Connecting African Entrepreneurs to the world with the first Pan-African Venture Capital Fund
by Khaled Ben Jilani and Denis Barrier
Africinvest and Cathay Innovation proudly announced today the launch of Cathay Africinvest Innovation. This new fund is the largest venture capital fund in Africa with nine offices interconnecting the entire African continent.
Our aim is simple: contribute to changing the financing and development of startups in this continent of 1.3 Billion of people. How so? By providing the right funding for the creation of new digital infrastructures and services in Africa, and by connecting the whole continent and the world’s leading innovation ecosystems and players. Why now? Because the African ecosystem is ready. This is the right time for such an initiative.
The Africinvest and Cathay teams have known each other for years. When we started discussing this project, the fit was perfect — we knew we could create a unique initiative that should reward our investors with outstanding returns, help great African entrepreneurs fulfill their dreams while improving the lives of so many people through technology, and maybe even impact the way innovation is developed in a continent with more than a billion of people.
Africinvest is the leading Private Equity firm in Africa, with more than US$ 1.5 Billion under management, offices in 9 African countries, and more than 20 years of knowledge, expertise and track record of succesfully investing in the continent. Cathay Innovation is a VC affiliated to Cathay Capital, who built a unique platform covering Europe-China-USA and dedicated to finance and support operationnaly the growth of digital startups in those geographies. Also Cathay Innovation enjoys a full set of Fortune 500 companies partnering with Cathay invested startups, and who could find an interest about also partnering African startups through an initiative at the scale of the whole continent.
As the bounds of trust, respect and friendship are established, our parnership can really blend a team operating succesfully for long in the African continent, and a team with strong tech and startup financing expertise. This harmony will enable to leverage operationnaly in the same initiative an infrastructure covering Africa, the access to the ecosystems of France/Europe/China/US, and deep relationships with more than 10 of the largest companies in the world. That’s why we believe that what we announded today represents a unique blend to make a difference for African Entrepreneurs eager to have a big impact in Africa and be fully connect to the world
Digital entrepreneurship is thriving in Africa
Archetypical of the rising stars of Africa’s burgeoning startups is Obi, a young entrepreneur based in Lagos, a town of more than 12 million of citizens. He built a fintech company that illustrates the continent’s growth and potential. Obi’s company deploys disruptive digital technologies that enables financial inclusion, automates banking and facilitates payments in Africa. It began as a platform enabling African financial institutions to replace expensive and rigid manual processes with agile and fully automated alternatives. In the next stage, the company applied cutting edge AI algorithms to extract insights and real time interactions for better decision making and to enhance the customer experience. Then his company started offering a shared service on a secure cloud infrastructure to enable digital services and channel management to serve the microfinance industry. This combination not only enabled the company to develop profitability, but was also an approach that favored financial inclusion.
Obi could have just provided these services to banks — which would have been fine in terms of profitability, technology, and impact. But he also decided to build a social m-commerce platform and ecosystem based on proprietary instant messaging technology embedded in apps. His goal was to transform the person-to-person payment system across countries in Africa while facilitating the building of merchant communities. The fees to transfer money between African countries could be more than 10%. With Obi’s application of interconnected payment systems using blockchain protocol, these transactions are free, creating a new efficient and economical pathway of exchanges and relationships between different African countries.
Meeting Obi and listening to this passionate entrepreneur, it is clear how the latest technologies used by African entrepreneurs can modernize existing services to serve business customers, positively impact African lives while simultaneously connecting individuals and businesses in different countries as they have never been before. What was impossible to achieve with physical infrastructures is now within grasp using the digital infrastructures and services developed by startups who aspire to become profitable unicorns.
Obi’s success story illustrates the tremendous potential of African entrepreneurs and the underlying demand driving the collaboration between Africinvest and Cathay Innovation. This partnership creates a dedicated fund of critical financial size to the continent, deploys broad operational support throughout with eight offices, and connects African startups to the three largest tech ecosystems in the world — Europe, Asia and the U.S. This will enable digital African entrepreneurs to efficiently reach critical mass through the network effect in various African countries while also ensuring that they will seamlessly connect to the most innovative visionaries and emerging technologies around the world.
A new breed of startups is rising
We believe the timing is right and this initiative has potential to be massive success. African economies are among the fastest growing in the world with an increasingly positive outlook. Of the top ten fastest growth economies in the world, Africa is home to six of them. Additionally, growth in the continent is spread among large numbers of countries, and today some of the non-commodity intensive economies are leading the growth like Ghana, Ethiopia, Ivory Coast, Senegal and Tanzania.
Despite this positive outlook, Africa is still missing homegrown leading companies that could boost its economy to the next level. Historically there has been an absence of strong role models, but over the past few years, a new breed of companies has blossomed across the continent. These startups are different and more innovative than their African incumbents and are led by founders with the ambition to solve some of the hardest problems found on earth such as reducing poverty or substituting defective infrastructure through innovation and inclusion.
Fund flows to African startups from global financial hubs have been a growing at an astonishing 46% per year over the past six years. Startups have also benefitted from the ability to attract global talent — as the nature of their missions resonate well with the values of young professionals seeking a mix of innovative challenges and meaning to their objectives. Money and talent are now providing African startups with the ability to achieve growth far beyond the expectations of some of the founders.
Startups will eventually develop the foundation that Africa needs to develop its champions; not the traditional infrastructure but a digital one that will make Africa a more connected continent inside out. We are currently seeing the changes in public transport using unexploited existing assets and optimizing their usage, logistics by connecting global distribution networks to Africa retail and e-retail sectors, payment infrastructure in their ecosystem and in terms of cross border payment solution, education & health. The digital infrastructure being developed now in the form of digital services and products should provide the foundation for African startups to build the first pan-African successes.
Large, growing and educated middle class
The population of Africa is forecasted to reach 1.6 billion by 2025 up from 1.3 billion in 2018, the highest growth rate in the world. Over the coming decades, Africa is the only continent whose population is expected to continue growing and is forecasted to account for 40% of the global population by 2100. The continent is also rapidly urbanizing, and its middle class is increasing. Combined these trends will drive higher consumption of goods and services. It is the second-fastest urbanizing continent just behind Asia. Its urban population is projected to grow from 480 million in 2015 to 1.3 billion by 2050. University enrolment in Africa doubled between 2000 and 2010 (highest growth rate in the world at 15%). By 2020, 60% of 20 to 24 year olds will have a secondary education (vs 42% today). Increasing diaspora has also had a positive impact on the local economy: in 2017, there was an estimated $33 billion inflows of remittances into Sub-Saharan Africa.
World population projection by continent (in Billion people)
Hundreds of million of connected people in Africa
In 2010, TEAMS (The East African Marine System) completed installation of undersea fiber optic cables, arriving in Mombasa and significantly increasing broadband connection in East Africa. This long-awaited infrastructure was a key pillar in enabling the development of the startup industry in Africa. To date, Africa has 362 million internet users (29% penetration), 170 million active social media users (14% penetration) and 150 million active mobile social users (12% penetration). While these numbers are rising, there is still significant opportunity to foster digital inclusion in the continent. Governments, telecom operators, big tech such as Facebook and Google, as well as Wi-Fi ventures are deploying various efforts that are likely to accelerate the connectivity trend.
A Venture Capital industry and innovation ecosystems are now emerging in Africa
African venture capital has seen a steady increase in inflows over the last five years. 2018 saw almost €950 million invested across the various stages, a 32% year-over-year increase compared with €760 million in 2017. Investment inflows grew more than ten times since 2012 as illustrated below (Figure 4). Cumulated venture capital investments in the last five years were worth more than €2.5 billion. Overall, figures point to a steady increase of the African venture capital market with a CAGR of 46% over the 2012 to 2018 period.
The venture capital industry continues to evolve in Africa. Increasing funding rounds and larger number of deals are being recorded each year. 2018 witnessed more than 30 deals over €5 million (compared to 20 in 2017) and 8 deals over €40 million. This was most recently demonstrated by the €115 million Series D round in Branch International, a U.S.-based fintech venture offering digital loans to East African businesses and customers, and the €89 million in Series D funding in Andela, a Lagos-based coding school offering IT outsourcing services to its customers. These single round raises are larger than the total venture capital investments made in Africa in 2010.
The funding landscape is dominated by three sectors: Fintech, energy and e-commerce/logistics industries. Combined, they attracted over 65% of total investments over last five years. Of these sectors, Fintech attracted the most funding with almost a quarter of the whole amount raised. An emerging fast growing sector is software, followed by EdTech, AgTech and HealthTech. EdTech and AgTech have recently witnessed a few megadeals (Getsmarter, Andela, AgriProtein).
Evolution in Value of Disclosed VC deals in Africa and industry split :
While these three sectors attracted the most money, Kenya, Nigeria, Egypt and South Africa attracted over 80% of the funding. Of those four, South Africa received the highest share at just over 30% of total African venture capital funding. However, there has been a significant increase in the number of countries attracting investments outside of this group, including countries like Ghana, Tunisia, Morocco and Ivory Coast.
In term of ticket size, 74% of all investments in the past five years went into early stage (tickets lower than $1 million). Only 26% went into later stage venture capital versus 49% in the U.S. over the same period. The graduation of ventures in this young ecosystem from the bulk of funded seed ventures will provide more opportunities for Series B and later rounds of investment in the coming years.
Proportion of investments by round in Africa and US (2013–2018, in number of deals) :
The African venture capital industry has been dominated by regional funds and funds operating from specific hubs in or outside of Africa. We believe the new generation of entrepreneurs deserves to be supported by a Pan-African venture funds large enough to finance their grand ambitions and favor the interconnection between the continent’s main hubs and beyond. The creation of Cathay Africinvest Innovation was not just about an opportunity for us — it was about fulfilling our duty to the new generation of digital entrepreneurs.
The potential impact of innovation in Africa is large and imminent due to the size of its gaps and the set of converging positive factors or innovation drivers. On one hand, Africa’s lag in economic development was maintained by four main development gaps: great inequalities, poor infrastructure, low productivity and inadequate regulation. On the other hand, positive demographic outlook, arrival of new technologies, quality of talent pool and increasingly pragmatic regulators emerge as innovation drivers and are at the core of the formation of the new venture capital opportunity in Africa. In a sense, Africa is where China was a few years ago. To enable Africa to leap-frog from its current infrastructure to the most advanced technologies, Cathay Africinvest Innovation was formed to help bridge the gap between different countries and continents, creating value for entrepreneurs and the African ecosystem.