Dear African VC, angel: international investors are stealing your lunch

Is there a shortage of VC and angel funding in Africa? Pose the question to entrepreneurs and the answer is bound to be yes. Omidyar’s latest report on African entrepreneurship found that 71% of respondents surveyed in South Africa, Ghana, Kenya, Ethiopia, Nigeria and Tanzania believe that there is a shortage of equity capital to start new firms. African financiers disagree, simply saying that many projects are not fundable.

Whatever the case may be, the International Finance Corporation estimates that up to 84% of small and medium-sized enterprises (SMEs) in Africa are either un-served or underserved, representing a value gap in credit financing of US$140-billion to US$170-billion. So, what’s a startup to do?

Instead of waiting on local investor sentiment to turn, entrepreneurs are looking beyond the African continent for funding. Through online platforms such as Venture Capital for Africa (VC4Africa), U-Start, The Sable Accelerator and AngelList, capital seekers are finding favour with international financiers.

The latest African startup to close a funding round online is Knellen, an Egypt-based platform that allows emerging artists to exhibit, promote and sell their work virtually, and gives art lovers insider access to new talents. The startup’s founder 24-year-old Ahmed Koraiem turned to venture capital community VC4Africa for funding and subsequently sealed a deal with European and African angel investors.

Hesham Wahby, a principle of the Innoventures incubator that fostered Knellen finds that its companies can often secure initial investor interest locally, but that follow-on funding requires a larger pool of contacts.

“It helps to secure the support of investors from abroad who can add additional valuable experience and network. It also gives local investors more incentive to engage local companies knowing they are part of a larger market,” says Wahby.

Some international investors don’t need an invitation. Netherlands-based eVentures Africa (eVA) Fund prides itself on being “the first venture capital firm investing in African SME’s active in digital media.” Since 2010, it has made five investments in African companies with funding ranging from US$100 000 to US$1-million.

Initiatives from abroad have found hotbeds of innovation in emerging markets. The Founder Institute has set up camp in markets like India, Africa, Asia and South America. Italian funding platform U-Start have recently completed their first talent search in an emerging market, showcasing South African startups to international investors in Milan. Silicon Valley-based BootstrapLabs, and Malaysia-based MAD Incubator have partnered to create BootstrapAccelerator Asia, a Southeast Asia-focused tech startup accelerator with a Silicon Valley fast track for its most promising candidates — initiatives like these are farming emerging markets for talent. Not only are they investing in startups that are solving problems in their local markets, they are exporting emerging market talent to the world stage where there is more avid capital and mentorship support.

In some cases local initiatives are working with international organisations to accelerate entrepreneurial growth in ways that local ecosystems cannot. For example, the International Trade Programme (ITP) is a collaboration between BT Global Services and MEDO, which fast tracks entrepreneurial businesses.

Local investors are missing out, but perhaps, for valid reasons. Africa is not Europe, is not the US. Things are different here. The risks, laws, political environment, utility situation and cultural elements are different here, affecting investor sentiment. What looks good on paper to one investor, might look like a high risk, or unfundable venture to another.

It’s therefore important for startups to get matched with the right investors — sometimes those investors reside abroad. But, we’re not letting local investors off the hook.

As Malik Fal, managing director of Omidyar Network Africa told Ventureburn, the lack of VC and angel funding is a serious issue and called the funding spectrum narrow. When considering financing sources like angel or VC to the left of the spectrum, traditional bank loans in the middle, and private equity and listing on stock exchanges to the right, with the exception of South Afica, Fal said that funding options are usually skewed towards the middle.

What needs to change? Fal offered some suggestions.

We need to reinforce the relationships between VCs and Angels, which are adjacent sources of financing in the spectrum. It could be a case of incentivising VCs to place their funding in earlier stages with the right capital guarantees and so forth. It’s also about incentivising high net worth individuals, or just individuals with savings that want to invest, to make angel investments. The type of incentives could be tax related or guarantees — for example if you have a R100 000, you have an opportunity in case things go bust to claim R80 000 back.

There are a lot of underlying factors in the ecosystem that needs to be there for the community to be ready to implement the solutions. It depends on how ready the community is to execute on the solutions.

While emerging markets fumble to become the environments that can allow the next Elon Musks and Mark Shuttleworths to innovate, international investors are stealing lunches left and right.

Whether at private or public sector level, things need to change. Quickly. Africa is bleeding talent.