3 recommendations to Chamath (and to any billionaire) who is coming to invest in Africa
Why Silicon Valley VC is a bad fit for Africa and how to navigate through early stage investments
Now that I got your attention, I would like to start by saying that I am in no position to give anyone financial advice, let alone to successful billionaires and influencers like: Chamath Palihapitiya, David Sacks, Jason Calacanis and David Friedberg, who’s “All In” youtube channel and podcast is IMHO one of the most educating, thought-provoking and entertaining material on social media.
But my partners at ImpactRooms and I have been involved for years in building and investing in early stage companies in Africa and have three recommendations for the tech-savvy, deep-pocketed US investors out there, who have suddenly discovered the investment opportunity Africa offers, in this emerging Web 3.0 digital economy (below).
(I also wrote about this here).
Recommendation #1: Understand why most startups and accelerators struggle in Africa
There is a disconnect between startup ambitions and market realities in Africa.
Despite the exponential growth in available investment capital (forecast at $4 billion this year), to say that global capital is scarce in Africa, is an understatement. Africans have limited purchasing power, and consumers are utility- and price sensitive. They spend their limited income on products or services that is perceived as valuable, and prioritize cost and ease-of-purchase over loyalty. As a result, startups’ products have to be affordable, accessible, and user-friendly. Also consumers are rarely amenable to fully-digital distribution methods, and prefer a “tech-touch” approach that creates trust by incorporating human interaction.
Not surprisingly startups overestimate the degree to which users are digitally literate, particularly if they live in rural areas, and they may fail to recognize the risks these consumers assume when trying their new products, especially when they have already experienced past disappointments. This high customer acquisition cost (CAC) can be prohibitive and requires startups to rely on multi-nationals, telecom companies and banks as strategic partners and distribution channels (full report is here).
Similarly, start-up accelerators that run dozen of high-growth startups, through an intensive mentorship program that results in a demo day to raise lots of money (as pioneered by Y-Combinator and scaled by Techstars), may work relatively well in emerged markets, but have not been particularly successful in Africa.
There are multiple reasons why this labor and capital-intensive accelerator model might not fit. One is that heterogenous access to education, digital literacy and internet creates a significant variance in experience, maturity, sector-choice, team-size and even mind-set of the startups coming into these programs. In addition, paucity of exits do not attract enough funders to create a virtuous cycle of investment and many accelerators (and their start ups) find themselves boot-strapped and frustrated. There are exceptions like: Startupbootcamp AfriTech, Grindstone and AdanianLabs, who focus on capacity development and aspire to create tech ecosystems by using open innovation (below).
Recommendation #2: Understand why Silicon Valley VC model is a bad fit for Africa
Venture capital is a strategy that enables companies with unproven business models to scale rapidly and exponentially (aka hyper-growth) beyond the confines of organic growth, so that they can achieve outsized returns accepting a comparably high risk of failure (“fail fast-fail often”).
There are four core assumptions behind this approach:
- A startup is a venture that can achieve high growth with low (and in Africa very low) fixed-costs or burn-rates.
- VC investing is a high-risk, high-reward approach in which a small number of exponentially successful “winners” compensate for a larger number of “losers.”
- VC investing involves using increasingly large amounts of capital quickly to create the exponential increase in value that drives return expectations.
- VC–funded startups seek to capture consumer markets that are broad and deep with digitally literate consumers that have high purchasing power.
But a Silicon Valley VC model that is designed to support high-growth companies, requires outsized returns that African markets can’t necessarily provide due to capital scarcity, debt load and costs associated with building infrastructure. Pursuing a “growth at all costs” using “spray and pray” strategies where capital pools are shallow and deal flow is scarce, may endanger the viability of these early stage companies.
Pressure to find cash might motivate founders to select the first investor(s) willing to commit rather than those who represent the best values and strategy fit.
Recommendation #3: Context matters. Think post-growth, not hyper-growth. Think ecosystems not industry verticals
It is estimated that economic diversification and the African Continental Free Trade Agreement (AfCFTA) will not only facilitate trade, but will boost the economy by $6.7 Billion and lift 30 million Africans from poverty by 2035. But cutting red tape is not enough, and the digitization and ‘greening’ of the African economy needs to pursue private capital.
This is where reframing our thoughts on Africa and business in Africa comes in.
One of the most important challenges Africa is facing on its path to prosperity is the high costs it is paying over the overinflated perennial risks it is assigned to, irrespective of its improving macroeconomic fundamentals, its global economic standing, and individual countries’ growth prospects.
This perception premium is a ruinous price Africa is forced to pay and it sabotages its sustainable development, unless fairer financing rules are introduced. This is in a time where significantly lower interest rates — negative in real terms — enable advanced economies to navigate the pandemic downturn effectively by extending large monetary and fiscal stimulus, while growth-crushing, default-driven borrowing rates on African assets set the stage for a slowed recovery and a heightening risk of debt overhang.
This offers VC investors a unique opportunity to participate in uplifting the African economy and transform a narrative of risk, driven by infinite pro-cyclical credit downgrades, into a narrative of opportunity and growth.
Beyond extricating Africa from this post-colonial vicious debt cycle and brighten their economic outlook, moving from a hyper-growth to a post-growth model can offer a working investment model that bridges between traditional VC and Impact investment. In this model — the Huber Social Wellbeing Measurement Framework — there is an emphasis on attributing ‘value’ in terms of how much an investment contributes to personal, community and social wellbeing creation, ensuring it is outcome-driven and goal-aligned (below).
Final Thoughts:
Africa is the world’s fastest growing market and is estimated to account for a third of global population, housing 17 of the 20 fastest growing cities by the end of the 21st century. It is ‘leapfrogging’ as seen by a stark rise in tech hubs, accelerators, corporate-startup collaborations and the adoption of blockchain and cryptocurrencies.
For investors my message is simple:
- Invest in African founders, especially women.
- Prioritize rural coverage.
- Study the costs, efficiency and outreach.
- Drive impact and scale by catalyzing partnerships with major purchasers and producers through tech-driven platforms with off-line solutions.
- Use a hybrid of in-person and technology interventions and harness innovators’ data analytics capabilities.
- Build sizable product datasets, currently existing in silos, using decentralized and distributed technologies to promote data sovereignty and business inter-cooperability.
and most importantly, as a doctor I beg you,
Primum Non Nocere — DO NO HARM —
ImpactRooms is the first of its kind, Enterprise Escalator, that prepares African companies for growth and investment at all financial stages.
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