Perception is not reality...

Seeking Alpha in Africa...

Seeking Alpha…

Every year, I aim to spend December in Africa investing quality time with my aging parents and actively engaging with local startup communities. Last year, I visited startups in Zimbabwe, Zambia, Tanzania, South Africa, and Mozambique. The breathtaking pace of change is fascinating!

I am writing to share my thoughts on the development of venture on the continent with a focus on factors driving risk. In the last few years, I have observed a derisking of venture driven primarily by an upgrade in the quality of founders. The new breed of African entrepreneur has an uncanny ability to navigate venture risk while leveraging world-class knowledge to build superior mousetraps.

Africa presents great opportunity for investors with the courage and industry to bridge the gap between perceived and real risk.

Policy, the diaspora & innovation:

Policy: African governments that are seeking economic survival — debt/sanctions relief, new investment for infrastructure — will constantly update policy to accommodate changing allegiances with western and eastern partners. African entrepreneurs increasingly demonstrate outstanding capability to navigate this dynamic political landscape. For instance, due to China's growing influence on the continent, savvy entrepreneurs moved quickly to supplement and/or replace import/export substitution with building value-add, proprietary supply chain relationships with Chinese partners. Entrepreneurs are also mode adept at exploiting changing local economic and social policies.

The diaspora & innovation:  Today, African entrepreneurs returning from the diaspora are innovating on both value chain and economic models of their businesses. Rather than simply import from China and add a markup or copy- paste western businesses a la Jumia, they are mastering foreign business models and relationships then successfully adapting them to local environments. For example, my best friend from high school, after spending time studying the homebuilding and “tradies” businesses in Australia, moved back to Zimbabwe and has established a fast-growing building products business. Instead of finished products, he imports raw materials for construction e.g., aluminum panels and then creates finished products that are distributed on a project-basis via a locally distributed network of “tradies”.

A localized venture model:

African entrepreneurs are adapting the venture capital model to fit local context. Today’s entrepreneurs don’t simply receive investment in USD, trade in local currency, hope for the best, and expect to deliver return out of sheer scale.

Treasury functions: Entrepreneurs are infinitely better at managing sales relationships and fx to avoid selling too many widgets in falling local currencies. Companies are installing robust treasury organizations to innovatively fund operations, sourcing, working capital with local, cheaper capital.

Local partners: While raising from top US VCs or those with a western affiliation remains prestigious, local investors with superior acumen, local cultural context, and strong local connections are increasingly in demand. And there is a growing number of them.

Non-dilutive capital: Startups are also building clever infrastructure to access non-dilutive capital from a plethora of aligned stakeholders with deep pockets – DFIs, Foundations, Churches, ESG folks – that are swarming Africa.

Local LPs: While this trend is still early, I am excited to see a wave of local institutional and HNWI investors taking interest in local fund managers and entrepreneurial ecosystems.

Cross-border action:

Venture investors have thus far favored single markets with large populations such as Nigeria and Egypt. In Tanzania, I was intrigued by the diversity of the ecosystem. Teams working together to in Dare salaam had members from the East African Community, Congo, Malawi, Zambia, Zimbabwe. Cultural and language barriers are being bridged as entrepreneurs innovate collaboratively to build ambitious cross-border businesses. Unicorns of the near future will transcend national boundaries, be led by multicultural teams from different countries working on a common purpose. Locally distributed teams reduce risk because they allow for fast navigation of local context, high performance teams, and speed to scale.

Venture Capital’s role in Africa:

Entrepreneurship and inventiveness have always been at the center of sustainable development in Africa because of the absence of safety nets, infrastructure, and policy required to address important human needs. This resourcefulness is the core of phenomena such as leapfrogging. Venture capital provides the structure, plumbing, and incentives for local entrepreneurs to effectively navigate local political inefficiencies. Most importantly, venture capital is accelerating cross-border collaboration, deep cultural exchange, and knowledge sharing among brilliant, determined young Africans, eager to take the lead in solving their own problems!

I look forward to my next Africa trip in April!