Silicon Valley: Invest in Africa, But Do It Differently
I was raised in an American farm town. My perceptions of Africa were a mix between the gruesomeness of Hotel Rwanda and the fantastical backdrop of Disney’s Lion King. To me it was a wild land without structure and organization, and it scared me enough to want to stay far away. Then one day a funny thing happened: I moved there.
My first day on the continent was spent dancing with families draped in white sheema cloth and being fed directly by the hand of a new friend in a gesture to show friendship and love, called gorsha.
As my year of travel unfolded, the old perceptions of Africa dissolved. In their place were the realizations of sheer depth, variety and opportunity of the continent — it was awesome.
I saw humanity’s greatest qualities in action: efficiency in the motorbike driver loading mom, dad, grandma, baby and a bundle of live chickens precariously on the back of his load. Ingenuity, as a broken bus axle swiftly replaced with a freshly harvested tree. Vigorous entrepreneurialism from the street-corner hustler hawking everything from a toilet seat to Beyonce’s new album. I also saw a general open-mindedness and an earnest adoption of technology and 21st century services, suggesting that Africa is rapidly beckoning to the future. The Africa I know is not what you might think.
With an anticipated 3% GDP growth rate in 2016, 65% year-over-year increase in foreign direct investment, the youngest population on the planet with a median age of 19 years and an estimated $1 trillion in consumer spending by 2020, Africa is open for business.
Technological advancement, in particular, puts Africa squarely in the sights of the global investment community. Africa is closing in on 1 billion mobile phone subscribers and its internet usage rate is growing at seven times the world’s average.
Yes, a growing patchwork of entrepreneurs, startups, and innovation centers are coalescing country to country, but the tech ecosystem is in its relative infancy. And while the headline-grabbing stats on Africa’s opportunity are legitimate, they must be understood in context. The continent’s transformation, does not mean that easy or outsized returns are just there for the picking. For Silicon Valley, an investment paradigm shift is essential.
Interested? Here are four things Silicon Valley must do to win big in Africa.
Target investments that nurture talent and build infrastructure
Silicon Valley prizes top talent. Its success stories all started by deploying the right human capital at the right problem, at the right time. The African recipe is no different, except for one thing: talent is scarce. Founders may lack formal employment experience, leaving a gap in professional, social, and problem-solving skills. Poor education levels mean that a workforce may be not equipped with technical skills and likely lacks perspective into applications and global best practices; this includes those with college degrees. Critical business management and interpersonal skills are at a premium. Business management, leadership, and technical skills are all highly sought and retaining talent in an environment where employees don’t trust the value of stock options and will switch jobs for a $500 annual salary bump are founders’ key struggles.
For investors to reap the benefit of African-born startup growth, investment needs to be directed toward talent producing engines. One example, Andela, sources local talent, screened on their ability to problem-solve and think creatively. The company drives them through a rigorous technical leadership and training program, then mobilizes and integrates the talent back into technology companies. The impossibly pent up ecosystem demand for talent means revenue for Andela, while their model serves as a mechanism to build the tech marketplace and capitalize on a under-employed millennial workforce.
If talent is the prized internal resource, then infrastructure is its external equivalent. Africa’s infrastructure limitations present operational challenges, but also affect customer experiences and stymie go-to-market strategies. The World Bank suggests that poor infrastructure curbs business productivity by 40%. Protracted outages, exorbitantly priced power, unreliable network access and a general, political reluctance toward infrastructure spending means startups startups are battling environmental hurdles alongside the already challenging marketplace.
How many pitches have you heard over coffee at Starbucks? Now, what if those meetings required a two-hour commute each way through snarled Lagos traffic? What if your star developer couldn’t join the team because two-year prepaid rent requirements prompted by a housing shortage were financially prohibitive?
While sometimes frustrating, infrastructure limitations do present opportunities for savvy investors. Fairwaves, for example, has launched a shoebox-sized device that seamlessly integrates with existing mobile operator networks to deliver network signals to mobile phones. Costing up to ten times less than traditional network solutions, Fairwave’s products make reliable, rural mobile coverage profitable and establish a mobile network to enable developers to build rich mobile applications for those networks.
This type of technology benefits the entire consumer value chain, from entrepreneurs to operators and customers. Operators’ reach extends to a previously unserved customer base while lowering the cost base of the network as a whole. Customers receive reliable mobile network access and entrepreneurs can capitalize on the opportunity to build applications which are integrated into the network, while leveraging the operator’s investment in billing and distribution.
Mobilize local capital
Despite strong macro signals, the local SME startup community starves for capital while investors wait for the bellwether exit or acquisition to signal that the industry has matured enough for investors to get in the game. The African tech community needs active local investors — and with Africa having the fastest growing high net worth individual market in the world, building an angel investor network seems obvious. But, these potential angels are wary of the risks and potential returns of investing in local tech and instead look to move their new-found wealth offshore.
Silicon Valley can lead the way by committing resources to invest alongside local investors as a vote of confidence and a tool to build knowledge for the African investment community.
But this isn’t about mercenary capital, or knowingly burning cash just to catalyze the market. Silicon Valley needs local investors to act as guides. They know what you don’t about market idiosyncrasies. They understand that Ngozi uses his cousin to make purchases because he doesn’t know how to order online. They know that Gbenga makes calls home at 2AM to save money on airtime, rather than pay for peak rates which are marginally more expensive. They realize that Jimoh won’t pay electronically for goods because he instinctively distrusts transactions online and the merchant to deliver. There is clear need for symbiotic relationships where the Valley commits resources and expertise, and local investors provide the contextual, nuanced perspectives that will make or break deals.
Stop ‘saving Africa’
Global tech companies are serious about Africa. Last year Facebook opened its first Sub-Saharan Africa office and SAP is investing $500 million through 2020 to introduce its technologies across the continent. And yet mention African investment and the global venture community assumes a modest posture. Tolerating lower returns, trumpeting social value and softening expectations on business, process and management rigor does a disservice to the community. To be fair, the intent is genuine. People want to see African-born companies succeed. But well-meaning remote mentors, incubators and even the press, petrified of irreparably damaging the psyches of what they see as a fragile entrepreneurial community may do more harm than good.
Investors need to move past the “made-for-Africa” mindset that has led to the acceptance of sub-par platforms; non-viable business models need to die. Accepting inferiority, regardless of the product or process in question, stunts Africa’s growth. When investors give mediocre African businesses and leaders a pass, they keep the community from learning the lessons that will ultimately seed its success.
Massive global revenue generation potential and major exit opportunities are real. But low expectations condition the tech community to settle. Active investors must be willing to sit across the table from their portfolio companies’ founders — whether from Europe, the US or Africa — and discuss target benchmarks, systems improvements and effective execution irrespective of their local geography.
Invest differently
Boil Silicon Valley’s investment approach down and you get this: ride the momentum and look for a few big hits. Of course they also know that the potential of any one company exploding is small. But spread the wealth and hit the next Google, and you just need one. Africa presents a thornier challenge. The investor landscape isn’t as dense and in many cases talent isn’t as mature. Investors will most likely be on the hook for future funding rounds, necessitating a level of hands-on commitment and oversight not seen in more mature markets.
The ecosystem realities that VCs have come to expect in Palo Alto, Seattle or New York are luxuries in Africa. Communities are competitive, not cohesive. There isn’t a preponderance of superstar technical founders. Administrative underpinnings of a company — HR or legal activities, for example, may be entirely ignored. The odds may scare some off. But these risks get priced in ways not seen in developed markets. For the ambitious few who are willing to labor alongside founders and co-invest and partner locally, the upside is enormous.
The rise of the tech-enabled, digital economy is underway in Africa and Silicon Valley has a role. This isn’t obligatory nor a passing fad or distraction. This is a chance to shape and capitalize on the world’s final frontier market, but it needs to be done right to realize returns.
After that first trip in Africa, I knew this would become my home. Since then, I’ve worked hard to understand the complexities of the continent and to capitalize on opportunities across the investment landscape. At Singularity Investments we are taking advantage scalable opportunities in the digital and technology infrastructure space in Africa. We recognize the benefits born out of working with global partners to develop a local tech ecosystem, which benefits both investors and businesses. The time is right to expand efforts between our communities, and dialogue at the Global Entrepreneurship Summit is the perfect first step.
About Singularity Investments
Singularity Investments is a private investment vehicle led by one of Africa’s most prominent and successful entrepreneurs, Issam Darwish, Founder, CEO and Executive Vice Chairman of IHS Towers. Singularity’s business strategy involves investing in technology, media and telecommunications companies, with a special focus on early and growth stage disruptive technologies. Singularity has a highly experienced board and management team that has a proven track record in Africa and North America.
Visit www.singularityinvest.com for more information.
