Seeing Black in a Sea of Red — Why We Invested in Tomato Jos
At VestedWorld, we’ve started to develop a reputation as contrarian investors: contrary to others, we believe that investing in core industries that are tech-enabled (but not bleeding-edge) can be both economically rewarding and impactful. We also believe that being first in developing markets will deliver attractive, diversified returns to our limited partners and VestedAngels, and that investing in resourceful early-stage companies who are designing their solutions from the bottom-up for profitability and sustainability is a winning combination. When an entrepreneur comes to us saying their small business is going to help solve the nutrition deficiencies in Ghana through the establishing of Africa’s largest organic moringa farm, or that they are going to create a step-change in Nigerian’s consumption of diesel through a proprietary energy-efficiency platform, we take them seriously.
It’s this willingness to entertain solutions that don’t fit the typical investor (or development) mold that piqued our interest in a small tomato farm in Panda, Nigeria, where the entrepreneur’s appetite for challenge was only matched by her vision for a solution that will integrate thousands of Nigerian farmers into the tomato value chain and produce Nigeria’s only domestically-processed tomato paste.
Enter Tomato Jos and entrepreneur Mira Mehta — when Mira laid out her plans for a commercial tomato farm, run to California-level standards and feeding a commercial tomato-paste processing facility, we immediately knew we had a special opportunity in front of us. And after nine months of getting to know Mira and her business partner Art, learning about their vision and the market, we couldn’t be more excited to announce our investment into Tomato Jos as their lead investor in a $2.1M funding round. TJ, as we like to call it, aligns very closely to our motto of “Doing Well by Doing Good” — where growth in the Company’s operations directly aligns with economic development. At scale, Tomato Jos will work with 2,000 smallholder farmers over 2,600 Ha (~6,500 acres) of land, putting an additional $1.3M of direct income into the hands of local farmers each year — clear impact by any yardstick.
TJ, as we like to call it, aligns very closely to our motto of “Doing Well by Doing Good” — where growth in the Company’s operations directly aligns with economic development.
After each investment we make, we like to do an “AAR”: an “After-Action Review.” This process allows us to step back and look at our investment process and thesis to get better at what we do; we can identify process issues, knowledge gaps and incorrect assumptions or biases that we might have had and which might affect future investments. With that in mind, we’re in the process of taking stock of why we invested in Tomato Jos.
Is there a market for this?
If you’ve ever been to West Africa, you can’t escape the region’s most debated food: jollof rice. For those not familiar, it’s comparable to the New York vs. Chicago pizza debate, in both vehemence of opinion and ubiquity of consumption. It shouldn’t come as a surprise that one of the primary ingredients of jollof rice is tomato paste.
Yet despite the popularity of tomato paste and the fact that the country grows over 1.8M metric tons of tomatoes per year, Nigeria imports nearly all of what it consumes (making it the largest importer of tomato paste in the world, to the tune of ~$1.0B/year). Our initial screening process for Tomato Jos confirmed that this was a market we couldn’t ignore, and that fit squarely within one of the investment themes we had prioritized: import replacement.
What is the entrepreneur doing differently, or is different about the situation that makes you think it will work “this time”?
The verdict is in: backward integration has failed in the tomato-paste processing industry in Nigeria. As early as the 1980s, Nigeria built state-owned processing facilities to encourage local production of processed tomato products, including tomato paste, and as late as 2015, the Dangote Group built a tomato-paste processing facility in Kano State promising 430,000 MT/year in production. Yet despite these efforts, not one of the more than 50 brands of tomato paste in Nigeria is produced locally, and all of the aforementioned facilities are shut down, unable to run efficiently due to an inability to source raw materials (tomatoes).
After many conversations with Mira, some of the largest tomato processors in the world, stakeholders, competitors, government officials and experts, we’ve come to agree with her that the problem is not the lack of processing capacity, but the failure of predecessors to work with the farmers and a lack of attention paid to the supply chain. When you are processing tomato paste, Mira likes to say that “you need to know where every tomato is coming from for every hour of every day.” At first, we questioned the need for a company of TJ’s size to vertically integrate into each part of the value chain, noting the complexity and challenges involved with such an endeavor. Over time, we came to understand that increased costs served to reduce production risk to the extent that value was being created by exerting greater control.
Zooming out on the problem, we know that between $1.0 — $5.0B in aid has been contributed to Sub-Saharan African agriculture each year for the last 30+ years, largely to top-down solutions financed by concessionary programs — and the average productivity of the Nigerian tomato farmer hasn’t moved an inch. It’s time for a new approach, and we are 100% behind Mira, Art and the TJ team.
Are there leading indicators for why the company will be more valuable in the future than it is today?
Nigerians are fiercely proud of their country. This sense of pride, combined with the fact that brand loyalty is high among Nigerians, is leading to a growing interest in and preference for local brands, especially for food and drinks. According to Deloitte, 78% of Nigerian consumers prefer local brands for food products. Over the next few years, we believe that domestic Nigerian brands will become an increasingly important part of the domestic Nigerian consumer packaged goods (CPGs) landscape and the regional West African market. The U.N. estimates that Nigeria’s population will surpass that of the United States by 2050, and become the world’s third most populous country by 2100. Urbanization rates have long been among the highest in the world (from ~3 million in 1950 to ~69 million in 2010). Both will contribute to higher consumer spending in Nigeria (McKinsey expects $100B+ more per year by 2020) and greater demand for locally made products.
In Nigeria, locally produced CPGs are gaining ground against similar product offerings from international brands across a variety of sectors — as exemplified by the rise of the Nigerian-brand Chi (whose fruit juices and drinks carry the slogan “Be Nigerian, Buy Nigerian”). The desire to have a local brand that caters to “evolving consumer tastes” was a significant factor in why Coca-Cola decided to acquire a significant stake in Chi. We expect that this trend will continue and are making investments to capitalize on it — Tomato Jos is our first of what will be several investments across this theme.
The desire to have a local brand that caters to “evolving consumer tastes” was a significant factor in why Coca-Cola decided to acquire a significant stake in Chi. We expect that this trend will continue and are making investments to capitalize on it — Tomato Jos is our first of what will be several investments across this theme.
Is there an exit opportunity here?
Ultimately, we can’t invest entirely on the premise that a company will grow and impact its community. We also need to believe that others will take note, and that there is support for an eventual exit from our investment. Here, we’ve identified three trends that suggest the future will be bright for a successful Tomato Jos: (1) increased deal activity by multinational players in East and West Africa; (2) an increasing focus on sustainable sourcing methods within these corporations; and (3) the rise of dedicated Africa PE funds.
Kellogg, Danone, Coca Cola and L’Oreal have all taken part in M&A on the continent, largely to get access to consumer brands in markets or market segments where they weren’t competitive and to establish local operations in unfamiliar places. Strategic transactions, as these are called, tend to be at a high valuation multiples, not surprising given what is at stake.
In other good news for African investors looking at core industries, large multinationals are starting to focus on sustainable sourcing for their global product portfolios, including partnerships and direct investments into primary producers and processors. Companies such as Unilever, Heineken, Diageo are all active on the continent and seeking partnerships with primary producers and processors. However, these upstream producers remain fragmented and the market is ripe for consolidators and promising new business models that offer the efficiency and scale needed to supply the large orders these companies require — a void new companies (like Tomato Jos) with strong entrepreneurs are eagerly stepping into.
On the financial side, over $16B has been raised by private equity firms in recent years dedicated to the continent of Africa, much of which remains as dry powder waiting for this new breed of companies to reach sufficient scale to warrant a growth-equity investment. While we are confident TJ will get there, we’ve also noticed a trend towards the raising of smaller funds focusing on more specialized opportunities (as demonstrated in the graph below — a small sample size, though in our opinion indicative of where the market is going).
It also happens that BCG agrees with us — “There is also a big need in Africa for smaller, sophisticated, and more specialized funds with strong local expertise that can help prepare the field for strategic buyers and larger funds.” Five to seven years down the line (i.e., when we expect to exit our investments) we are confident that these players will be looking for opportunities such as Tomato Jos — strong growing brands who have de-risked the operational aspects of their plan and are ready for regional and continental expansion.
While the countries that we focus on (primarily Kenya, Nigeria and Ghana) are exposed to challenges unique to developing markets, we choose not to dismiss so easily the fact that Coca Cola, Johnson & Johnson, Heinz and other similar household names all got their start in a market that had recently emerged from a civil war and had relatively poor but rapidly developing national infrastructure. The First Transcontinental Railroad was completed the same year that Heinz was founded, most Americans were considered working class and the federal government’s ability to regulate private industry was still being established (the Interstate Commerce Act of 1887 established the federal government’s expansive ability to regulate commerce). The founders and original investors of the aforementioned companies became incredibly wealthy while building businesses that helped transform the U.S. economy. In our view, the time is now to invest in the African brands of the future, including Tomato Jos.
In our view, the time is now to invest in the African brands of the future, including Tomato Jos.
We are extremely excited to be joining Tomato Jos’ team as their lead pre-Series A investor and congratulate the team on the exceedingly hard work and sacrifice that it has taken to get here. We often say the work we do is easy when compared to the amazing things that the entrepreneurs we invest in do every day. With the funds in hand, Tomato Jos is now at a new stage — scaling — and while there are most certainly challenges ahead, we are confident the team will meet those challenges head on.
 UN World Population Report
 McKinsey Global Institute: Lions on the Move II
 BCG: Dueling with Lions
 BCG: Why Africa Remains Ripe for Private Equity