Investing in Africa

I’m frequently asked ‘why’ I invest in startups focused on Africa, and this post attempts to clearly articulate the reasons this is important to me.

I was born and raised in Mombasa, Kenya and my family has been in here for 5 generations (since the 1850s). I grew up in relative privilege compare to most Kenyans. I remember being about 6 years old sitting in our car when a homeless boy about my age knocked on our window. My father opened the window and handed him some candy, and turned to me and said ‘You are sitting here and that little boy is out there. I hope you appreciate that was luck of the draw and will do something good in your life’. I remember that moment quite clearly even now, over 30 years later.

There are many reasons for my interest in investing in Africa, and I don’t pretend that I invest out of altruism, but I think this is what led to my interest in supporting early stage entrepreneurs on the continent.

I always liked maths and science and studied engineering at university. This experience taught me to approach problems from first principles and think through effective systems. I don’t really have skills that I can directly help people (e.g. a doctor), so I needed to approach the problem space differently. In my early 20s, I realized that entrepreneurship and technology could drive economic development, in a relatively capital efficiency manner. I started building my career in technology, starting at Google in London. After spending time at Index Ventures and learning about venture capital, I realized that, with even small amounts of capital, you could have outsized returns both in terms of value creation and impact.

Technology entrepreneurs create products that improve the effectiveness for people and businesses, and create new jobs with new skills. Given all these benefits I decided to start investing in technology companies in Africa a little over 5 years ago, after ‘learning to invest’ in silicon valley as an angel through my own fund, Musha Ventures starting in 2011. As an inexperienced investor, I tried to maximize learning per dollar invested, as I did not have a lot of capital. I tried to be disciplined by writing investment memos (that no one read), conducting reference checks and completing annual reviews for every company. 

In 2014, there was little capital available for early stage entrepreneurs in Africa and even today in 2020, there is still a deficit of capital available for those who don’t have the right networks. With small investments I am hopeful that I’m able to have an outsized impact on this ecosystem. Even when I don’t invest, I try and give entrepreneurs feedback, be clear on my reasons for passing, or share articles or advice that I think might be valuable to them. 

There have are some early positive signals; my Africa portfolio has rougly doubled in value (on paper), and the companies have created thousands of jobs, enabled new startups to exist, and improved efficiency in archaic supply chains / markets. Despite these early signals, it’s still very early in the life of the venture capital ecosystem in Africa and it’s still unclear if these companies will endure and to have a lasting positive impact on the economic development and people’s lives in the markets. Only time will tell.

My plan, which has remained consistent over the last 5 years, is to continue to think very long term and invest consistently and conservatively in early stage (mostly B2B) technology businesses in Africa and support entrepreneurs doing the hard work along the way. 

Kenya – entrepreneurship, funding, and technology

Note: I wrote this about 9 months ago after spending most of 2015 living and working in Nairobi. I have had enough people express interest in reading my notes that I thought I would share broadly.

Summary

  • I lived Kenya over the last 6 months and left feeling inspired. I believe there is tremendous opportunity for awesome entrepreneurs to build products for the East African market. In particular, I would be well suited to focus on something that bridges the gap between the West and Africa 
  • There is a lot of raw talent, fundamental problems that need solving, and plenty of enthusiasm and excitement around building technology companies
  • There are few excellent company builders / focused executors and a lack of a proper seed/venture firm or decent incubator. ‘A’ level entrepreneurs (silicon valley, local or elsewhere) who have built a successful business are sparse
  • Access to seed and early stage capital is difficult and the fundraising process is suboptimal due to the lack of proper local vc funds which leads to entrepreneurs chasing short term revenue and lack of focus on the long term objective – funding/focus is a chicken/egg problem

Startups and Entrepreneurs

  • Entrepreneurs are hungry, have lots of enthusiasm and there is a plenty of excitement in young talent who want to build something awesome.
  • Startups are solving fundamental issues vs. incremental issues in the west –  access to good education, electricity, health care and phone/internet. There are opportunities to build on top of these solutions or provide additional products and services that are already mainstream in the west – I’m particularly excited about financial services.
  • Entrepreneurs often have their fingers in lots of pies, can be distracted by too many ventures, and seem to be doing too much with too little capital and too few people. This leads to lots of half-formed businesses versus a few well built ones
    • Chasing (short term) revenue is required to grow businesses here due to lack of access to capital for early stage businesses
    • This is partly due to the opportunistic nature of working in Kenya, and more commonplace with local entrepreneurs
  • Entrepreneurs lack role models in the community that they can get mentorship from who can help them with product strategy, marketing, assembling the right team, raising funding, and scaling the business. Some missing pieces:
    • Best in class experience – understanding of what ‘great’ looks like
    • Successful Kenyan technology entrepreneurs – groups of people who have built and exited an excellent businesses in Kenya (or East Africa)
  • Foreign entrepreneurs are met with mixed feelings especially when it’s believed that they are only in Kenya for a fixed period of time. I believe that foreign entrepreneurs can add a lot of value by mentoring local talent especially if they have best in class global experience and hire local teams

Investment – Venture Capital / Incubators

  • Local funds either have very little capital to deploy or strict mandates about where they can deploy their capital because of conditions stipulated by their LPs – leads to defocusing in startups
  • Entrepreneurs looking to raise small seed rounds have a few options:
    • Raise capital from local angels who are not often sophisticated investors and often don’t understand what they are signing up for
    • Raise money as grants or from funds (with LPs who have strict investment criteria) and these come with conditions that often result in unnecessary/unhelpful changes in strategy
    • Go on long (many month) investment trips across Europe and USA which are also usually an uphill battle and often result in small ticket angels vs. larger funds
  • This current fundraising process feels inefficient and distracts entrepreneurs from focusing on their product and company from both a time and strategy perspective
  • Local incubators have unfriendly terms for entrepreneurs and are not run by successful entrepreneurs or investors
    • Incubators typically have many companies vs. a few companies with lots of mentorship and focus
    • $25k investment for 15-25% of the company plus terms which are not founder friendly e.g. ratchets, clawbacks, pushing to early exit
    • Many incubators have shut down their program as they could not find enough quality companies – I think this is in part due to the fact that they were going for scale vs. focused set of companies
  • Grant funding can be disruptive and distracting – companies are incentivised to abandon their vision in the ‘short term’ (to get the grant) and end up building a frankenstein company with multiple focuses which is hurtful in the long term

Working in Kenya – personal learnings

  • Talent gap still pretty significant (orders of magnitude worse than Silicon Valley, which is not surprising) although there is thirst for learning and a no lack of young people who are not afraid to work very hard
  • Mid-Skill workers care more about job protection than innovating and often see change/removing things from their plate as scary – will they lose their job, or not be good at the new thing we need them to do
  • Micromanagement is necessary to make progress – you can’t just email people and expect stuff to get done. There is constant checking in and auditing of people’s work. The level of trust still does not exist at the same level as working with ‘A’ level talent in a place like San Francisco
  • My decision point is between spending my time training, teaching and mentoring in East Africa or or serve this market from abroad (with an already high performing team) and travel back and forth as needed
  • Local:
    • Pros: Close to market – context, people, can really help mentor, market changing fast, partnerships easier
    • Cons: spending time on micromanagement v.s solving hard problems, personal life issues, quality of life
  • Foreign:
    • Pros: Better team quality, valuations, exit options, potential to build global business
    • Cons: not close to customers, coordination overhead, travel burden, missing important things