We are now at the 20-year mark into the first chapter of venture capital in Africa. The start of 2021 is a better time than any to take a moment to reflect. What has gone well? What hasn’t? What drives outcomes in early-stage ventures? To answer that question, over the last year, we interviewed 100+ investors, entrepreneurs, and LPs across 15 African nations. We found that the Silicon Valley VC model is largely a mismatch for African realities and is blindly applied too widely. But we also found that startups and funds have been thoughtfully innovating and adapting around those mismatches.
Evolving ecosystem leads to success and exit
And as the ecosystem continues to evolve, there will be big successes. Exits are beginning to happen. Two Nigerian bloggers put it this way in The Chicken or the Exit: The continent only just had its first unicorn. China had its first unicorn in 2010, and it took five years for it to get to five unicorns; the year after that, it had twenty. Ecosystems develop very slowly, and then all at once. “All at once” could arrive in leading African markets by 2030, but there is work to be done to get there at all. In an effort to further honest dialogue, I humbly offer some ideas for each stakeholder group in the format of actions to keep doing, stop doing, and start doing.
As the saying goes, “follow the money.” It all starts with the Limited Partners (LPs) who invest significant resources into venture capital funds. LPs can keep investing courageously into the ecosystem. However, LPs can stop expecting risk-adjusted market-rate returns on short time horizons. Thinking beyond the traditional metrics, such as financial return over a fixed 10-year term, will enable more aligned capital to reach the best companies. LPs can start dedicating a small percentage of their assets under management to exploring new structures and models, such as revenue-based instruments, permanent capital vehicles, different carry structures, and closed funds with optionality to convert to longer-term structures.
General Partners (GPs) are often stuck in the middle. They must attract LPs to invest in their funds, and thus are constrained by LP global expectations. However, as they work to invest in entrepreneurs, the “on the ground” realities are often more challenging than expected. GPs can keep being creative about making first funds work by generating revenues from grants, concessionary capital, and building other revenue lines. GPs need to stop relying on others to lead rounds and build the internal capability to lead or co-lead. GPs — especially well-established ones with track record– are best positioned to start new funds with innovative structures using new models.
For entrepreneurs and incubators
Entrepreneurs can keep grinding, learning, pivoting, and adapting. However, they can stop taking money with unacceptable strings attached. It is a tough decision, but sometimes no money is better than misaligned money. Also, stop measuring success by funds raised. Start investing one hour a week to learn more about investing “hot spots”: stronger governance, the fundraising process, fundraising options, and investment due diligence.
Incubators can keep up-skilling great talent in cohorts. However, incubators can stop thinking about training as knowledge transfer. The transformative part is unlearning mindsets. Also, incubators can start onboarding more mentors with entrepreneurial experience. The corporate types are good for technical know-how, but not relevant for the daily decisions entrepreneurs face. Incubators can also differentiate further, focusing on specific niches of entrepreneurs. Angel networks are an important part of the ecosystem—keep investing in groups and learning from one another. There are more and more groups popping up all across Africa. There are even “accelerators” specifically to upskill angel investors. Angel groups do need to respect the entrepreneur’s time and to stop saying “no” to entrepreneurs by not saying anything. Start working on ways to de-risk early projects and to encourage investment by considering co-investment funds or first-loss vehicles.
Governments can keep adopting new regulations that facilitate entrepreneurship, lower the risk of capital, and stabilise the business environment. Too often, governments need to stop thinking about innovation as a defensive zero-sum game to be taxed. Start thinking more bottom-up, not top-down. Governments can leverage existing private sector assets and strengths to build upon. Tunisia’s start-up act is a good baseline. Big corporates also have a role to keep building out their corporate venture arms and investing in deals. However, corporates need to stop trying to use their venture arms to steal ideas, intelligence, or tech. Also, too many big corps get complacent and just think about turf protection.
Start thinking about innovation as a core strategy for survival, not as a nice-to-have side programme. All of us can keep being clear about what we are doing and what we are not. We all need to keep building deeper trust, focusing on long-term partnerships, and not “doing deals.” Also, as an ecosystem at large, we need to stop paying too much attention to the hype, click-bait and superficial stories. Let us get to the real, more layered narratives. We can start being more open about mistakes and pivots. We are all learning, and in the end, a rising tide will lift all boats.