Why do African startups promise such huge potential for investors?
Poor access to capital has continued to choke enterprise and small business prospects across Africa. To make a bad situation worse, the banks are not eager to provide capital to startup businesses. They are too focused on businesses with proven credentials to bother about 'big hairy business ideas.' Just for the record, Google, Facebook and Twitter were once big hairy ideas.
In the US alone, more than $50 billion is invested annually in small businesses and startups by Angel investors and Venture Capital firms. There is evidence of a widening gap between potentially profitable business ‘ideas’ and available investment capital in Africa. Only the savvy investor will successfully adapt to the huge risks and reap the enormous rewards of Africa’s untapped startup investment market.
Africa is awash with young talent and ideas that have the potential to change lives, countries and maybe the world. The combination of a large pool of educated young people and inadequate formal employment opportunities is breeding entrepreneurship and creativity across Africa.
The banks, which remain the traditional and most influential sources of capital in Africa, are increasingly reluctant to support startup businesses. Most times, requirements such as collateral and guarantees are clearly out of the reach of most startups and, in the end, many of these businesses never really start up.
With restricted access to capital, many of these ‘would-be’ entrepreneurs lose their dreams and revert to tuning up their resumes in a bid to struggle for limited employment opportunities – and many end up working at jobs they clearly have no burning passion for. Up to 90 percent of African ideas never become real life businesses.
In spite of these odds, some promising African startups have received startup capital and have achieved amazing success. We’ll look at a couple of these innovative ideas that received the crucial lifeline they needed to grow to the next level.
Some African startup investment success stories…
Iroko TV was a startup business idea focused on transforming the poor distribution system of Nollywood, Africa’s popular and most prolific movie industry. With roughly 40 films produced per week, Nollywood has become a global and cultural phenomenon, adored by millions in Africa and across the Diaspora.
Despite its international following, most Nollywood movies were largely distributed via physical compact discs. Jason Njoku saw an opportunity to expand the reach of these popular movies by distributing them through the internet. After his amazing success sharing these movies through a Youtube channel, IrokoTV was born. Today this platform has catalogued more than 5,000 Nollywood movies online and attracts more than 10 million page views every month.
Following this spectacular success, Iroko TV attracted nearly $10 million from Tiger Global Management, a New York-based private equity firm. In July 2012, it got an additional investment of $2m under a Swedish-based hedge fund-backed arrangement.
In May 2013, Jason Njoku and Sabastian Gotter, both co-founders of Iroko TV, founded SPARK, a one million dollar angel investment outfit based in Lagos (Nigeria) and dedicated to funding and helping young tech and internet startups. The firm has already provided seed capital (between $30 – 75K) to fifteen startup companies. The companies in its portfolio include online fashion and drug stores, an online social-based borrowing service and a photo stock website.
M-Kazi is another amazing success story on the amazing potentials of African startups.
M-Kazi (Kazi is Swahili for ‘job’) is a Kenyan mobile recruitment service that allows job seekers to get information about available job vacancies and helps employers to target the right talents. MKazi’s SMS-based information service can be used on basic mobile phones with no internet capability which are still very popular in many parts of Africa.
The company, founded by Nancy Wang (far right) with co-founders Lino Carcoforo and Mem Maina, has been attracting a lot of interest from foreign investors; the most significant of which has been the investment by Jerome Kisting, a Canadian angel investor. The seed round which closed in late 2012 is believed to have raised thousands of dollars for the new venture.
MKazi has raised US$ 100,000 to date and is looking for an additional US$ 350,000. Using launch pads like Demo Africa, the three founders hope to get exposure, strategic partnership and mentorship that will be crucial in the long term success of the business.
Market Opportunities for investing in Africa’s Startup businesses
Startups in agriculture, technology and several other growth areas in Africa can be sources of significant return – and risk – to an early investor. Although more than 90 percent of startup businesses fail in the first five years, many that survive turn out to be incredible successes.
In search of higher returns, more foreign investors are targeting businesses with high growth potential in strong emerging markets like Africa. With the increasing difficulty to access startup capital from banks, African entrepreneurs are looking to informal sources such as close family and friends to finance their businesses. Venture capital and angel investing are still relatively undeveloped sources of capital on the continent.
The major benefit of investing in startup businesses is the immense potential for huge returns. There are very few other investment options (if any) that can provide the kind of returns that startups can. On the other hand, there can be significant risks in investing in startups in Africa given the challenging business environment and poor legal structures for resolving business disputes.
However, there are effective strategies investors can use to limit the effects of these risks and challenges. We’ll discuss these in detail in the next section. One of the popular places on the internet to find start up investment opportunities on the continent is VC4Africa.
Success tips – How to invest in African startups the right way
- Invest in an entrepreneur you can trust and believe in – At the early stages of the business, the qualities of the entrepreneur are a major determiner of how successful (or not) the startup will become. Does he/she have any relevant experience/technical skill in the business area? Is he/she passionate, persevering and determined to make the business succeed? It is important your investment decisions are not clouded by sentiments or pity. The consequences of making a wrong investment decision are real and can be very harsh.
- Before committing any capital, investors must understand the nature of the startup business and how it will make money. A lack of this knowledge is very likely to lead to friction, mistrust and controversy much later in the investor- entrepreneur relationship. No matter how passionate and high-sounding the business idea might be, if it will not make money, it’s just not worth it.
- Start your investment with little amounts. As a popular African proverb goes, a wise man would use one feet to test the depth of a river before going in with both feet! Like every sound investor would, it is always wise to first invest little amounts and increase your investment as the business becomes more promising. This low risk approach allows an investor to cut his losses early in the investment journey and helps to identify a bad situation before it gets worse.
- The terms of your investment must be clear from the start – Will you be a lender to the business and expect your capital to be paid back with interest? Or will you invest equity and be a co-owner in the venture? Most times, it is preferable to ask for an ownership stake in the business and be part of the startup’s long term success. Most startups will likely require up to one or two years to stabilize before profits start rolling in. You need to consider the different investment timeframes before you get in.
- Offer to play an active role in the business – Especially in Africa, too much distance from the business may prove to be disastrous for the investor. Investors must not rely entirely on reports from the entrepreneur and must try to see the business in action for themselves. Providing guidance and constructive criticism is also very important for the business and your investment. This usually sends a clear message to the entrepreneur that you have a genuine interest in his success (and your investment too!).
Some things you should consider before investing in startups…
Given the knowledge and skill requirements for any investor interested in investing in African startups, it is important that investors have a sound understanding of the business landscape, consumer trends, government policies and many other factors that may affect the business in the short, medium and long term. African countries differ in their characteristics; you will have to do a proper background check.
As much as the success of the startup depends on the entrepreneur, the investor is also responsible for managing the risks that may affect his investment and future return. Complementing the creativity and passion of the startup entrepreneur with the experience and guidance of the investor is key to the success of any startup business.
Available research shows that only one in every ten startups will still be in business five years from when it started. These are very high odds that every investor interested in this area must consider. However, these high risks are compensated for by huge rewards. Investors must ensure that they are not too exposed to any one startup, country, industry or sector.
Our Top 2 Recommended Books if you want to succeed in startup investment...
Of the hundreds of books written on the subject of investing in startups, these books are our best recommendations for you. They are all best-sellers in their own right and have got a lot of favourable reviews on Amazon’s bookstore. If you intend to succeed in investing in startup businesses, these books are a must-read for you.
We would love to hear from you about your successes, challenges, advice and questions. Do not forget to leave a comment in the section below.
To your business success!