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Kinyungu Ventures, an East African venture advisory firm has published a white paper, titled Chasing Outliers: Why Context Matters for Early Stage Investing in Africa. According to the report, there is a “wide misalignment between traditional venture capital models and the African market.”
Paper recommends investment structures and approaches tailored to African operating conditions
Tony Chen, Managing Director of Kinyungu Ventures and co-publisher of the report comments on its findings.
“Capital in Africa is scarce and pursuing a “growth at all costs” strategy where capital pools are shallow presents huge risks for companies. We’ve also found that many great businesses don’t fit the typical VC profile, but have tremendous unfulfilled potential”.
The findings of the in-depth report were gathered from 100 Pan-African founders, investors, limited partners across 15 African countries.
According to a press statement by Kinyungu Ventures, a broader approach to institutional investment must be implemented in Africa.
“‘…the research suggests investors should prioritize investing structures and practices that reflect the realities of operating in Africa. This includes adopting more flexible investing structures with longer time horizons.”
Why the VC cut-and-paste method must change
The white paper has revealed that there are numerous mismatches between key characteristics of the Silicon Valley VC and African markets. This, in turn, influences how startups and funds maneuver as well as what outcome they expect and produce.
Tayo Akinyemi, lead researcher and writer of the report provides insight into the key findings and the overall impact on startups.
“In our conversations with numerous investors and founders, it is clear that nuances in variables such as consumer behavior, cultural norms, and business practices impact startups significantly, and being on the ground is crucial for success. While African markets aren’t always able to provide the outsized returns that Silicon Valley typically looks for, in high-growth companies, a more focused strategy here could unlock real gems, as has been proven by some of the startup successes the continent has seen over the years.”
In addition, the report has found that African markets albeit large, are highly fragmented with their consumers limited in purchasing power.
“Furthermore, consumers on the continent are difficult to acquire and retain, yet the sheer size of the African market also presents a real opportunity for profit once the environment is clearly understood,” explains the venture firm.
The report recommends the following for VC funds to change the existing narrative and adjust the current strategy used.
The paper’s key recommendations for funds include:
- Adopting more focused investment strategies, such as investing in b2b companies or cross-subsidizing a portfolio with less risky, steady return assets
- Considering non-unicorn investing models geared at more resilient companies, with returns distributed more widely across the portfolio
- Using flexible structures such as debt or PCVs to accommodate market-level changes, where feasible
- Allowing a longer time horizon for returns, understanding that growth could be slow and difficult to achieve for many companies
Featured image: Cytonn Photography via Unsplash