Startup Venture Creation vs Venture Capital Process in Africa
There is an increasing trend of organizations coming to invest in Africa as holding companies or venture funds that internally incubate ideas, turn them into ventures and spin them off (or hold them) for the long term. The model is not a new one. We have seen BetaWorks or even IdeaLab incubate startups in the west with some success. In South Africa, I have noticed a lot of ventures are part of a larger conglomerates. MIH internet is one example.
Why an internally created venture is a good idea- the same reasons why a Corporate would open another line of business
Startups are hard, not only do you have to work against the status quo, your timing can often be off given market conditions and your team is often the best asset you have to execute through all the ups and downs. And that’s the key, having a team that can both create, execute and sustain a venture autonomously is the key to successful disruptive high growth startups. My favorite example of this is Carey Eaton’s Africa One Media. Carey doesn’t call himself an investor, but he is more of an operator with his team. He specializes in marketplaces/classifieds in Africa where he can leverage skills in both jobs, cars and real estate and scale across multiple opportunities, often acquiring them as well as starting them if needed. If the opportunities are not related to the core ability of the team, it makes things extremely difficult. Take the Africa One Media model and try internally create a gaming app, ecommerce site and tech education venture and you can see how hard it is to try find the talent between the core team to sustain them all. But when the opportunities are related you can leverage both economies of scale and scope as well as core market knowledge from related ventures to turbo charge growth. Rocket internet has perfected this for ecommerce globally and what is manifesting itself in Jumia and other related ecommerce ventures in Africa. Since they are in the business of selling online, they are probably single sourcing products for multiple markets to get scale as well as leveraging an internal team in Berlin whilst hiring local talent to execute a perfected strategy. Whilst Rocket will start multiple internal ventures they tend to only succeed in ecommerce, a standardized model now for selling online- although one could argue that Africa is NOT a country and hence a different approach is needed in different markets, particularly in early stages.
Do Africa tech ventures want diversity or focus?
Africa is a really diverse place- even the differences between Tanzania and Kenya, 2 neighbouring countries, can be enough to challenge the most talent entrepreneurs when it comes to scaling. The teams required to execute the venture in a small unit doing diverse activities in differing markets don’t often lend themselves in diversity of scope. Particularly in culture, its very easy for the same cultural practices to cross into all the ventures when those ventures need to operate autonomously. Large corporates normally solve this by acquiring companies down the line vs trying to recreate them whilst growing as a startup. Given the lack of local tech M&A activity in Africa, it becomes very tempting to try to diversify into a conglomerate early for growth- this is especially the case when there is a lack of talent in every market to execute all the ideas. But we all know the value of focus in increasing the odds of success both in Africa and abroad. Better perfect one model enough before trying others. In more the venture context, the skillset to source, coach and invest in startups in multiple markets is different from recruiting a team to start multiple ventures- well unless you are the Bill Gross of Africa- then you might really be a serial entrepreneur who can invest his or her own resources.
Internally created ventures might create the same problems in tech as outsourcing your core competency
Team talent is one of the key issues with creating an internal venture and nowhere do I see it more apparent in when an internally created ventures has to struggle with the tech talent side. Whilst tech is becoming more standardized, in some areas its becoming more specialized. A gaming startup requires an interplay of gaming mechanics to art/music and analytics, whilst an ecommerce site might require a logistics coordination and payment fraud prevention tech as key differentiators. Just like most investors might have a problem investing in a startup that has outsourced their tech out of fear of whether the venture can iterate in a fast changing and competitive tech world, an internally created venture might have a CTO work across multiple technologies that he or she may not be able to fully keep up to date on. Whilst I use tech talent here as a key example, the problem compounds itself when an organization tries to do too many diverse things, it might not do one venture well enough due to both a lack of specific expertise and focused attention on the venture, particularly in the early stages when time, skills and talent are in short supply.
Talent Retention and Founder/CEO Incentives whilst bringing in Investors.
Startups are typically founded by entrepreneurs who want to strike it out on their own – when an internally created venture brings in a CEO to run the venture at such an early stage you potentially create all the wrong incentives for team cohesion through good and bad. “It wasn’t my idea after all and I was hired for the job” vs “I founded this, it’s my baby and will not stop till I see it succeed, funding or not” are pretty different motivations to grow a venture. Throw in the fact that an internally created venture will typically have the CEO/founder take minority stake relative to the group that is both funding AND key decision makers in the venture and you can imagine that you have created an organization that might end up with organizational issues. Take M-PESA, a favorite Africa poster child tech success story; Nick Hughes was the driver behind the groundbreaking venture within Vodafone and left to start Signal Point Partners where he has had more control of mobile money related ventures such as M-KOPA. Note that Signal Point Partners, a holding or venture company for the innovations in mobile money that now ceases to exist. It is interesting to ponder why this is- is Signal Point Partners a defunct VC firm or has Nick decided to spend more time being an operator or board advisor within M-KOPA? Similarly, one should start to study what happened with World of Avatar (VC) and Mxit (startup) in South Africa. World of Avatar ceases to exist now.
Roles and Responsibilities, internal coordination costs
Experienced operators such as John Borthwick from Betaworks or Bill Gross from Idealab, or closer to home, Nick Hughes either possess the skills themselves to start and grow a venture or have clear teams that focus on the different stages of a venture- from the idea creation, incubation, growth and spin/scale out. In Africa this is extremely rare to find and expensive to maintain. One example is Cleanstar ventures that focuses on clean energy, a pretty diverse team runs the operations but the nature of the venture requires a substantial set up costs that once set up correctly can leverage multiple important aspects of the venture’s ecosystem- in the case of energy: supply chain, retail to R&D. Not all startups have that luxury, but corporations do (or ventures that start out as large corporations). In the venture space, one of my favorite HBR articles talks about the systems approach to venture capital in emerging markets, and touches on something I am already seeing happen with Savannah Fund: Zatiti an ecommerce software builder in Kenya is helping Zished, an ecommerce gifting company based in Ghana in product and R&D in exchange for market access, something that happened serendipitously through the accelerator program that finished recently in November 2013. The point is you can still achieve a level of coordination and value add between different ventures without having to start them all as one company.
Investor Incentives and motivations
The last point is probably the most important one and is somewhat related to the last. Many corporations and successfully created internal ventures have substantial capital to launch a venture. Just look at how much Rocket Internet is spending globally to start up their ventures whilst fully recognizing the risk of betting on a standard model in a unique environment in Africa. Creating a startup within an internal setting may skew burn rate and mask internal accounting and unit venture economics- how do you account for that CTO who feels half in the venture one day vs 10% another? How does an investor decide whether they are backing a startup or an R&D project of another company? Are the internal organization selling their shares as part of the seed or A investment round to offload a risky project or doubling down? If doubling down, why bring in external investors at all? Why not fund the venture internally for longer and keep all the upside? Organizations like Spark Capital in Nigeria (or us!) might be thinking exactly this when they stumble upon a winner or have signalling issues when trying to find capital for other ventures- or maybe they don’t need to if they can incubate their ventures directly to scale. That’s why we always make sure to follow on accelerator investments if they find investors whilst being cautious not to follow on too many ventures prematurely when clearly many maybe destined to fail- [reality check: this is the risky startup world]
Startups are not small versions of large companies, and companies are not wired to innovate like startups. The sooner many of us in the tech sector in Africa realize this the more success we will have whether coming in as an investor, startup, holding company or corporation. Savannah fund is a Venture Capital organization that invests in disruptive startups recognizing full well we are living in diverse ecosystem of different models- just don’t expect us to invest in a model that doesn’t match our own for innovative startups. We believe in entrepreneurship in Africa for the right teams to address the right opportunity.
Here is a final checklist to summarize my thoughts:
- Ability: Does our team and internal resources possess the ability and experience to execute multiple lines of business in Africa (aka are we a startup innovating or a company expanding into a related line of business)?
- Scaling up: Can we efficiently raise capital for the venture internally or separately without running into signalling, decision making, risk taking and control issues of the founding team or organization that started the venture?
- Culture: Can we maintain the right cultures between ventures/lines of business to execute and attract further talent or resources? Is this a venture that is executing an idea of someone else or is the founding team needed to be in the driver seat to innovate and execute the vision?