Investing in East Africa
Africa is on the move! This shouldn’t be news to most of us because with a population of about a billion and significant natural resources, the continent has been growing for a while now. With a fast growing youth population and urbanization expected to drive 50% of Africans to cities, it is an exciting time to be involved in business here. However, many entrepreneurs cite a lack of capital as the main reason they are not growing and reflecting the positive economic outlook of the region. While there is a lot of investment into businesses, a large percentage of these investments go to expat-led African businesses. Steve Odhiambo is an entrepreneur and innovator that has raised over USD 200,000 in funding for two businesses. He started the African Investor Masterclass and the African Investor Club in a bid to get Africans in the diaspora to invest in African businesses and create the next generation of African investors. We spoke to him about his work supporting local businesses and the investors who invest in them.
The African Investor Masterclass
“During the course of my 10 years in Frankfurt, Germany, I was fortunate enough to raise capital for my business,” Steve said, “However it wasn’t as much as I would have wanted.”
Steve had a hard time fundraising despite the fact that he was based in the West where a lot of the capital for businesses currently comes from. He learned that locally based African businesses were struggling even more to raise funding. Because of this, he started thinking about how to provide a solution to this problem.
“This was a problem because there wasn’t enough domestic capital. A big chunk of the capital going into Africa is from the West,” he said, “One way to tackle this is to get Africans to invest in African businesses and I thought the best place for me to start was in the diaspora where I had been for the last ten years.”
For about two years, through the African Investor Masterclass, Steve has been creating awareness on investment opportunities available on the continent to Africans in the diaspora. He offers investor education and allows them to invest in these African businesses.
“In order for more of us to start investing, we need to be equipped on how to make these investments. That’s what the Masterclass does.”
So far, these Masterclasses have happened across Europe. However, because Steve is keen on not only engaging Africans in the diaspora but also those locally based, toward the end of 2018, he held a Masterclass in Nairobi and plans on doing more across the region. The main target of the Masterclasses is both investors and entrepreneurs. Investors need to understand how entrepreneurs think, especially as they build relationships with them, both pre and post investment. This is one of the benefits of the Masterclass to investors — especially those with little investment experience.
The content of the Masterclass is split between three main thematic areas. The first one is the Mindset where they discuss why businesses ought to think global and not just local.
“A lot of entrepreneurs think too small or too little of themselves and therefore can’t see their businesses growing across the borders.”
The second thematic area is Strategy where they discuss in detail the various forms of investment including mergers, acquisitions etc. The third thematic area is Knowledge where they go over all the terminologies, giving them the knowledge and information they previously didn’t have concerning investment and building a business.
The African Investor Club
In line with Steve’s mission to get more Africans to invest in African businesses, he launched the African Investor Club. This is a paid exclusive member club that consists of both entrepreneurs or businesses and investors. Through the club, investors have access to investment opportunities across the continent and entrepreneurs can tap into a wide database of investors. Steve and his team either identify promising businesses to join the club or have them referred from other ecosystem players like Angel Networks, Hubs, Incubators and Accelerators.
“We perform due diligence with the startup then match it with an investor and help structure the deal,” Steve explained, “As soon as the deal happens, we leave the investor and startup to carry on. However, we are going to start offering advisory services and are setting up our operations in Nairobi.”
The team is currently made up of four people spread across Amsterdam, the United Kingdom and Nairobi. Because the network is growing, they are setting up a physical presence in Nairobi and will begin hiring consultants to carry out these operations at scale.
Their first batch of investor matches consisted of four fairly early stage companies with investment ticket sizes ranging from USD 50K to USD 250K. However, they would also consider matching investments as low as USD 10K.
“When we started these Masterclasses in Europe, we got a lot of interest from Africans living in the diaspora looking to invest in Africa,” Steve said, “However, we have come across an even larger group of locally based investors in Africa who have been investing in local businesses for a number of years, which is exciting! Africans investing in African businesses!”
Why More Africans Don’t Invest in Local Businesses
- Lack of Information
One of the main reasons many Africans don’t invest in local businesses is the lack of information, particularly for those living in the diaspora. According to Steve, a huge misconception regarding investment is that real estate has the highest returns. People think it is the safest and most secure form of investment.
“There is a lot of real estate being put up, but there isn’t enough demand to match this supply,” he said, “For example there are so many half empty malls in Nairobi and many unoccupied houses.”
A couple of years ago, real estate was a safe bet because a house or apartment complex was tangible and could be used as security to access loans from banks. However, the smart investor would focus on investing in something that will keep generating more value.
“On average, a real estate investor makes between 25% and 35% return on investment in a year. While someone that invests in a business makes a return on investment of 25% and above — depending on the industry, the kind of investment you make etc.,” Steve said, “For example the early stage investors in Iroko TV (the Nigerian online film market place) made well over 3000%.”
If you invest in a growing business now, it will constantly generate value and this value will increase overtime. We need to look at alternatives to real estate. Every single industry in Africa is set to grow — from manufacturing, production, healthcare etc. Right now is the best time to get in and grow with these industries because there is a lot of returns to be made.
2. Lack of transparency.
Because the right structures and systems aren’t in place in many of our local businesses, they are not as transparent as they ought to be, making investors hesitant to invest.
“Capital from the West usually ends up going into African businesses being run by expatriate founders because they trust them more,” he said, “They trust their background, education and integrity.”
Trust is the bottom line and has to be built overtime. Can African-run startups be trusted to grow their companies the way they need to grow? Can they be trusted to introduce and implement the necessary structures and systems and grow the company to an expected level? Can their integrity be trusted and do they have the necessary competence to take their businesses where they need to go?
“We need to build capacity of local businesses in order to equip them to better answer these questions,” he said, “Like SHONA, a number of players in the ecosystem are doing this with local businesses.”
Steve says local entrepreneurs are skilled, smart and talented but need to be shown how to implement the right structures and systems, how to be compliant and run global businesses. This has to be a joint effort by the entire ecosystem. When this capacity has been built, it not only creates a level of trust across the board, but it also opens the companies up and allows them to grow and scale their businesses. In order for more local investors to invest in local businesses, the local investors also need to be equipped with information. Building capacity will open up domestic capital but the intended outcome is economic growth all over the continent.
Most Exciting industries Or Sectors
Regarding the most promising investment opportunities, Steve thinks we need to understand where the world is going and align ourselves with that, citing Artificial Intelligence as the most promising sector. He ranked agriculture as the second most promising sector with the focus on optimization and efficiency with the purpose of food sustainability and export. Healthcare and Financial Services were the next in line.
*Flowers to Steve for contributing to this article! Steve is an award-winning entrepreneur and innovator. He is the Founder and CEO of ukowapi UG and also serves as the COO of QoL-MA UG. He has vast experience in building a sustainable business from idea to execution. He is convinced that Africans have the potential to create employment for other Africans either by starting or investing in African businesses.
