Beyond Investing: Building Fintech Companies and Supporting Entrepreneurship in Africa
As seed-stage impact investors, we at Accion Venture Lab look for passionate entrepreneurs who are both committed to our mission of building a financially inclusive world and have seen massive opportunities in the market — ones they believe they can address with new, innovative business models. But what if we see an opportunity in the market that no entrepreneur (or established company for that matter) is taking on? What if, instead of waiting for the right entrepreneurs to come across the right ideas, we find talented founders ourselves and support them as they build out fintech businesses? Accion Venture Lab has thought a lot about situations like this, particularly in Africa where we often see opportunities in financial services that are not being addressed. To that end, we’re exploring ways to build fintech companies and continue to support entrepreneurship directly in Africa.
Our Interests & Investments: Improving the Access to and Quality of Financial Services
Accion Venture Lab’s mission is, quite simply, to unleash startup led innovation in order to increase the quality of and access to financial services in underserved markets. We were set up in 2012 to provide seed funding and management support to promising startups. We believe startups are nimble, hungry, and able to innovate in ways that existing financial institutions often are not. Venture Lab has invested in 24 startups worldwide, and our portfolio companies cover a range of areas — from tech-enabled lenders that extend loans to consumers and small businesses (for example, Umati Capital and Kopo Kopo operating in Kenya); to companies using new forms of data to assess creditworthiness of customers with limited to no credit history (for example, First Access in Kenya and Tanzania); and to companies working on other gaps in the market including insurance, savings, payments and beyond.
Challenges & Opportunities in Africa
I see a lot of excitement around tech entrepreneurship across Africa. Everywhere I go — from Nairobi, Lagos, Accra, Dakar, Johannesburg and beyond — I am in awe of the passionate entrepreneurs I meet who are willing to build and experiment with new ideas. As an investor, however, finding investment-ready companies isn’t always easy. There are two reasons for this. First of all, there is still a dearth of strong founders with the business acumen, technical skills, and market relationships necessary to build successful financial services businesses. A lot has been written about the reasons for this already: Entrepreneurship is still culturally not as well-respected as jobs in government, banking, or at multinational companies; starting a business is too risky for those individuals who have the capabilities but not the capital to bootstrap themselves; and, finally, there are too few success stories of African fintech startups that have “made it” to serve as inspiration for others. These stories are what could entice talent by showing how rewarding, lucrative and exciting starting a business can be.
Secondly, we have found that many of the entrepreneurs starting businesses today are not addressing the biggest opportunities in financial services. There are exceptions of course, but oftentimes startups are focused on a handful of solutions already in the market. Those businesses may be onto something, but more often the result is copycat companies focused on innovating around the periphery of existing offerings instead of addressing much larger opportunities yet to be tackled.
A Company-Builder Approach
These two challenges — of finding the right entrepreneurs and of building business models that address opportunities in the market — have led Accion Venture Lab to explore a “company builder” approach: we could identify and validate promising fintech business models in a specific country, recruit and incentivize founders to adapt/build businesses from the ground up, and then support those teams using our team’s expertise in financial services.
For example, we are exploring two opportunities in West Africa. One is to build a tech-enabled supply chain lending company that uses the data and relationships of fast moving consumer goods (FMCG) companies like Unilever, P&G and Nestle to extend working capital to the hundreds of thousands of small retailers distributing their goods. These small businesses aren’t able to access funding from traditional banks. As we’ve seen in Latin America, retailers can use that capital to finance more inventory for their stores, meaning more revenue for both the retailer and the FMCG company. In addition, we’re exploring an inventory finance model targeting the growing number of small merchants selling on large e-commerce platforms. These merchants are also not being served by financial institutions today. As we’ve seen with similar models in India (Lendingkart, Capital Float), partnering with these e-commerce platforms provides access to verifiable data on a merchant’s transaction history and consumer reviews that can be used to build a strong underwriting model. We believe there is significant opportunity for these businesses in West Africa and are eager to find founders with passion for the ideas and relevant experience to make them a reality.
The “company builder” approach would go beyond the work of a typical accelerator or incubator. We would target the business models we’d support, and find experienced individuals to come on board to run them. This model isn’t completely new — a similar approach is currently employed by Rocket Internet, probably the most familiar company builder operating on the continent. Rocket Internet has built 37 companies around the world. Its Africa entity, Africa Internet Group, is now Africa’s first ‘unicorn’. Similar to Rocket, we would focus on a well-defined vertical (e-commerce) and have substantial expertise in that space. We envision the founders driving the strategy as well as the execution for their businesses — these fintech models will require thoughtful leaders to adapt them to new contexts. In return, we believe that these founders must be incentivized by more than just a salary, including a majority stake in their businesses up through a seed or Series A round.
What Will Be The Next Big Thing?
We believe that supporting African entrepreneurs in building fintech companies would bring tremendous impact to the current entrepreneurial ecosystem and to financial inclusion more broadly, both directly by starting successful companies, but also by creating a demonstration effect to encourage entrepreneurship and innovation in financial services.
We see opportunities to not only build companies but to also empower entrepreneurs and business leaders across the continent. As a starting point, we are especially excited about the potential in Nigeria and Ghana where we’ve been meeting with investors, entrepreneurs and others eager to support the space. We still have a lot of thinking to do around this, and a lot more to learn. We know that finding and convincing qualified talent to develop new businesses in relatively nascent markets is not going to be easy, and we welcome your thoughts and feedback as we explore this more in 2016.