Africa’s Early Stage Investment Challenge – Solved?

Africa’s Early Stage Investment Challenge – Solved?

According to Quartz, African startups raised a record $725.6 million across 458 deals in 2018, writes founder of Africa Business Angel Network, Tomi Davies.

While the exact proportion that came from Angel investors is unclear, it’s still particularly impressive considering early stage investment is relatively new on the continent and as our research with the World Bank last year found, 70% of African early stage investors have been funding startups for less than 5 years.

Through our work at the ABAN , we’ve been tracking and monitoring the growth of angel investor groups supporting African entrepreneurs for the last few years and there is absolutely no doubt in my mind that Africa is developing what potentially could become the most vibrant and innovative early stage entrepreneurship ecosystem on the planet.

Transformative Factors

The first thing to appreciate is that Africa is urbanizing faster than any other region in the world, with our cities gaining 24 million people per year. This puts the predicted number of Africans living in cities up to 187 million within the decade. It’s a well-known fact that Africa currently has 60% of the world’s unutilized but arable cropland, as well as the world’s largest reserves of critical minerals including vanadium, diamonds, manganese, phosphate, platinum-group metals, cobalt, aluminum, chromium, and gold.

In addition, digital penetration of the internet through mobile phones (smartphone ownership in Sub Saharan Africa will reach 500 Million by 2020) is transforming the entire business landscape of the continent. From finance to retailpower to health caretransportation to education all are becoming tech-enabled in one way or the other. This combination of factors are all transformative in nature with the single biggest contributor to Africa’s future development that I personally find most exciting being the young working-age population andgrowing labor force expected to reach 1.1 billion by 2040 surpassing China and India. Although there are no African companies in the Fortune 500, there are currently over 400 African companies with annual revenues exceeding $1B. African companies grow faster and with more profits than their global peers and 2018 saw 30 African startup ventures joining the $5M Investment Club of ventures on the continent that raised over $5 million in funding in the year.

Investment Destinations

With 50% of middle class African citizens living in the top 18 cities, per capita consumption in urban areas 79% higher than country average and just 75 cities in Africa accounting for 44% of total consumption on the continent in 2017 it is easy to understand why African cities, are Africa’s market.

Lagos and Cairo top the continent’s population with over 20 million inhabitants each, making them definitive markets in their own right. Kinshasha with over 13 million people typifies the sprawling African city while Luanda, Nairobi and Mogadishu, each with about 6 million residents account for another 19 million Africans. Abidjan, Accra, Addis Ababa, Alexandria, Casablanca, Dar es Salam and Johannesburg with over 4 million people each house another 30 million.

Early stage investments in Africa are also city-centric, so as the African Early Stage ecosystems experienced a 300% leap in total funding and 127% increase in number of deals last year compared to 2017, Johannesburg, Cape Town, Lagos and Nairobi remained the top investment destinations. Even then, Nigeria outperformed all other locations with a total of 136 deals. South Africa wasn’t far behind with 107 deals, and Kenya was third with 73 deals. Other destinations for investors were Cairo, Kampala, Accra and Tunis. In total, 30 startups raised individual rounds higher than $5 million in 32 deals valued at $626.9 million.

So, the question is, to which industries did this funding go? The biggest opportunities on the continent as determined by investors were Money (Fintech) $284.6M, Power (Cleantech) $143.5M, Consumers (eCommerce) $97.7M, Education (Edtech) $32.3M, Food (Agritech) $20.2M and Health (Healthtech) $15.3. Investment in others like Transportation (Ride Hailing) and Entertainment (Sports & Film) are also on the rise.

In addition to this phenomenal increase in funding available to startups in the African early stage tech ecosystem, global leaders in technology are taking notice. Following the success of ccHub in Lagos, Nigeria, iHub in Nairobi, Kenya and Jorn Lyseggen’s Meltwater Entrepreneurial School of Technology (MEST) Hubs in Ghana, Nigeria and South Africa, Facebook launched its first African hub space in Lagos in 2018. Both Google and Microsoft have also followed suit setting up their own hubs across the continent, a sure sign of market potential if ever you needed one. According to the GSMA there are now over 400 active hubs in Africa, and AfriLabs the continents largest network of technology hubs has nearly 200 members.

While this is great news for entrepreneurs on the continent who usually have to address the lack of funding, poor infrastructure, dearth of talent, and inadequate access to the technology that they need to grow, there is still a big gap when it comes to capital for getting started. Venture capitalists have minimum investment ticket sizes that can choke the life out of most newborn enterprises and Tech Hubs in Africa mostly have the capacity (not always) to support fledgling startup entrepreneurs with developing their minimum viable products during incubation. Unfortunately, when accelerating startups as they look for product market fit, traction and the growth that would make them viable contenders for the VC pipeline most hubs struggle to access the expertise, experience, guidance and funding required to make that happen.

Angels Arise

Business angels solve this early stage venture challenge by providing funding, connection to business networks, mentoring and advice to startup entrepreneurs building their ventures. When compared to venture capitalists or other institutional investors who typically have investor capital return deadlines Angels are usually more patient and tend to work with startup entrepreneurs longer as they invest personal capital and so do not have the same timeline constraints.

Angel investment returns improve as individuals educate themselves, gain experience and diversify their portfolio. Regardless, investing in startups is risky and the proven way for angels to mitigate their investment risk is to co-invest with other angels as part of a syndicate or network. This is especially true in Africa where notoriously businesses take longer to build and there aren’t many support systems for early stage investors in place yet. That is why I believe the value of local Angel investors on the continent cannot be overstated especially when they focus on development of the city which nurtured their career success be it entrepreneurial or professional.

Angel investment in Africa however is still nascent and although we set up the Lagos Angel Network in 2012, and networks like the Cairo Angels in Cairo, Egypt, Jozi Angels in Johannesburg, South Africa, Kairos Angels in Lagos, Nigeria and the Viktoria Business Angels Network in Nairobi, Kenya have been actively investing and we now have all-women Angel networks like Rising Tide Africa in Lagos, Nigeria and Dazzle Angels in Cape Town, South Africa, more than half the countries on the continent still do not yet have an angel group, something ABAN is working tirelessly to correct.

This year we have already supported the launch of the Dakar Network Angels in Dakar, Senegal; the Benin Business Angels Network in Cotonou, Benin and the Mali Business Angels Network in Bamako, Mali with work going on in other cities to create more city-based business angel networks. By the time we co-host this year’s African Early Stage Investment Summit (AESIS) in November, I expect some more networks to have launched. All this in an aim to ensure that the development of Africa is led by indigenous entrepreneurs supported by local investors solving continental problems. This in no way precludes international investors in early stage opportunities but actually de-risks their participation through the inclusion of local investors.

So, could this momentum we’re witnessing be a predictor of things to come? Will we see angel networks in each major city in every country in Africa? Could angel investment groups become the default goto funders for startup entrepreneurs in Africa? I believe so and hopefully, thanks to our continuous efforts at ABAN promoting a culture of local early stage investment on the African continent, it is something I look forward to writing about in the future.

Tom Davies is an entrepreneur, writer, speaker, mentor, investor and advocate on things Technology, Education, Mobile and Africa.

 

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