|Venture capital investment in Africa: Where the IFC is betting its money|
The International Finance Corporation’s (IFC) Venture Capital arm invests in growth-stage companies that offer innovative technologies or business models geared at emerging markets. Olawale Ayeni is regional head for Africa investments at IFC Venture Capital. How we made it in Africa asked him about investment opportunities in the continent and how local start-ups compare to their global peers.
Is it true that the IFC wants to double the value of its venture capital (VC) portfolio to US$1bn by 2018?
I don’t want to go into numbers, but I can say that the IFC will focus on being more aggressive with the venture asset class, particular in frontier markets. The size of the team has increased and we are looking at [more deals on the continent]. We are not just increasing for the sake of it. It is about using equity to really unlock markets… and actually create new markets. It’s more around us trying to push the envelope in Africa to do more.
Any specific sectors or countries where you see potential investments coming from?
Basically we are looking for high-growth businesses that can use technology to enable their ability to scale rapidly. Within Africa there are both large and small markets – but we focus on all of them, as long as the potential to scale rapidly is there. The total addressable market has to be big enough for venture capital to participate.
We look at a bunch of sectors too – but mostly tech and tech-enabled businesses… We spend a lot of time looking at consumer internet technology, such as e-commerce and e-logistics platforms. Consumer internet as a sector is quite broad, but we focus on it a lot. We also focus on education technology. We actually have an investment in a company called Andela, which has done quite well. It was started in Nigeria, then [expanded to] Kenya and has recently launched in Uganda.
We are also focused on health tech, fintech and clean tech. Mobisol is one of our portfolio companies within [clean tech].
In addition to all of this, we also focus on frontier tech. Frontier tech refers to businesses using new technology solutions like artificial intelligence and machine learning – which are coming up in the world. We see an opportunity to apply these technologies to African problems today.
Which of the IFC’s current African VC investments are looking particularly promising in terms of potential returns?
We believe most of our investments are doing well, and that is why we invested in them. We have had some exits which have been good. I think the bottom line of your question, which I will address, is whether you can get high returns in Africa. I fundamentally believe you can get high returns in Africa and the way you get them is to fully understand the opportunity and then source the right team to address a very large problem.
If you are successful there are various ways you can exit – from trade sales (which is very prominent on the continent) to merger and acquisitions (M&As). In Africa, if you are able to scale quickly and solve a large problem, the chances are actually quite high that it will become the only solution available. And once you become the company which everyone goes to, you have a lot of pricing power and value to bring to the table.
In terms of [high-return] sectors, it is still broad. We see a lot in the over-the-top (OTT) sector where people are leveraging the mobile connectivity that has been growing rapidly in Africa for the past seven years. People are building digital infrastructure around that with a lot being quite profitable. We also [see the same] in the e-logistics space, which is fundamentally trying to solve Africa’s supply chain problem. About 80-90% of the retail market in Africa is informal, and the supply chain is very haphazard. So a lot of people are using technology to really disrupt the informal supply chain.
And then there is the education tech space. Africa is a young continent and there are a bunch of players that are leveraging the ability of young people to adapt to technology quickly, and then provide that talent to a global audience. Andela is an example of that and doing quite well. Another example in this space is GetSmarter in South Africa, although it is not one of IFC’s investments. It just got acquired for over $100m. That is an example of a successful exit in Africa.
I could go on and on about different sectors but the overriding notion is that it is all about opportunity at the end of the day, and having the right team to design solutions to solve very big problems in a large market – and tech can be used as a turbocharger for scale.
In your opinion, how do African start-ups in general compare to those in other part of the world?
Start-ups are always different all over the world… But with looking at how entrepreneurs should approach opportunities, the advice I would like to give is that African start-ups need to have a bigger vision and dream more. In my view you are only limited by how big you can actually dream. Drawing from my experience with meeting start-ups from San Francisco, their vision is very big. If you ask what their vision is, they always start with saying they want to change the world.
I think African start-ups are more humble and reserved in the way they communicate their vision. That is the difference I see. But [my advice] is that [entrepreneurs] can start with a small problem, as long as that problem is applicable to a very large market. I can’t over emphasis that enough. There are various asset classes, but for the venture asset class the size of the problem matters a lot. It needs to be big.
So this is a lesson that African start-ups can take from their peers in Silicon Valley?
Yes, from a vision and market [size] perspective, this is a lesson they can learn from Silicon Valley. But there are also lessons Silicon Valley can learn from African start-ups. In my experience African start-ups are ultimately more capital efficient, just given the nature of the capital raising and funding activities on the continent. African start-ups are actually very capital efficient from day one. So that is one lesson Silicon Valley can learn from them.