Small businesses fail at an alarming rate in Africa, due to lack of venture capital and knowhow. New investor networks and incubators aim to change that.
Crowdsourcing ventures based on the model of the Kick-starter business fundraising website, and networks of 'angel investors' and venture capitalists, are springing up from Johannesburg to Nairobi, but raising capital remains one of the greatest challenges to the success of start-ups.
The business environment for small businesses is rough: a 2007 report from the Kenya Bureau of Statistics found that 60% of small and medium-sized enterprises (SMEs) collapsed within just a few months of their creation. Competition within the SME and startup market is fierce, with many people trying to develop similar business ideas.
Banks in Nigeria, for example, are reaching out to SMEs but most insist on seeing a long track record of revenue before accepting to provide credit. Investors also complain that many entrepreneurs lack the training to develop a strong business model and to know how to stand out from their competitors. These advances are not limited to Nigeria but are spreading to the continent's largest economies.
The Kenyan-based Savannah Fund specialises in investments of between $25,000 and $500,000 for tech start-ups in their early stages. It completed work with its first group of young companies, which included a startup each from Ghana, Kenya and Uganda, in June. It took on a new group of entrepreneurs in August.
South Africa has one of the most developed investor networks in Africa. It is home to funders like Ivenfin, which offers seed capital for companies in any sector, and the local branch of the Angel Investment Network, which has nearly 30,000 investors.
Website Thundafund seeks to replicate the success of Kickstarter, the crowdfunding website launched in the United States in 2009 that allows the public at large to invest in new products and businesses. The website's backers are focused on South Africa after its launch in June, but they plan to expand its activities to the rest of the continent over the next five years.
The field is already filling up with crowdsourcing competitors, as the sector's development is still in its early stages.
In South Africa, in addition to Thundafund, there is also Startme and FundFind, while Ghana has SliceBiz, Kenya hosts M-Changa and Nigeria has StartCrunch. For now, there is more money in the long-established networks. Kenyan open-source software developer Ushahidi went to Kickstarter and raised more than $170,000 – its initial goal was $125,000 – in June for BRCK, its mobile internet modem and router.
Technology firms are the focus of many of these new investment structures. The Netherlands-based Africa Media Ventures Fund (AMVF) provided $200,000 to the Kenyan accommodation website Sleep-Out this May in order to help it expand its operations into other African countries.
The AMVF is joined by institutions such as East Africa Capital Partners and the eVentures Africa Fund in the technology, media and telecommunications funding sector.
Cape Town-based 88mph provides seed capital and an accelerator course to help mobile and web entrepreneurs get off the ground. Forums like Co-Creation Hub Nigeria help people whose business ideas combine solutions for social problems with new technological tools. It works with entrepreneurs from the idea stage through capital raising and into business expansion.
Running on empty
Mayowa Owolabi is a technology entrepreneur in the buzzing tech ecosystem in Lagos. In 2010, he and two partners set up a business called Workdey (www. workdey.com) to address the problem of finding competent artisans to carry out repairs and provide other services for the public.
After pooling and investing personal funds and contributions from family and friends that amounted to N3m (about $18,600 at the time), they built and found a host for the website. They sealed agreements with several state governments, local unions and other relevant associations to support the business model.
The site passed through alpha and beta testing phases with good reviews and was set to launch when the promoters ran out of cash.
After trying all they could, including meeting several local investors, they elected to abandon the venture but keep the site live. "We'd approached a lot of people and local investors. One even made us an offer for funding but with the proviso that we'd cede 90% of the company to them and also sign a lock-up agreement for five years during which we would not do any other thing aside from work for them," Owolabi explains.
He also points out that entrepreneurs who studied abroad appear to be the only ones who can attract foreign funding. "Look at all the tech companies that have gotten funding, it's either one or all their founders schooled abroad: Paga, Jumia, Wakanow. Obinna Ekezie from Wakanow schooled in the US, he even played in the NBA [National Basketball Association]."
Changing attitudes
Sourcing startup capital in Nigeria is often a frustrating experience for local entrepreneurs. Since local angels – wealthy investors who often provide finance and advice – and early stage investor networks are still largely undeveloped, entrepreneurs have only local banks and the alliterative combination of 'friends, families and fools' to approach for funding.
While the requirements by the former are often prohibitive, contributions by the latter usually only carry the entrepreneurs so far.
A lack of patient capital is a significant obstacle to the development of entrepreneurship and business ventures. A forum organised in May by the Omidyar Network, a philanthropic investment firm, reported that an estimated 95% of new businesses that are started in Nigeria shut down within one year of starting. Compared to Silicon Valley, where it is estimated that 30% to 40% of startups fail and there is a culture of rebuilding after projects collapse, the harsh conditions that Nigerian startups face is apparent.
However, attitudes towards entrepreneurship are changing. The work culture has undergone a radical change from the 1970s and 1980s when most people sought the security and status of government jobs. More people now embrace entrepreneurship, with globalisation and 14 years of civilian rule helping to reshape mindsets.
The Omidyar Network produced its 'Accelerating Entrepreneurship in Africa' report in April. An entrepreneur who was part of its survey was quoted as saying: "Perceptions are not that negative with regard to failed businesses; at least you tried and can start another business."
Stakeholders are working to find solutions to financing problems. Nigeria's communication technologies minister Omobola Johnson announced in August 2012 that the ministry is working to establish a $15m venture capital fund to provide funding to tech entrepreneurs and developers.
Individuals in the private sector are also establishing new funding ventures. In May, Jason Njoku and Bastian Gotter of iROKO Partners, founders of the Nollywood startup iROKOtv, established SPARK, a company that invests in tech startups and provides them with access to resources to enable them to run smoothly.
Njoku explains that "in Nigeria for start-ups, 50% of your time will be spent doing things which in the West you wouldn't even think of doing: banking, incorporating companies, sorting out internet. These add no value to your business, but you still have to deal with them. So the idea was, let's divorce this non-essential stuff from these businesses and allow them to focus on delivering value."
Tomi Davies, a senior executive who sits on the board of MBO Capital Management, helped establish the Lagos Angel Network in 2012 to provide funding to tech startups. Davies admits that entrepreneurs have struggled to access capital partly because these structures do not exist.
"We don't have funds of funds. We have a few, but not a significant number of private equity funds. Venture capital is just starting, then seed [money], which is the primary level, is virtually nonexistent in any structured way, and that's why it's difficult.
He adds further: "I don't know if it's going to change immediately. We are trying to change it, and I know there are a lot of people with a lot of passion and access working in this space, sort of trying to fundamentally alter it. The prospects are optimistically good, but my jury is still out."
Investors need data
Uganda does not have a very strong investor network of its own. Stephen Kaboyo, the managing director of Alpha Capital Partners, a company that deals with preparing smaller firms to attract private funds, says it is a challenge to channel money towards local entities.
"There is big potential here," says Kaboyo, who arranges private funds in the range of $1m-$15m for SMEs. "But there is a big problem of information and data. If there is a private equity fund that wants to go into real estate, it will find a problem trying to know the top five real estate companies in Uganda today. It wouldn't find that data," he explains.
Kaboyo, also a former director of financial markets at Uganda's central bank, says that many Ugandan businessmen are not comfortable opening up their companies to due diligence. "They have governance issues like poor bookkeeping and weak policies on disclosure," he says.
Uganda's government has tried to step in with some financial help. In 2012, it announced a USh25bn ($9.7m) venture capital fund for young people, which would be channelled through local banks. However, a number of people have com- plained that they have tried to access the funds but failed.
The success of new funding ventures highlights the potential for growth of African startups. With nearly 50% of the more than 500 entrepreneurs surveyed by the Omidyar Network and Monitor Group in Ethiopia, Ghana, Kenya, Nigeria, South Africa and Tanzania turning to friends and family for financing, the arrival of institutional investors and the growth in the number of angel investors could lead to a boom in SME and startup activity in the next decade.
Source: The Africa Report
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