In 2021, we started the Ask an Investor series to help explain why and how investments in companies happen in Africa from the people who make them happen.
This year, I interviewed over 20 investors who shared their thoughts on what investors look out for in founders and startups before investing, the lessons learnt and mistakes made, key trends, and other relevant nuggets.
I’ll be highlighting a few insights from the published interviews here. You may follow the links to read the full version of the interviews.
Zach George: From Wall Street to investing in African startups
Ever wondered what the difference is between investing in public companies or larger companies, compared to startups? Zach George, managing partner at Launch Africa Ventures, has the answer to this question:
“Venture capital is very similar to investment banking. In investment banking you’re investing in listed companies while in venture capital you’re dealing with unlisted companies. I found that the skills I learnt in investment banking can be applied to startups. For instance, while in investment banking, you do a lot of analysis around profitability ratios, revenue growth ratios and leverage margins. In the startup world you analyse a different set of metrics. For startups, unit economics are a lot more important than balance sheet numbers. In unit economics you’re looking at the lifetime value of a customer or the cost of acquiring a customer. Here it’s not just your earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins, but how your EBITDA margins change over a period of time. You look at growth versus churn, you look at your virality coefficient, which is basically about how many other customers are referred from customers onboarded. Unlike in investment banking, startups don’t have much data, so the ability to work with small sets of data is something that VCs really need to get.”
The Cameroon Angel Network: Investing in francophone startups
There are many hurdles to legally investing in startups in Africa, one of which is registering the entity that’ll do the investment. In my conversation with Serge Ntamack, former director of public policy at Microsoft and founding member of the Cameroon Angel Network, he shared a funny moment when the government suggested that the Cameroon Angel Network should be registered as a church. Why?
“We got a very interesting challenge from the government, because people were asking us, ‘If your organisation’s name is Angel, it means you’re probably a church. You should be registered as a religious group, so follow the registration process for churches’,” Ntamack said.
Ntamack went to explain what’s different about investing in francophone startups, especially in Cameroon.
“Cameroon has a dual culture: you have the French-speaking parts, which is the majority of the population, and the English-speaking regions. (Remember, Cameroon shares borders with Nigeria in Adamawa state.)
Notably, the startup scene started in the anglophone part of Cameroon. Why? The government invested in a small training centre that grew into a full university. It became the bedrock of entrepreneurship and an area now called Silicon Mountain. This helped increase the maturity of entrepreneurs and investors in that region.
On the francophone side, however, the available body of knowledge was small; there wasn’t much knowledge about how to build a startup. This is because the francophone ecosystem is a bit closed. Here people turn to France a lot, and, until recently—two–three years ago—there wasn’t much you could learn from France. France was very inward-looking in terms of entrepreneurship and building startups. Although we’ve made progress in the past five years. So the first thing to note about investing in francophone Africa is the maturity of the players in the startup ecosystem.
Next is the market size and sophistication. In terms of market size, Nigeria, South Africa, and Kenya are top in Africa. Whereas, while Côte d’Ivoire, for instance—when you look at basic economics today—is the leading country when it comes to gross domestic product (over $60 billion) and has a population of over 20 million people, its wealth is heavily concentrated in Abidjan, the capital. The bulk of the wealth resides in one or two spots in the country. So it’s difficult to invest in that market.
In general, however, you have to be careful about generalisation in francophone Africa. There are some common threads, but there are some differences among the countries.”
A15: Investing in startups and founders who have something to prove
Sometime in 2023, Bassem Raafat will return to Egypt, his country of birth, where he spent the first 15 years of his life before moving to the UK to study economics.
During our conversation, Raafat, a principal at early-stage investment firm A15, shared a few red flags he looks out for in startups.
“Part-time founders; founders that are trying to start the company on the side while having a full-time job. That’s a massive red flag. Now let me clarify, it’s okay if it’s one or two positions. Sometimes I see a company that has an amazing CTO who has helped them build the tech and is ready to join full-time as soon as they can pay his salary.
“But if you have a full founding team that is part-time, that just tells me that no one has enough conviction on this idea to start doing it full-time. If the founders don’t have enough conviction in the idea, then why should an incoming investor have that conviction?”
On market trends, Raafat wants to see more North African startups expand down south.
“One thing I’d like to add is that North Africa always gets looped into the Middle East, and when founders think about expanding they immediately start talking about the gulf, Saudi Arabia and the United Arab Emirates first. But I’m starting to remind them that North Africa is part of Africa and there’s a massive continent down south that they shouldn’t ignore.”
Angel Network Botswana: Backing companies to help diversify Botswana’s economy
In 2019, a group of business professionals in Botswana and surrounding countries who were wary of the country’s dependence on diamonds, came together to support local businesses with access to capital, mentorship, and other resources.
Mythri Sambasivan-George, an African woman of Indian origin, was one of them. The following year, the Angel Network of Botswana was formed. Two years later, the Angel Network of Botswana has 48 members and has invested over $300,000 in six startups within Botswana and neighbouring African countries.
To help improve founders’ investability, Sambasivan-George and the other members of the Angel Network of Botswana experimented with an idea: mentorship as an investment.
“It is a model that I know has been used across the world. But, again, it’s something we think is kind of new, innovative, and certainly responsive to what’s needed on the ground in Botswana. The mentors exchange their time and knowledge in return for an equity share in the business. That’s something great I hope will take off because it’s one of the catalytic effects I think we need to grow the Botswana startup ecosystem.”
Adaverse: Backing a diverse range of Web3 startups across Africa
The crypto bear market might be biting hard but that hasn’t stopped Adaverse, a $100 million funded accelerator from backing notable African startups such as Zimbabwe-based pan-African freelance marketplace Afriblocks, crypto infrastructure startup Cassava Network, DeFi startup Stakefair and 10 other African startups.
One thing William Phelps, an investment manager at Adaverse, pointed out early in our conversation was that the accelerator is not just looking to invest in cryptocurrency exchanges because the blockchain is more than cryptocurrencies.
“A big problem globally is that when people talk about blockchain, it’s automatically associated with cryptocurrencies. And while crypto is a part of the blockchain, the blockchain is not about crypto. I think the problem that type of thinking causes is that there’s some sort of conflation that is very unhelpful because people assume that the only utility and benefit of blockchain is quick profit from the trading and exchange functionality.
“So a big part of our investment strategy, beyond just being investors, is actually looking for projects that target specific pain points and have real-world effects and grassroots utility.”
Transcendance VC: Impact investing is not charity
By the age of 26, Lin Dejean Yun had built her first business and exited it. She sold her company, a digital identity security for Fintech companies, to the French multinational telecommunications corporation, Orange.
After an illustrious career in investment banking and investing in startups, Dejean moved to Dakar, Senegal, in 2019, and the following year formed Transcendance Venture Capital with her partners.
One fascinating nugget Lin Dejean shared during our conversation is her knack for assessing personalities and interpersonal skills within her startups. She’s created a methodology for assessing the compatibility of a startup team member.
“For example, I can ask an entrepreneur to give me the Myers-Briggs profile of the entire team. From these profiles, I can detect that two employees don’t get along well without knowing the people. Most often when I do this, the entrepreneur is surprised. We then create a management strategy to reorganise the team to fit the phase the company’s at. We can add pet projects to enable people of different characters to work together, and sometimes we even step into the company for a whole day, where we do a day of team building, and we will literally invent games or methods that actually solve the core issue they might be having. For instance, I had to work with a team that was entirely Extraverted, Observant, Thinking, and Judging (ESTJ). ESTJs are very dynamic workers but can be very aggressive.”
MaC Venture Capital: How to do Cultural Investing in Africa
Last year, MaC Venture ramped its investment in African startups and now has a portfolio consisting of companies such as Ajua, Sote, Stears, Identity Pass and Big Cabal Media, the parent company of TechCabal.
Before then, the Los Angeles-based VC firm which recently announced the close of its second fund at $203 million, had invested in about 50 companies.
The thesis behind MaC Venture Capital, according to Marlon Nichols, founding managing partner, is Cultural investing—a concept new to me.
“We call it cultural investing because it’s essentially all about looking at emerging behavioural trends and figuring out which one of those trends to bet on. We’re investing in companies that are building solutions that fit those emerging behaviours.
“Just to give you some kind of context on why we went this way: if you had a crystal ball that helped you decide on investments you were to make today, you’ll be making investments in companies where people and enterprises are going to be spending their time and money in the future.
“Popular culture is essentially a group of behaviours that have become a part of social norms—they become popular. So all we’re trying to do is identify popular culture before it becomes popular culture.”
Hannah Subayi: The gap between anglophone and francophone African startups is reducing
Hannah Subayi loves to identify talent, provide capital and allow the combination create a business that grows over time. She wears many hats which include being the country manager for development finance institution Propaco in the Democratic Republic of the Congo (DRC), a board member of the African Business Angel Network, and a partner at Dazzle Angels, a female-focused angel fund.
During our conversation, Subayi spoke about what investing in the different regions of Africa look like.
“The difference between regions in Africa is a reflection of the economic and social development history. As you know anglophone Africa tends to be a bit more advanced than Arab-speaking and francophone Africa.
“We’re also seeing an improvement in the regulatory environment. More startup investment clubs are being supported by local governments. We see universities putting in place structures to assist students who want to create their own startups. We see VC firms being more active at the seed level, series A, and other levels. Generally speaking on the continent, there is still a lack of sufficient pre-seed funding, which typically is taken care of by the government.
“The quality of companies is increasing everywhere. I’m always happy to demonstrate that even in francophone Africa, you’ll find 5 founders and startups who have better metrics in terms of turnover, number of users, and profitability than in Anglophone Africa.”
Adesuwa Rhodes: “Women don’t need more seats at the table, we need to create our tables.”
It’s a bit ironic that while women run 40% of Africa’s small and medium-sized enterprises (SMEs), female single founders received less than 1% of funding from venture capital (VC) firms in 2021.
Compared to the fact that male single and all-male founding teams received 84% of the funding from VCs in 2021, the handwriting on the wall is clear: female-led startups in Africa remain critically underrepresented and underfunded.
For Rhodes, the big objective of Aruwa Ventures is to empower more women-led businesses.
“I think a bigger objective for Aruwa is that we want to be an example of the magic that happens when women are empowered as capital allocators. We have less than 10 private equity funds in the whole of Africa run by women and possibly even fewer funds run by African women. So I’m very passionate about telling that story because as you invest in more women as capital allocators, there’s a natural trickle-down effect to women in our portfolio.
“The increased gender diversity that happens in our portfolio enhances the profitability of our businesses and enhances the returns of our fund. We’ve now seen so much research from Harvard and BCG, that talks about the improved performance of female founders and the enhanced returns profitability of gender diversity in executive management teams and founding teams. We’re really just trying to showcase the competitive advantage of having women as capital allocators in a market of very limited competition, where we can invest in those that are overlooked on top opportunities.”
Factor[e]: De-risking startups for other investors
Factor[e] has invested in about 23 companies over the last five years, an intentional approach that speaks to the commitment to make a much smaller number of bets on startups and spend time and effort with them.
In doing this there are red flags it looks out for, Amanda Delcore, Director at Factor[e] shared with a few with TechCabal.
“Husband-and-wife founding teams. The thinking behind this is that building and leading a startup is challenging. I think a CEO or an entrepreneur needs a support system—whether it’s family or friends—that’s outside of their work bubble.
“In addition to that, it’s important to point out that we as investors need to be conscious about the human aspect of running a startup. For example, I once spent about eight months with one of our portfolio companies (60 Hertz) as a product manager, just because I wanted to understand their day-to-day activity. Doing that gave me a better understanding and appreciation of the amount of effort and time that’s put into the companies and the pace at which they operate. As an investor, I think you can dream all you want about the long-term vision of the business and where they should go and what they should do.”
Fadilah Tchoumba: Helping African SMEs and startups build investable companies
Fadilah Tchoumba is the secretary general at the African Business Angel Network (ABAN) which has 60 member networks with over 1,000 early-stage investors, in over 40 African countries and the diaspora. She’s also the managing partner at Amzil, a management consulting firm that helps small and medium enterprises (SMEs) in West Africa.
In our conversation, she stressed the importance of startups and SMEs focusing more on becoming attractive to investors first before seeking capital.
“Amzil was contacted at the beginning of COVID by a Ghanaian automobile company that made between $1–2 million turnover per annum.
“The CEO had said that he’d like us to work together because he wants to raise money. After talking a bit more, I pointed out that that the key to unlocking capital was ensuring his company was well set up to attract investment. Without addressing some key areas in the operation of the business that are of particular interest to investors it would continue to be very difficult for him to try and convince financiers to back the company even though they had an impressive historical turnover.
“As I learnt more about his business, I advised him to make some adjustments in his mode of operation and I nudged him to become more transparent with his businesses.
“We worked together for six months restructuring functional areas and helping turn it around. One of the major issues the business faced was that they were holding on to products that weren’t generating revenue.
“As soon as we finished restructuring, they were able to unlock capital from a different partner. And one day, the CEO told me laughing, ‘Fadilah, you were right. Our problem wasn’t capital. Our real biggest problem was the way the company was structured’.”
Acumen: changing the way Africa and the world tackle poverty
Twenty-one years ago, the idea befuddled donors and people in the nonprofit sector.
Jacqueline Novogratz, a former banker at Chase Manhattan and manager of special projects at the Rockefeller Foundation proposed a venture, Acumen, that looked like a philanthropic venture capital fund.
Five years after its launch in 2001, Acumen launched in Africa in 2006 when its Kenyan office was set up. Its Lagos office was later created in 2012.
In hindsight, after deploying $146 million in philanthropic investments and $156 million in for-profit impact funds which have impacted 380 million lives, the Acumen approach to tackling global poverty appears successful by many indicators.
One of the enlightening aspects of my conversation with Acumen President Carlyle Singer was on Acumen’s efforts to use investment as a tool for peace.
“The first time we tried that was a few years ago in Northern Uganda, where we actually created a working facility for an agricultural company that was bringing refugees back and rebuilding the community.
Now we’re doing something similar in Colombia. It’s all about working with communities that have been ravaged by civil war for many years, and where they’ve lost all trust.
Here’s what we do: we create a business joint venture with the community, where we usually own the majority share and teach them how to run the business, usually agriculture. One of my favourite examples is a rice processing plant that was funded by the United States Agency for International Development (USAID) and it wasn’t being used because nobody knew how to run a business. We organised the community and started investing in building the company and teaching them how to run the rice processing plant.
They learnt how to process rice, package it and sell it. We’re still in the early stages, but over time they’ll buy us out and we’ll not get a high return because we’ll be bought out at a very predicted return rate.
What that does to the community is that they end up establishing relationships because doing business with another person forces you to relate with others and trust them. This in turn helps rebuild the social fabric of the society.”
And that’s all for this year! Thank you to all the investors who took the time to talk to me and help others learn more about investing in startups.