Isolation: a problem for current and future African entrepreneurs

Talking with African entrepreneurs, one of the recurring topics is the difficulty of sufficient funding in seed- or early-stage with internationally acknowledged and well-connected investors. The recently born African digital ecosystem has only a few established venture capital funds, and even these funds usually have limited available capital with a minimal international network.

Understandably, this limited available capital results in a serious constraint in the later stages of funding (Series A and Series B) for any aspiring start-up. The lack of the investors’ international network also means that the knowledge transfer between Africa and the developed tech communities (US, Europe and Asia) is minimal. Last but not least, this disconnect between Africa and the developed tech communities can also limit the exit opportunities of local start-ups by not having the necessary spotlight and the required connections that could lead to a successful exit (an acquisition or an IPO).

The question that is frequently asked by non-African entrepreneurs in these discussions: “Why don’t the American VCs invest in the African start-ups? They have the capital, the network and they could find some worthwhile and cheap deals in Africa that could have some potential even outside the continent.”

US-based venture capital presence outside the United States — the research approach

In answering the above question, I believe understanding what the local ecosystem looks like is crucial. In order to offer a preliminary answer to this question, I have completed a primary research. This analyses the American venture capital funds’ international presence focusing on the permanent offices of these venture funds.

My research includes only seed and early-stage venture capital funds that are registered members of the National Venture Capital Association in the United States. This analysis is solely about technology-related VC funds, therefore medical and healthcare-related funds have been excluded from the analysis.

In analysing where these VC funds are currently present, I have focused only on their office locations that have been communicated on their official websites. Consequently, firms that may invest in Africa but have no office location in the continent have been also excluded.

Africa — complete apathy
As the results show below, majority (71.6%) of the early- or seed-stage technology-focused American venture capital funds have offices exclusively in the United States. Given the size of the market, the relatively similar customer profile and the very high average disposable income per capita, this result cannot be seen as a big surprise.

However, analysing the 38 venture capital funds that have a permanent office outside North America, the result is shocking from an African perspective. Most of the VC funds (76.3%) have some presence in Asia (mainly in China, India or Singapore), almost half of them have an office in Europe (UK, Germany and Eastern Europe are the usually preferred locations). In the last 10-15 years, some companies also opened an office in Israel due to its vibrant and highly innovative local tech community.

Comparing Africa with Europe, Asia or the Middle East can be misleading though. The size of the respective markets, the level of higher education and GDP per capita statistics prove that these locations have unquestionable advantages over Africa from an investor point of view.

Yet the difference between Africa and South America is not significant. In both continents we can find countries with a GDP per capita (PPP, USD) of US$10 000 or more (in Africa: South Africa, Mauritius, Botswana, Gabon and Libya; in South America: Chile, Argentina, Venezuela, Brazil, Colombia and Peru ). In South America, the total addressable market is around 400-million people, in Africa this is above 1-billion — although the countries with biggest markets have relatively low GDP per capita in the case of the latter (e.g. in Nigeria the GDP per capita PPP is around US$3 002 for 2014).

Nonetheless, these similarities cannot be seen in the presence of the U.S.-based venture capital firms. While five venture capital firms have opened offices in Brazil recently, not one has committed to open a permanent office in Africa.

Implication of this isolation

Although this lagging behind the other continents could be seen as a natural consequence of Africa’s current position in the tech world, this phenomena can impact not only the current African digital space but also the future of it.

The limited competition among the local venture funds and angel investors could be seen as an advantage – assuming that you are a venture capitalist or angel investor in Africa. Realistically, the lack of competition, the limited available resources, and the minimal knowledge transfer between the African and American tech communities mean that the technological gap between the regions will widen even further in the future.

All these result in an environment where start-ups do not consider a traditional exit (an acquisition by a large player or an IPO) as a realistic long-term scenario. By giving up this long-term belief, the entrepreneurs will have no other options than focusing on short-term results such as the annual net profit or free cash flow – as this is the only way in which they can make money at the end of the day.

Consequently, this short-term strategic focus can prevent African companies building disruptive, game-changing businesses, and when American investors can’t see outstanding profit potential in a location, they won’t bring their money here. This is the Catch-22 why African start-ups operate on an isolated continent today.

The potential African entry of a US-based tech-focused venture capital firm may fundamentally change the local tech scene by connecting local talent to international opportunities and network. The question is: given Africa’s current risky political, and unstable economic environment which will be the first VC to make this bold, but potentially very lucrative move and when?

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This article by Daniel Petz originally appeared on dpetz.com, a Burn Media publishing partner.