Are Venture Capital Investments what Africa really needs at these moments?

 

Retrieved from: Business Elite Africa

Last year November, I had the opportunity to join a round table discussion with Ministers of Finance, Central Bank Governors, top investors, and investment firms in the African continent. Some of the key issues being discussed were the role of private-sector investments in driving sustainable growth across Africa. Private sector investment, particularly VCs has been at the forefront of a new revolution sweeping across Africa fuelled by the vibrant youth population and burgeoning tech ecosystem.

According to Techcrunch, VC funding to African startups in the year 2022 exceeded the $4b – $5b thresholds recorded in previous years. This trend is particularly interesting as Africa is fast becoming the focus for Western VCs looking to explore new promising markets. Yet, this is also not surprising as there are evidently many gaps to be filled in regard to finding solutions and making life easier for the population whose average income has an upbeat in recent years. There is also an increase in the middle-income and upper-middle-income populations translating to an increase in disposable income which means more money to spend on wants.

Judging from the trend of VC money flowing into Africa, it is easy to point out that Fintech startups have gulped the majority part of the share. According to Briter Bridges, fintechs represented 62% of the total VC funding raised by startups on the continent in 2021; the number fell to 38% in 2022 but still maintains its position as the most backed sector. 

The explosion of Fintech is not an African-only issue, but it should be of more concern to Africa because it doesn’t really address the core of the challenges faced by Africans. In Nigeria for instance, 64% of the adult population is already financially included according to CBN. Approximately 80% of these financially included populations reside in the urban areas leaving over 80% of those in the rural areas financially excluded. In rural areas, there can be no true financial inclusion without sufficient mobile and internet penetration, electricity, or quality education, these facts render the financial inclusion mantra of most fintech firms questionable.

Despite the billions of dollars mentioned, Africa is still underfunded by VC money when compared to its global counterparts, being the only continent that raised single digits in billions of dollars last year (2022). The continent’s position amidst its global counterparts speaks to the fact that it is still one of the least lucrative markets for Venture capital investors. During our round table discussions at the Africa Financial Industry Summit, Investors recount how their returns from the African market are far lower when compared to the European, American, or Asian markets. They also stated that exit from these African startups constitutes a big challenge due to the weak capital market.

VC investments in African tech startups have enabled the creation of jobs for the teeming youth population, but at what expense? Startups and entrepreneurs are increasingly tailoring their solutions and business models to attract funding in foreign currencies rather than solve real-life societal issues. Fintech startups tend to have a more proven model to offer faster returns; as such they get more money at the expense of other critical sectors in the economy. Innovation is still far behind in Africa (Most especially in sub-Saharan Africa) with respect to health, Infrastructure, education, property, and real estate. These are the sectors, in which investors want to see innovations. 

In the past, VCs have helped great companies such as Apple, FedEx, Microsoft, and Genentech become household names. They became very popular in the 1990s with total VC investments reaching $17b in the 2000s. All of these happened in countries that have attained a significant level of infrastructural development, high levels of income, stable inflation rates, and low levels of unemployment. 

No doubt VCs are important to the sustainable growth and development of entrepreneurship in any country, but the questions we should be asking ourselves are, Where are the monies coming from? What are our priorities as Africans? Do we have the requisite infrastructure and economic strength to sustain this growth going forward? Are the Tech startups offering true Value that would meet the needs of the common Nigerians?

It is not just about the VC money, it is about the future of Africa and what its priorities are. To address this future, we need to figure out a way to fund African startups with African money, foreign VC monies should serve as extra investments and not the core of our startup ecosystem, that is the only way we can guarantee that profits will be re-invested in the country and not repatriated offshore. Also, governments should not leave the duty of solving societal problems to private businesses. We should be able to have a well-connected intra-city and intercity transport system alongside Ubers and Bolts. In a previous article of mine, I wrote about how funds can be mobilized to fund Infrastructure development.

While VC funds are important to the economic growth of Africa, infrastructure is the backbone of Africa’s economic growth. We have seen and read the stories of startups such as Wala, a South African startup that failed mainly due to poor internet infrastructure, and ORide which failed due to the harsh business environment. While the failure of these businesses might have not been in its entirety a result of infrastructural challenges; frugality, political instability, government policies, and lack of product need have been highlighted as some of the other major reasons for their failures. 

The majority of these failures can be linked to Africa’s unpreparedness or unsuitable business models which in the first place were mostly created to benefit from VC funding. You might want to ask, Don’t other startups fail in other continents, yes they do! In fact, “it is estimated that over 90% of startups fail in their first 5 years”. These failures are acceptable when they don’t gulp millions of dollars that can be channeled into crucial projects that can reduce the potential for failure and improve the standard of living of the people.

The trend of how money is been disbursed by VCs is however changing; founders now attend accelerators and fellowship programs to receive coaching and training on how to build resilient business models and avoid frugality. Models that can withstand harsh regulatory changes and government policies, models that will thrive in the face of inadequate infrastructure, and Models that will make profits in tough situations instead of solving tough situations to make a profit. 

One of the most vital ways to guarantee sustainable economic growth in Africa is through infrastructural financing and concerted development efforts. Africa is clearly lagging behind in that respect, if the continent truly wants to dine big at the VC money dining table with its two-digit billionaire counterparts, it must fix its infrastructure and its founders must learn to be in the business to solve real-life problems.