One-size-fits-all view on Africa and other mistakes VCs make

A one-size-fits-all view of the African market or simply transplanting Silicon Valley startup models on the continent, will doom those looking to invest in Africa, argue venture capitalists active in Africa.

While the African venture capital (VC) sector is growing it’s still hobbled by challenges like a lack of seed or follow-on capital (see this story).

In addition, it doesn’t help that many investors fail to understand that Africa is different from Silicon Valley and that each African country has its own unique challenges.

This is something that irks David van Dijk, the co-founder and director general of the African Business Angels Network (ABAN).

“I keep being surprised there are still people who parachute in from the West and just assume their Silicon Valley model or concept or widget will just take the African continent by storm. It doesn’t just work that way.

“It takes the hard work and engagement and a certain openness and being inquisitive to get even a remote understanding of how local markets operate,” he stresses.

There are still venture capitalists who parachute in from the West and assume their Silicon Valley model will just take the Africa by storm

Venture capitalist Llew Claasen (pictured above) — who together with Vinny Lingham manages SA investors Newtown Partners — raises this as a concern too.

“Nigeria is not at all like Kenya, which is not at all like South Africa or Ghana or Tanzania.

“If it works in one market, there is no guarantee it will work in any of the other major Sub-Saharan African markets, so regional expansion is unlikely — solve global problems, not local problems,” he advises.

Claasen provided Ventureburn with a few more pointers in an email, these are:

• Don’t register your fund as a Section 12J (tax incentive) in South Africa unless you’re investing in property. He says it takes two years to get the fund licensed and almost all of the Section 12J investments made by individuals go into lower-risk property funds, not into VCs investing into startups.
• Institutional investors (asset managers, insurance companies) don’t invest in VC funds in South Africa — no-one is willing to take a risk on unlisted equity that doesn’t have liquidity.
• High-net-worth individuals don’t invest in VC funds investing in South Africa — they’re trying to get their money out of South Africa, not in.
• Don’t try to raise from US investors — they’re scared of the political and economic uncertainty in Africa and they’re not patient for liquidity — rather get your money from family offices in Europe and Asia.

VC takes time, so be patient

Silvertree Holdings managing director Paul Cook advises those looking to become venture capitalists to first run a startup themselves before considering opening a VC.

“It’s easy to think you provide fantastic support to your portfolio, but often the best advice is not strategic: it’s about finding and managing people in a rapidly growing team, and for this topic, nothing beats experience,” he says.

Knife Capital partner Keet Van Zyl’s advises venture capitalists to build sustainable companies first — save the gazelles and forget the unicorns, they will come eventually, he adds.

Venture capitalists should also accept adversity as this fosters innovation, embrace diversity, co-invest more with like-minded angels and VCs and add value to portfolio companies by active post-investment management.

But most important of all for venture capitalists looking to fund tech startups, is not to give up early.

Says Van Zyl: “The business model of venture capital is hard and takes time, so hang in there”.

Read more: VC is growing in Africa, but sector still hobbled by lack of follow-on and seed funding
Read more: African tech startups raised over $1.2bn in funding in 2018 – Partech report
Read more: African funding figures – what’s the real number? [Opinion]
Read more: Are these the 10 biggest disclosed African tech startup deals of 2018? [Updated]
Read more: Are these the biggest disclosed VC deals in 2018 involving SA tech startups?
Read more: Weetracker African VC report raises questions on definition of tech startups
Read more: Tech startup site Disrupt Africa mum on how it collects data for $150 reports [Updated]
Read more: AfricArena predicts funding raised by African startups in 2018 will crack $1bn

Featured image: Newtown Parnters managing partner Llew Claasen (Supplied)