Investing in Africa: A local partner makes all the difference
Our continent’s entrepreneurs are remarkably resilient - motivated to solve crippling problems within their communities and overcome obstacles. And with escalating smartphone penetration, African start-ups are side-stepping the lack of infrastructure to produce world-class, technology-enabled solutions. But translating this enduring entrepreneurial spirit into a global tech business requires the help of a local investment partner with experience in scaling African innovation domestically, regionally, and internationally.
Africa can be daunting for investors. The continent’s start-up ecosystem is as unique as its diverse landscapes. In contrast to more developed economies, African markets typically lack reliable, up-to-date data, which limits the efficiency of traditional analytical approaches to understanding opportunities and risks. Investors still operate on dated perceptions, failing to recognize the dynamic trends that have shaped the continent over the past two decades and into the present day.
Solutions for real-world problems
Much of Africa’s potential for growth is rooted in its problems - the real-world challenges people face daily. The market’s fastest-growing sectors directly correlate with its most significant issues, including infrastructure, health, financial inclusion, safety and security, transportation and logistics, and education. But scaling African start-ups require the strategic guidance of an investment partner with contextual knowledge of the local landscape, cultures, pressures, and unique ways of doing business. Without it, it’s very tricky to distinguish between practical solutions to actual issues and nice-to-haves. An experienced on-the-ground investment partner has the framework to motivate why and how a start-up will work and actualize success across Africa and beyond.
Understanding African entrepreneurs
Markets in Sub-Saharan Africa, especially East and West Africa, are dominated by micro-entrepreneurs trading in an informal economy out of necessity. According to the African Development Bank, 22% of Africa’s working-age population is starting their own businesses (2017). It is the highest entrepreneurship rate in the world. With little to no access to financial services or capital and high levels of uncertainty, these entrepreneurs face some of the world’s toughest business conditions. They are exceptionally resourceful and unfettered by challenges thrown their way - shaped by challenging living environments and the absence of a safety net or fallback plan. They have to hustle to keep the lights on.
However, unlike their counterparts in more established markets, our continent’s entrepreneurs rarely have access to the enterprise educational experiences that shape founders. The world’s top and most established universities are a significant source of ecosystem support for start-ups, from providing opportunities to network and collaborate with multidisciplinary teams to incubating ideas and commercializing intellectual property (IP). In contrast, the majority of African entrepreneurs are motivated by practical experience and often require compassionate mentorship to help shape their businesses over time. And in the absence of ecosystem support, a strategic local investment partner is critical to unlocking domestic collaborations at the start, followed by regional and international networks, partnerships, and capital down the line.
Navigating the finance gap
Access to sufficient capital is vital for early-stage companies to grow, create jobs, and generate economic growth. But access to financing remains a key hurdle for Africa’s early-stage companies - the large majority require more funding than they can access. Compared to more developed markets, start-ups on our continent compete for a significantly smaller pool of capital. In Sub-Saharan Africa, only 19.9% of firms reported having a bank loan or line of credit in 2020 (Global Findex & World Bank database), and over half are cash-strapped.
As a result, African start-ups have to lean on local investment partners to optimize and build leaner businesses that preserve cash. It’s important to avoid comparisons with start-ups in more traditional venture markets where fast growth - fuelled by more readily available capital - has become the norm. Conversely, with slower access to capital comes more tempered growth phases. It gives founders the space and time to create a more sustainable growth framework - one that creates rather than reflects the success of the business. Slow growth means scaling with a framework that is already working and, with a focus on cash flow, is more likely to continue working.
Given how rare and expensive traditional sources of working capital can be for African start-ups, capital is typically secured in exchange for equity or equity-like financing instruments such as convertible loans or SAFE notes. With the guidance of a local investment partner, start-ups can more effectively optimize these investment terms to attract other local and international partners and investors and secure meaningful capital when appropriate.
Legally speaking
Africa’s legal and regulatory landscape is as diverse as it’s challenging, politically and legally. The right local investment partner has the know-how to navigate unique challenges like exchange control, tax, regime change, and indigenization rules like Black Economic Empowerment or BEE in South Africa. They lean into a trusted network of Africa-wide accountants, lawyers, and bankers to correctly structure the business. They also help mitigate local risks and pre-empt pitfalls when scaling into regional and international legal jurisdictions. Ensuring the company remains poised to attract the right partners and investors is vital.
In Africa, this can include moving intellectual property (IP) to foreign jurisdictions very early on. Registering IP offshore not only enables founders to scale across borders regionally and abroad but also protects African start-ups and their investors from political interference.
The extensive venture capital opportunities in Africa are a culmination of three factors - Over the past few years, African venture capital has proved its place as an exciting alternative asset class. International investors have everything to gain from working with an experienced local investment partner to help mitigate risks and optimize opportunities in Africa.
By Kiara Suttner-Tromp , Venture Capital Principal, HAVAÍC.
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CDI Global Africa draws from multi-disciplinary professional experience including corporate finance, merchant banking, consulting, advisory and personal investing gained from global banks to Private Equity Funds. Their corporate finance team advises on private and public middle market transactions with access to a range of different investor types from private equity funds, endowments and pension funds to family offices and Development Finance Institutions.
CDI Global provides middle-market advisory with globalreaching success. Our commitment is to deliver worldclass service built on long-term client relationships. The pillars on which we have built our organization are integrity, excellence, client focus, and partnerships. These core values are at the forefront of every CDI Global engagement, driving our dedication to finding the best opportunities in virtually any industry or location. Our goal is to create a lasting and positive impact through our history of successful cross-border transactions.
