By Eric M.K Osiakwan, Managing Partner, Chanzo Capital
Jumia, Africa’s first tech unicorn started trading on the NYSE at $1.3B valuations with a 75% rise in the share price on the first day of trading; the first African tech venture to do so whose biggest shareholder is MTN Group – Africa’s leading telecom company from South Africa. This listing has been long anticipated and marks a remarkable milestone in the Africa tech startup and investment ecosystem as it is the first “African” billion dollar venture to debut on the New York Stock Exchange (NYSE) . The closest “exit” to this was a buyout of Mark Shuttleworth’s Thawte by Verisign in 1999 at about $600M dollars – a span of two decades between these two transactions. The first was at the beginning of Africa’s digital economy and the later at the inflection point of Initial Public Offers (IPOs) suggesting that after two decades we are going to see more IPOs.
While questions abound about not only the negative performance of Jumia but also its “African-ness” those are not the subject of this oped. Rather the positive elements of what can be used to fix what I called the “zig zag” African investment ecosystem which is significantly different from the global one – an inverted pyramid. Jumia successfully raised growth capital over a decade of operation to expand into 13 African countries after successfully launching in Nigeria with two expat and local founders as the dream team. In the absence of growth capital funds, Jumia was able to raise money from MTN, Orange, Millicom and Goldman Sachs in what was then billed as the most successful growth capital raise. 15 startups have been built by the first 50 employees of the company within that period indicating it’s catalytic effect on the startup scene.
In the absence of growth capital funds, Africa’s investment ecosystem looks like a zig zag instead of an inverted pyramid like all other markets with the Capital Markets (CM) at the top, followed by Private Equity (PE), (a non-existent) Growth Capital (GC), a burgeoning Venture Capital (VC) and fast-growing Angel Investment (AI) scene at the bottom.
According to the Africa Venture Capital and Private Equity Association (AVCA) annual report for 2018, PE fundraising for Africa-focused funds were up to $2.7B from $2.4B (+$300M) the previous year but these numbers are down from the recent highs of $3.4B in 2016 (-$700M) and $4.5B in 2015 (-$1.8B). Secondly, the growth trajectory of PE investments in Africa has also been inconsistent, last year the number of deals rose to 186 from 171 deals from the previous year (+15 deals) but the total value of those deals fell for a third year to $3.5B from $3.9B in 2017 (-$400M). We also see a “zig zag” in PE at the micro level which begs two questions;
1. Did the departure of big global PE firms like KKR, Carlyle and recently Blackstone have anything to do with it?
2. If so, why are more African-owned and led PE funds like Convergence Partners, DPI, and Helios Investments doing more deals while others like IFC, ECP, Actis, Ethos doing more smaller deals than before?
According to Partech Research, 2018 was a monumental year for AI and VC in African tech as $1.163B was raised in total funding, a 108% growth from the previous year. Note that the report lumps up AI and VC with some GC in there. It is important to note the consistent growth from $277M in 2015 to $367M in 2016 (+$90M) to $560M in 2017 (+$193M). AI and VC are gaining serious momentum as observed by Yinka Adegeka in this article at the expense of GC which raises the question, WHY?
Apart from Nigeria and to some extent South Africa when it comes to the tech ecosystem, most African markets are too small for one to gain significant valuation within one market. Africa is a huge continent of 55 “small” countries while the US is a country of 52 states. While the US may be homogenous, Africa is heterogenous hence being successful in one market does not guarantee automatic success in the others for a wide range of reasons from business culture differences to local knowledge and on the ground execution. Hence doing growth investments requires operational expertise and experience from the fund managers to buttress that of the entrepreneurs or at least of them needs to have that.
Secondly, first and second-generation entrepreneurs who are leading the African tech revolution have little to no continent-wide exposure and experience hence they foray into Africa “blind”. Similarly, first and second-generation African fund managers as well as multi-generation US and European fund managers may have exposure to Africa but no operating experience to support the entrepreneurs to grow their ventures, so they also tend to fly blind. Hence there has been mixed results from the few who have ventured because it is like the blind leading the clueless.
Jumia is an exception because they hired “local entrepreneurs” and raised from “local investors” who have both the exposure and experience to help them and even with that the company has never been profitable. Building profitable business in Africa requires local knowledge and deep experience which only entrepreneurs with previous operating experience have. Hence to build a successful growth capital fund one needs a combination of operating and investment experience in Africa and this does not come cheap.
In 2013, I took the job of Geographic Expansion Director at Hubtel (then SMSGH) as a result of my long-standing relationship with the founders dating back to their college days before they started the company. According to them, my entrepreneurs boot camp which they participated in 2003 under the auspices of the Ghana New Ventures Competition (GNVC) equipped them adequately to later launch SMSGH after college. Three years into it the company became profitable to the extent that ten years later they had enough internal capital to expand into Africa, but they did not have the exposure and experience, so they beckoned me to lead them in addition to joining the Africa board. After ten years of becoming the leading mobile value-added service provider in Ghana they were ready to go Africa wide. Within two years of assuming that role (in addition to doing my angel investments and launching Angel Africa List, Angel Fair Africa and Chanzo Capital), I helped rebrand and restructure the business into an African enterprise and lead their foray into Nigeria, Kenya and Cameroon – using our internally generated revenues.
I could only do that because, in my previous life, I acquired the exposure and experience whiles helping build 14 Internet Service Providers (ISPs), Internet Service Providers Associations (ISPAs), Internet Exchange Points (IXPs) and Internet connectivity ventures across Africa from 1998 to 2008. I then moved on to co-found and lead the building of The East Africa Marine Systems (TEAMS) in East Africa – the first in the region based on the Open Access Model I co-authored at Stanford University and later finalized under the auspices of InfoDEV at the WorldBank as a consultant. I would later help build submarine and terrestrial fiber cables in Nigeria and my native Ghana – these experiences of building ventures in African countries would combine with my investment experience attained from AI to position Chanzo Capital (which I manage with my colleagues from my previous life) as the go-to firm for AI, VC and soon GC through our KINGS (Kenya, Ivory Coast, Nigeria, Ghana and South Africa) Fund.
We started Chanzo Capital in 2014 and have invested both capital and mentoring (we call it “mentor financing”) in 16 tech startups; 4 have gone bust whiles 12 are going strong. 3 are profitable while the rest are revenue positive with two at break even. Our focus is to get these ventures to profitability and through our KINGS fund expand them into Africa.
The focus of our KINGS fund is to be the first calling card for African tech ventures in Kenya, Ivory Coast, Nigeria, Ghana and South Africa who want to expand into other markets outside their country of domiciliation. My partners and I would be doing this by providing them with Capital, Community and Capacity as a bundled service from our exposure and experience gained over our collective 45 years of building and investing in enterprises in a total of 45 African countries.
We would be providing growth capacity for our portfolio leveraging our expertise and experience using our community building event Angel Fair Africa which has enabled $23M of investments in the countries of South Africa, Nigeria, Ghana, Kenya, Ivory Coast and Mozambique where it has been held (with one alumnus exit this year).
Without a strong AI community, it becomes difficult for new companies to achieve the necessary traction required to become sustainable in the marketplace. The nascent development of these Angel groups across the continent gives an indication of what the future holds for entrepreneurs with the availability of follow-on growth capital. Through initiatives such as our Angel Fair Africa event and others, we look forward to a more strengthened entrepreneur and angel investment community leading to more successful venture companies to attract venture and growth capital.
With our GC fund we would be able to grow these venture companies into other African markets to be big enough for the PE funds or big corporates to invest or acquire them from us and then take them to the CMs like Jumia – this is how we would be fixing Africa’s zig zag investment ecosystem.