Africa Seed Investment trends to watch in 2014
It’s been a busy 1st full year for Savannah fund as we end 2013 with 10 investments, the 10th is yet to be publicly announced. We ran 2 accelerators in Kenya with founders hailing from Ghana, Uganda, Nigeria and Kenya. Whilst it was a tough year for Kenya with elections, JKIA airport burning and Westgate, we ran accelerator classes that not only attracted great founders/companies, but some great mentors and advisors came from very far to help out.
In September, we expanded the team by adding Malaika Judd as a Principal, and first hire into the fund. She started well helping making the 2nd accelerator a success and will expand to include deal sourcing and helping add value with her strong logistics/transportation experience- check out her first post if you missed it. Long time friend, Vivian Chan, also helped with the 2nd accelerator and Agnes Sokol was great marketing help for the 1st class .
With a 1/3rd of our deal flow in the financial services and ecommerce industry, we launched Afrikoin, a payments and digital currency event focused on Africa where we helped expose to the world some of the innovations important in the financial services ecosystem from mobile money, remittance driven commerce to bitcoin. We thank everyone for supporting us on such a great event. There is great material and research for anyone diving into the African digital money scene. Check back for more organized content in 2014.
So what’s in store in 2014? In past end of years, I focused on tips for entrepreneurs as well as general industry trends around growth of smartphones and ecosystem in general. This year I wanted to focus on seed investment trends in Africa as that part of ecosystem starts to grow. When we first began the Savannah Fund journey, many didn’t think it was viable, now we are seeing all sorts of players joining the ecosystem. Many in the private equity industry say that typically later stage comes first and seed comes last reflecting the risk preferences of investors entering new markets. I wouldn’t say seed investing in Africa is the final piece, but its encouraging to see the scene evolve quicker than we expected.
Here are some of the key trends to watch getting into the next year:
- Corporate venture capital begins to pick up steam but deploy capital slowly with key corporate strategic goals as an investment criteria . We have seen Corporates start to deepen their commitments in working with startups in Africa. You only need to attend a demo day, tech conference or take a trip around the iHub to see the amount of mindshare Tech Corporates are trying to get. Startups need to beware that relationships don’t get too one-sided. There is an argument to be made that corporates play a very important role in startups on the continent, but many managers handing out money have different incentives than other investors. Some corporates will get wiser with their marketing and approach. We should remember that startups should be at the centre with their best interests at heart, not one way business development deals.
- Mobile Operators start to invest in the Africa tech ecosystem via partners or directly: We have seen Millicom and more recently MTN support via investment into the global startup incubator, Rocket Internet. Whilst we have also seen some mobile operators like Safaricom try run their own accelerator like programs/competitions. Whilst I fundamentally believe the largest impact mobile operators can make is to accept open innovation and open up their platforms around billing, mobile money and distribution with an App Store like economic deal for startups/developers- historically this is something we can only wish for vs a reality. The next best thing that mobile operators are doing is trying to get directly more involved in the ecosystem in the race to generate new service revenue beyond voice and text. We can expect GSMA (who opened an Office in Nairobi this year) to take a guiding role in this territory in helping mobile operators get better in working with startups.
- There are more funds being raised than active funds deploying– beware. In Silicon Valley, when you meet a VC, they can quickly start talking about their most recent investments. In general, if a VC has not made an investment in the last 3-6 months, they are considered “out of the game”. In Africa, you need to actually pause and ask if the VC or fund even has capital to deploy at this very minute (this can manifest into a very painful hopes dashed scenario for startups depending on VCs to close their fund). The reality is that the fundraising environment is brutal. One Fund of funds once told me that there were over 200 new funds being raised in Africa at the moment. Many are making tours of the tech hub cities, peaking into companies on the promise of convincing their risk averse investor community to commit. I don’t think 2014 will be any different. A fund can take 2-3 years to put together and many started only this last year, so 2015 is probably the earliest we can expect them to deploy capital. Many have made strong progress including hiring local partners/principals and Associates.
- “Tech enabled” gains more steam than “tech apps“. What does it mean to do a tech company in Africa? Does it mean a photo sharing app? Ecommerce or infrastructure? Increasingly it will mean immediate cash flow/revenue generating or even tech enabled ordinary business plugging a huge problem or unmet need. No need to try emulate what has worked in western markets where developed payment, distribution systems coupled with high adoption and trust. Take the popular taxi ride innovation, Uber, that recently started operations in Africa. If you think Uber is about ordering taxis vs logistics you might make a crucial error in taking the model to Africa. We saw 5-6 Uber clones, many focusing on the app vs the real problem and unit economic of such a business in African cities. We will start to see more funding for startups solving fundamental problems with tech vs western tech looking for an Africa solution. Investors will start to get savvy around the kind of tech problems startups tackle- I expect a less M- [insert noun/adjective] named startups in 2014.
- Accelerator investments start to see pickup, recognized as key talent training and “development” for 1st time entrepreneurs or safe landings for diaspora.We are seeing record number of accelerators being set up globally. Many in Africa are trying to innovate on new models that you can’t really call them accelerators anymore. The key is that many in the development and impact industry will start to take them more seriously as they seek ways to fund local entrepreneurs vs founders who look like them who discovered Africa on vacation or doing aid work. After we did our first investment in biNu, we were questioned whether we were actually funding “African startups”– well in 2013, 100% of our 7 accelerator investments are African originated founders. 9 out of 10 have at least one local founder in the team. Investing in Africa can mean investing majority in Africans. We hope this will continue. I also expect to see more African founders needing landing pads for moving back on the continent to apply to accelerators. For these reasons I foresee 2014 be a year many recognize accelerators as an important ways to get local businesses going. Mentors wanting to make an impact will go help where the problems are as we saw with high participations in the over 30 sessions we organized.
- East and West starts to connect with the South in the hunt for continent wide deal flow. This year we started seeing more investors start to think and act pan Africa. South Africans are taking a look to both East and West Africa. Nigerian investors are also looking East and South. This a healthy trend for more collaboration and to help companies reach Africa wide scale faster. If flight connections reliable and prices were cheaper- this would be accelerating right now- don’t underestimate the impact of a $100 one way flight between Tanzania and South Africa– thank you Fastjet.
- Tech angels begin to emerge from 1st generation Africa startups: In Nigeria, the rise of Spark Capital , founded by a successful first generation tech Entrepreneur , Jason, is very healthy for the Africa ecoysystem. Key lessons, mentoring and local voice will be added to the Nigerian ecosystem. Will we see this trend continue in other Africa countries? There are many success stories out of Kenya that may start to break out and get involved in angel and seed investing in 2014, some also form their own VC firms or join existing firms as partners. The influx of local capital, or capital controlled by local experience founders will be a welcome type of investing in Africa it may also help spur unlocking more capital for risk investments from larger institutions such as pension funds and Chama Groups (Kenya).