneurs using software to bridge that gap. We see the lack of infrastructure as an opportunity.
“We invested in a company in Kenya called FinAccess, which built a credit-scoring system. One of the infrastructures lacking in Africa is that there is no credit-scoring system. There is no address system, so it is hard to find people and hard to lend to them. Most people do collateralised lending – ‘Bring me something that is worth double what you want from me, and I will give you the money.’ That is not lending. The primary reason that credit scores do not exist is that people do not have addresses. Two, there is no credit history on people, so it is difficult to determine how to give credit.
“Now [FinAccess] has said: ‘People use mobile money, people use their phones to prepay their airtime. We can use that data point to create a credit score.’ FinAccess built that system, and then on the back of that built a lending platform. Before I invested, there was 98% repayment. They were picking the right data points and making the right assessment.
“This is a clear opportunity where you are using software infrastructure to fix an existing infrastructure gap.”
The opportunities are there. The talent is there too, as expatriates and repatriates are coming to Africa. De Padirac and Osiakwan both see the advantages, with de Padirac focusing on the ambition they bring.
“There are many expat entrepreneurs in Africa, but there is a mix of expats and repats, which is very good news for Africa. People want to stay on the continent and to build big businesses on an African scale, not just local entrepreneurs who are more focused on a national scale. We have seen more and more dealflow pitching pan-African ambition. That is quite new, so I believe we are going to see this boom and growth continue.”
Osiakwan believes local founders can have their visions clouded by western influence, yet restored by co-founders with western experience.
“We are seeing two sets of entrepreneurs. We have entrepreneurs who are coming from the west. They see a problem in Africa and they are coming up with a solution to that problem. Some of them have the added challenge of not realising that copying a western solution for an African problem is not the way to go. In that regard, you begin to see co-founders where one is a foreigner and one is a local, and they can balance each other nicely.
“Then you have the other scenario, where you have a local entrepreneur who is providing a solution to a local problem, but he or she does not have the experience of building a company. We are beginning to see some of those local entrepreneurs partnering expats and repats. I think that is a very nice dynamic. As a fund we like that, as there is a leveraging of strengths that plays down on each other’s weaknesses. That is good for the ecosystem, because we want to back companies that can solve African problems, but we also want to back companies that can go global.”
Part of the benefit that expats and repats bring is that they have better access to capital. De Padirac brings the capital, and likes to see the familiar – the technology and innovation ecosystem that has worked so well elsewhere. He said: “Most of the first generation of entrepreneurs who managed to raise funds are repats. That is normal because they are building the ecosystem. They are bringing their experience from Silicon Valley, from London, from Paris.
“The next generation will be former employees of the startup. The ecosystem is like that. The first generation creates a generation of kids.”
Parminder Vir knows African entrepreneurs better than most. As CEO of the Tony Elumelu Foundation, she set up an annual entrepreneurship program in 2014, providing a 12-week online course that includes mentoring and basic business skills. Most importantly, the program provides seed funding – $5,000 to 1,000 entrepreneurs each year. Available to all 54 countries in Africa, but not the African diaspora, there is huge demand – 63,000 applications were submitted this year.
“It is proof-of-concept capital. The word that I use is non-returnable. Instead of someone going to their family and friends and saying ‘I need $5,000 to get this thing to do whatever’ in terms of their business, it is more of an angel investment. The return we expect from that is that the entrepreneur goes off, creates jobs, and generates revenue.
“Funding and access to capital is one of the biggest challenges for entrepreneurs the world over, but particularly on the African continent. You would be stupid to go to the bank because the interest rates are so high. It takes much longer to grow because you are generating revenue only to be ploughing whatever profits you make into the business to keep it sustainable.”
Adewale has his own experience of this. A local entrepreneur originally, he founded a startup to solve a payments issue at his university in Nigeria. It struggled until Adewale shut it down. He eventually founded Kudi, which was picked up by Y Combinator. So he understands the relationship between African founders and funding.
He added: “External capital is a lot more difficult to access as a local startup in Nigeria, and that is because you need credibility. You cannot just walk into Silicon Valley as some Nigerian dude. That is why incubators help, because they help answer that credibility question. You are a Y Combinator startup, talking to a VC.
“It is a lot tougher to get outside funding if you do not have either some level of schooling abroad – for example, you went to Harvard – or you went to Y Combinator. All of the founders in Nigeria I have seen who have raised external funds either went to Ivy League schools or they went to one accelerator or another.
“From what I have seen, most startups raise venture capital funds from the US or from China. There are very few startups who raise money locally. There are a few funds that focus on emerging markets like Africa, but the challenge is that because there are not many of them, they can only do so much each year. It is very difficult for local companies to get funds from them, and since most of them do not do seed investment, they focus on series A or B. Most startups will not get to series A if they cannot get seed, and most of the seed I see tends to come from the US.”
Adewale believes the capital will come, but that investors are still dragging their feet for a big exit before they will throw themselves in at the deep end. “For me, most investments still have to go into getting one or two companies to get to scale, in terms of the digital economy, digital payments, or e-commerce. Once one or two companies grow, become a $100m business or a unicorn of some sort [worth at least $1bn], that could potentially bring an exit to the market, which would make more VCs invest in Africa.
“For example, exits have been very difficult in Nigeria. No startup has been able to exit for anything like $1bn. Most VC funds, even in the US, would not consider doing an African deal except the very large funds that are willing to take the risk.”
Osiakwan agrees that venture capitalists are hanging around, waiting for a major exit. “That is accurate, but I shall give you one or two examples of exits that speak to the point. African Internet Group had a billion-dollar valuation – making it Africa’s first unicorn – that brought in quite a few strategics, Goldman Sachs, MTN, Orange. That is one of the biggest new examples in the market in terms of potential. It is looking to go public, we do not know when yet, but there is speculation.
“The other example is 2U, a public company in the US, which bought GetSmarter, a South African educational startup, for $103m. One of the investors was called DiGame, which we actually do quite a lot of work with. We believe this is going to be the pattern for the next five to 10 years. As more corporates come into Africa, they will be looking for acquisition opportunities. That is why our fund is focused on investing and scaling companies so that they are big enough to be acquired. There have not been a lot of exits, but I would caution that there will be a lot in years to come.”
For Rennard, the man in charge of a major European CVC, exits are as important as you would expect. Speaking specifically about Nigeria, he noted how easy it was to invest there, but the exit remains an open question. He said: “The question is, how do you manage the exit? How do you manage the potential conflict? What is the legal ecosystem like?
The person left at a loose end is the startup founder. As Adewale has said, although not a problem for Kudi, accessing venture capital is hard enough, even in Nigeria. If founders in Nigeria are finding it tough to access capital, it is prohibitively hard to access it elsewhere. According to de Padirac, 70% of investment in Africa is located in just three cities – Lagos, Nairobi, and Cape Town.
Rennard believes Nigeria is a centre of investment just by virtue of its population. “Nigeria is the biggest country on the continent. Nigeria is probably bigger than all our other countries where we operate in west Africa. Senegal plus Ivory Coast, plus Niger, plus Cameroon is roughly the size of Nigeria in terms of total population.”
Vir sees this too, with Nigeria providing the largest single-nation contingent to the foundation’s program each year. She said: “We receive most of our applications from Nigeria, not because the foundation is based in Nigeria, but because Nigeria has the largest population – 200 million. It has the youngest population. It has the most highly-educated entrepreneurial population. Everybody feels that they can set up and run a business.”
Population is a key driver of investment, both in terms of individual countries, but also for Africa as a whole. “Africa Rising” has long been a narrative going beyond investment circles, into politics and broader society too. It is a narrative complicated by Africa’s relationship with the west and former colonial powers, but one thing is very straightforward. As Osiakwan puts it: “In the next 20 to 30 years, one in every four people in the world is going to be African. There is no doubt that Africa is going to be the market of the 21st century.”
Orange is one of the first major European CVCs working in Africa, and African CVC units are still relatively thin on the ground. A certain level of trepidation remains, perhaps unnecessarily. Investing in Africa is, as Rennard says, much like investing in other countries, but with certain specificities. “When you want to evaluate companies, you need to know the environment, the ecosystem, the legal ecosystem of the country where you operate.”
Rennard knows the continent well, and Osiakwan is one of the few better placed to comment, given his experience. Osiakwan points to high levels of diversity as one potential stumbling block.
He said: “The global south is very different from the global north, and when you look at Africa, there is a difference between west, east, south and even north Africa. And then when you get to west Africa there is a lot of difference between Accra and Lagos, Abidjan and Dakar. Africa is very heterogeneous, but the challenges these markets face are very similar. The dynamic is that you can have a business model that solves a problem in South Africa, but you cannot copy the same model and just stick it in Ghana. You have to tweak it and adapt it to the Ghanaian environment. The devil is in that detail.
“We believe this is where the biggest success trigger comes from, because if you do not understand the business culture in Nigeria, you may copy your model from South Africa, and it will not work. The cultural context is different, the business climate is very different, and the approach to customer engagement is different.
“I have had 15 years in a previous life of building about 15 companies in 32 African countries. We believe we bring really strong experience and exposure to the markets to entrepreneurs. There are a lot of funds trying to look at Africa, from Europe especially, and some of them are learning the ropes, but it is just one of those things that you gain by experience.”
If VCs and CVCs can learn only by experience, they have to enter the market at some point. Osiakwan offers a couple of options – go there yourself, or work with an African partner. “There are two ways to go. One is to go and set up your corporate structure and begin to deliver your product or your services in a market. You have a lot of learning to do. On the corporate venture side, one of the ways is to partner people like us – Chanzo Capital – who have a track record of building companies in Africa. We can also help you with your corporate setup. That is what our core business is – to be able to leverage not only capital but our resources to be able to go and venture.”
While that process is happening, it still leaves founders in the lurch. Africa is not a core market. Investment teams are being built in Asian and European markets. Africa is different. It is a litany familiar to Adewale. He said: “After Y Combinator, while we were trying to raise funds I spoke to a lot of VCs. That was the response I got as well: ‘We do not understand what is happening in Africa.’ I remember talking to a VC and saying: ‘What do I have to show you for you to make an investment in Nigeria?’ He said: ‘There is nothing you can show me. I do not understand what the regulatory landscape looks like, I do not understand the risks.’ There is still a long way to go.”
Adewale posits a solution, not so different from Osiakwan’s own. “A VC fund could invest in some of the smaller African VC funds that show traction and have good portfolio companies. The [African VCs] can then invest in the actual Kenyan or Nigerian companies because they understand the risk and they understand the market.”
Part of the problem is that Adewale is still encountering misconceptions about Africa more broadly, ridiculous as they are.
“I have had people ask me: ‘Do people use internet? How are people going to use your app? Do people have smartphones?’ Some people think everywhere in Africa is rural, people are farmers, and they do not go to school. It is wrong.
“We have a very young population. We have a lot of young people in Nigeria who are technology-savvy. We have a thriving economy. The government is stable, and infrastructure is being put in place. A lot of growth is going to happen in the next decade.”
The message to venture capitalists is clear – be cautious, be prepared to learn, but the opportunities have already arrived. Africa may not yet be risen, but founders like Adeyinka Adewale and funders like Eric Osiakwan are making it a reality.
