Alternative Models For Early Stage Investing in Africa by Kenneth Legesi, CFA

There are growing amounts of capital coming to African startup ecosystem with 2021 likely to be the largest ever in funding rece. Per the Digest Africa VC Index, there is a 30% YoY growth in deals (469 deals, September 30 2021) and 349% YoY growth in value ($2.37bn, September 30 2021). However, this still represents less than 1% of global venture funding which stood at $288B as of 07/07/2021, per Crunchbase data.

Graph: Digest Africa Venture Capital Index as at 15/09/2021

However, this funding continues to be concentrated in some countries. Egypt, Kenya, South Africa and Nigeria represent 80.65% of funding to startups and 74% of deals by number for all of Africa this year so far. More so, certain sectors also dominate, fintech attracted 66% of funding, other sectors attracting capital include transport & logistics (8.5%), e-commerce (7.7%), emerging technologies (4.58%) and healthcare (4.51%). There is also a gender bias with only 10.5% of funding to female led entrepreneurs.

On Tuesday 21 September 2021, I shared on “New Funding Model for African Innovation” at a webinar arranged by the Global Innovation Initiative Group, Global Startup Awards Africa and The Loudhailer. As we discuss new investment models and frameworks for Africa, we should ask ourselves what is important for Africa, what problem are we solving?

Africa needs more capital to address meet its Sustainable Development Goals (SDGs) targets. To do this shall need different models for targeting entrepreneurs and democratising capital, this means all types of startups need to have an equal and large opportunity to see and attract capital to grow while helping Africa meet its SDGs.

OECD states that “The pre-COVID-19 USD 2.5 trillion annual SDG financing gap corresponds to about USD 500 billion for low-income countries and USD 2 trillion for other developing countries, or respectively 15% and 4% of GDP of additional spending per year (Gaspar et al., 2019[11]).”

The current frameworks for funding at the early stage, while helpful are not optimal, they rely on models that may work better in more mature ecosystems but also tend to proliferate concentration of capital which. This may reflect why certain ecosystems in Africa attract the capital.

Current models also tend to assume entrepreneurs have a good grasp of what their funding needs are and can easily find investors and different sources of this capital easily. The capital also tends to be more readily available for later stages which startups may not reach if not supported at the earlier stages.

The current models seek to identify ‘Unicorns’ due to investor unit economics but what Africa needs are startups that will create jobs that scale and will deliver on SDGs, especially including women and youth while delivering acceptable risk adjusted returns. This will require more blended and diverse forms of capital.

This is why at Ortus Africa Capital, we focus at the pre-seed/seed stage. This is where we believe there is a major need for funding, where we can increase the chances of and create a lot of winners by backing them early in their journey, this also allows us to create investment frameworks that promote equal opportunity for startups to raise capital, more choice for investors to deploy capital and a framework that harnesses local entrepreneur support organizations and ecosystems to add value beyond just finance. From a purely portfolio management point of view as well, investing at the pre-seed/seed stage allows one to more easily build a diversified portfolio per unit of capital available.

The investment models for Africa should go beyond providing just financial capital but also work with the growing entrepreneur support ecosystem across Africa to ensure equal access to funding and support for all entrepreneurs – The Global Startup Awards (GSA) model and the Global Innovation Initiative Group (GIIG) Fund anticipates this. At Ortus Africa Capital we work through collaboration with entrepreneur support organisations across Africa and are glad to be partnering with GSA and GIIG on the same.

Another feature of early stage investment models in Africa is the heavy reliance on foreign capital via Development Financing Institutions (DFIs), global venture capital firms looking for Africa exposure and foreign angel investors. This capital is very welcome, however, models and frameworks need to evolve and extend to work with local capital to bring it to play as well.

This way, foreign investors can tap into the de-risking and mentorship role available from local actors and local capital that act as a layer of extra due diligence, align incentives further for success and in the process ultimately deepens local financial and capital markets by growing venture as an asset class.

Venture remains a very small percentage of allocation within individual and institutional portfolios in Africa versus global peers in spite of its acknowledged role in portfolio.

Africa needs investment models that are tailored for its markets and conditions to support the journey to SDGs!