Ground Game: Smart Investing in Africa

In April I was sitting at Pete’s, the outdoor café in Nairobi’s iHub, lunching with a Nairobi-based entrepreneur. Pete’s and the iHub can make a visitor feel like he or she is actually in Palo Alto. The climate is breezy and warm. Young, hungry entrepreneurs huddle around laptops, in heated discussions about the future of their business, code, hiring, strategy, pricing…so many decisions. Everyone is hustling.

But, there’s one thing that’s different. The long-time serial entrepreneur with whom I was sharing burritos — yes, there is also Mexican food — articulated it perfectly. “Right now, I feel like I’m being forced to choose between doing what’s best for my business — being based here in Nairobi — or what’s best for fundraising, living 10 time zones away in Silicon Valley.” The frustration clear in his tone, this entrepreneur is the embodiment of the state of VC funding for Africa.

Nairobi’s startup scene is hotter than ever and Silicon Valley, the epicenter of venture capital, has taken notice. For those of us that have been investing in, living or working in Africa for some time, this is an epic moment. Multinational corporations like MasterCard, Google and Microsoft are funding incubators and opening offices in Nairobi. Media outlets are trumpeting a “tech gold rush” on the continent in articles like this one in TechCrunch, and this one in The Economist. The Global Entrepreneurship Summit kicks off at Stanford this week featuring a significant number of African entrepreneurs. Deep-pocketed investors have entered the fray. Storied VCs, including Andreessen Horowitz, Chris Sacca’s Lowercase Capital and DBL Partners, are making multimillion dollar investments in businesses operating on the continent.

On one hand, this attention and investment is validation that the African startup market is reaching a tipping point: a billion-consumer opportunity, woefully underserved by existing products and services and ripe for better solutions in every sector — -from energy and fintech to healthcare and education. Technology can play a huge part in solving some of these problems. As a result, Bay Area investors have bestowed tens of millions of dollars in funding on Bay Area management teams to bring Silicon Valley-technology-style innovation to Sub Saharan Africa.

On the other hand, the realities of doing business on the ground mean few of these market opportunities will be solved by technology alone. Investors are deploying capital often without setting foot in the countries where these businesses earn revenue. Money is flowing from the west coast of the U.S. to the east coast of Africa predicated on the belief that we can innovate away social challenges with snazzy apps and hardware based on human-centered design. But poorly functioning electricity grids, banking institutions that don’t reach beyond major cities, and underfunded health and education systems will not be solved by apps and widgets. From challenges in infrastructure to the size and cost of venture funding rounds, what happens in-country is very different from the U.S. experience.

To deploy technology in Africa, a company must acquire customers that lack reliable internet access, hire skilled personnel from a workforce with limited startup experience and get products to markets where addresses often don’t exist and roads wash out during certain seasons, just to name a few challenges. Ok Hi is a startup helping other startups just by creating addresses for people and businesses. Until you’ve searched for an office or a shop that is 100 meters past the kinyozi before the Safaricom agent on an unpaved stretch of road in Kakamega Forest, such an enterprise is hard to comprehend. BRCK provides a last-mile boost to existing data networks, ensuring people and businesses in remote areas have access to basic data services. Sendy helps deliver everything from documents to dry cleaning on motorcycles in cities that are often gridlocked more than not. Understanding these basic challenges is tough from afar.

Companies in Africa need capital, but often in much smaller increments than most VCs are used to providing. A $10-million to $20-million round from a U.S. or European fund may seem trifling by Silicon Valley standards, but could represent years of cash burn for an African upstart. Smaller commitments mean less incentive to kick in-country tires and engage with a startup’s personnel and customers firsthand. What’s more, American VC-style valuations based on metrics like user growth don’t exactly light the way for Africa- focused investors concerned with cash-generation and a sight line to break even.

Enthusiasm to meet the needs and opportunities across Africa has the potential to lead to billion-dollar businesses, but what happens if too much money ends up chasing too few deals and valuations prove to be unrealistic? An abundance of capital can cover up a lot of mistakes. If mistakes pile up and Western investors lose their appetite, “Africa” may take the blame, rather than limited due diligence or lack of market understanding, and future entrepreneurs will have a more difficult time raising money for promising ventures.

At Blue Haven Initiative, the family office where I manage a fund investing in Sub Saharan Africa, we look for “ground game;” finding management teams that are 100% (or pretty damn close to it) based in their region of operations. We believe these teams are better positioned to understand market opportunities and challenges, because they are living them, every day. Proximity also means teams can experiment and iterate rapidly to meet customers and markets where they are, not where they seem to be from 10,000 miles away. In-country staff, local managers and engineers are also significantly less expensive than their Silicon Valley counterparts.

These facts are primary to our investment thesis. Of the four investments we’ve made since I joined Blue Haven in late 2014, none has the slickest technology, the highest-paid engineers or the prettiest app. Blue Haven-funded entrepreneurs are tackling problems they know well from firsthand experience, and then constantly iterating, in real time every day, on the best way to deliver a solution. While tech certainly underlies their business models, we believe winning ideas will be driven by ground game, hustle and perseverance in the face of seven to 17 different kinds of adversity on any given day.

Investing in Africa requires a lot of faith. Challenges to scale are plentiful, logistics infrastructure limited and power shortages frequent. Avenues for exit aren’t obvious or well-traveled. For entrepreneurs with at least one foot in the Bay Area, it’s much easier to raise money, go public or be bought by another company. After 10 years of following and investing in tech in Africa, this is an exciting moment for the continent, and I’m thrilled to be in the same ecosystem alongside each and every VC firm investing in the region. Investors from the developed world bring experience and know-how as well as financial capital. What I hope they’ll keep in mind is this: the 54 (or so) countries that make up the continent of Africa don’t need more easy money, only smart money — and a commitment from investors to understand the everyday challenges faced by entrepreneurs.

Note: This post first appeared in June 2016 on LinkedIn

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