Seed-stage investing is on the rise globally, accounting for 67% of all venture capital (VC) funds in North America and increasing 19-fold in Europe. According to PwC and the National Venture Capital Association, venture capitalists invested $48.3bn in US startups last year, the biggest level of investment since the dotcom bubble burst in 2001.
But it is not just in the West that these trends can be seen.
For instance, the online funding platform VC4Africa found that the total capital investment in African startups made through the organisation in 2014 was more than double the previous year’s figures.
The overall numbers for invested capital in Africa last year are probably close to $500m when huge funding rounds for e-commerce companies like Takealot, Jumia and Konga are taken into account. And the first half of 2015 offers no evidence that this growth in available funding is going to slow down.
African startups have already seen a spate of funding rounds and, most tellingly, acquisitions. East African solar startup M-KOPA raised $12.45m, e-logistics company Parcelninja $1.7m, and Nigerian hotel booking platform Hotels.ng $1.2m. There have also been impressive exits for Kenya’s Weza Tele and South Africa’s WooThemes.
For VC4Africa founder Ben White, this growing willingness to invest in smaller African businesses is linked to both the quantity and quality of the continent’s entrepreneurs.
“The number of venture applications on VC4Africa has grown 640% in the last three years,” he says. “More important than the increasing number of ventures coming up is to recognise that their level of seriousness and overall quality continues to improve. The increasing scope of investable opportunities has resulted in an increase in investments.”
These investments are coming from a variety of sources. Mobile operators are playing a part, with the likes of Millicom, Safaricom, Airtel and Orange all launching investment funds of sorts. Private equity firms in the US and Europe – such as Helios Investment Partners – are beginning to see Africa as a priority too.
Meanwhile, individual ‘angel’ investors who invest smaller sums, but earlier in the process, are active especially in South Africa, while investment networks are also more common. The African Business Angels Network (ABAN), for example, is made up of the likes of the Lagos Angels Network (LAN), Cameroon Angel Network (CAN), Cairo Angels and the Ghana Angel Network (GAIN).
White says this plethora of investments is increasingly attracted to the high potential, high growth opportunities Africa has to offer, particularly with startups in the fields of e-commerce, clean technology, e-health and financial services. Kenya, South Africa, Uganda and Nigeria are the key investment destinations currently, according to VC4Africa’s research.
On a prayer
A demand for higher yields is partly responsible for VCs switching at least part of their focus to Africa, according to Tomi Davies, who runs ABAN.
“There is an increasing demand by patient capital from the West – and also the East in some cases – to find higher yields than the sub-5% coming out of Euro-Asia in the last few years. With Africa’s now common-knowledge growth of between 6-8%, the challenge for VC funds has become finding great deal flows in Africa,” he says.
Justin Stanford, co-founder of 4Di Capital, which has angel invested in a number of South African startups, says investors are looking to future opportunities even more so than existing ones.
“In the developed world, things are very saturated and quite settled, and what gaps exist are heavily competed for by many startups with lots of funding,” he says.
“It is quite the opposite in Africa. Markets are undeveloped and unsophisticated. There is little investment capital in tech companies. Yet there are billions of people who are becoming consumers and lots of growth. Technology and the internet haven’t yet penetrated deeply at all. This creates a lot of opportunity for those brave enough.”
For Stanford, Africa is the last frontier, with opportunities similar to those in the developed world two decades ago before the likes of Google, Facebook and Amazon “established the internet playing field as we know it today”.
For White, investors have taken note of the “massive potential” to create impact.
“One billion people, rapidly expanding mobile networks, and increasing internet penetration, a growing middle class with increasing spending power, and the continued progress different African countries are making to develop their political, economic and social systems, continues to introduce an increasing number of areas where entrepreneurs can make a real difference,” he says.
On the side of angels?
It isn’t all plain sailing, however, and obstacles to investment in African startups still exist. Davies says Africa and its entrepreneurs lack the education, exposure and structure of their Western counterparts, while the policy environment in most African countries is not friendly to investors.
“The fact that there is a dearth of local investors to provide matching funds, guidance and direction in my opinion is another critical factor hindering the growth of investment,” he says.
Stanford agrees on the policy hindrances, saying regulations and laws need to be liberalised to encourage investment.
“This is the single biggest impediment. Tax incentives for angel investors like in the UK would be a huge boon as well, creating much larger deal flow for VCs,” he says, a view shared by another South African angel investor, Vinny Lingham.
“In South Africa, investor confidence in government and the exchange rate is waning. Also, government policies are preventing foreign investors from actively backing South African startups in a meaningful way,” says Lingham.
According to White, the problem of the so-called “missing middle” persists in terms of funding, though the gap has narrowed. He explains: “Especially in leading markets like Kenya and Nigeria, founders increasingly succeed in raising the first $100,000.
“The challenge now is to reach entrepreneurs operating in other markets, [and] at the same time help the companies grow to a size where they become viable prospects for the larger venture capital funds, impact investors and SME financiers.”
White believes growing the number of business angels is key to this, with investment networks such as ABAN and LAN working to connect and strengthen angel investors.
“These are important interfaces for engaging early stage, high-potential companies, to build up their track records and get them into markets where they can achieve their full potential,” he says.
“Through co-investing opportunities we look at ways to make it easier for high-net-worth individuals to get involved, and to connect entrepreneurs with the mentor capital they require.”
For White, fundraising success is all about density of an entrepreneur’s networks and the quality of their teams.
“Having one or two financing options is not enough for entrepreneurs starting out. The more channels they have to tap into, the greater number of companies we will see achieve scale as a result.
“Entrepreneurs should focus on the quality of their management and team to attract investors. This point is the most important factor for investors deciding in which ventures to invest. ‘Team’ is followed by financial performance and market size.”
In spite of these hindrances, and the lingering idea that Africa is a risky place to invest, a positive trend seems to have emerged. Success stories like those of Jumia, Konga and Hotels.ng will only help to continue this trajectory. And those ahead of the curve and already funding African startups are confident they have made the right call.
“We could not be more enthusiastic or optimistic about where we are today. That said, there is plenty of work still to be done,” says White.