Africa Roundup: Jumia’s IPO, DHL launches Africa e-Shop, Cathay’s $168M VC fund, ConnectMed acquired
The biggest news in a month of weighty African headlines was Jumia listing on the New York Stock Exchange.
After filing SEC IPO docs in March, the Pan-African e-commerce company’s shares began trading on the NYSE April 12, opening at $14.50 under ticker symbol JMIA. Jumia stock rose north of 70% on its first day of trading and started this week at $46.
With the public listing, Jumia became the first startup from Africa to list on a major global exchange. The IPO raised more than $200 million for the internet venture.
The listing created another milestone for Jumia. In 2016, the company became the first African startup unicorn, achieving a $1 billion valuation after a funding round that included Goldman Sachs and MTN.
Founded in Lagos in 2012 with Rocket Internet backing, Jumia now operates multiple online verticals in 14 African countries — from consumer retail to travel bookings.
Jumia has also opened itself up to Africa’s traders, with more than 80,000 active sellers on the platform.
Like Amazon, Jumia brings its own mix of supporters and critics. On the critical side, there are questions of whether it’s actually an African startup. The parent for Jumia Group is incorporated in Germany and current CEOs Jeremy Hodara and Sacha Poignonnec are French.
On the flip side, original Jumia co-founders (Tunde Kehinde and Raphael Afaedor) are Nigerian. The company is headquartered in Africa (Lagos) and incorporated in each country in which it operates (under ECART Internet Services in Nigeria). Jumia pays taxes on the continent, employs 5,128 people in Africa (page 125 of K-1) and the CEO of its largest country operation, Juliet Anammah, is Nigerian.
The Jumia authenticity and diversity debates will no doubt continue. But the biggest question — the driver behind the VC, the IPO and demand for Jumia’s shares — is whether the startup can produce profits. The company has generated years of losses, including negative EBITDA of €172 million in 2018 compared to revenues of €139 that same year.
Entrepreneurs have a pivotal role to play in Africa’s unemployment crisis. Today over a third of the continent’s young workforce (those aged 15-35) are unemployed. Another third are in vulnerable employment. By 2035, Africa will contribute more people to the workforce each year than the rest of the world combined. By 2050 it will be home to 1.25 billion people working aged.
To absorb these new entrants, Africa needs to create over 18 million new jobs each year. Governments need to put in place policies that drive economic growth and competitiveness. These in turn, will enable the growth of small and medium-sized enterprises (SMEs). This is important because they currently play a significant role in low-income countries, representing nearly 80% of jobs. They are also responsible for 90% of new ones created each year.
The challenge for countries is how to support the growth of SMEs. Various African governments have experimented with ways to help address the US$140 billion funding gap for startups and SMEs. For example, one approach has been to set up entrepreneurship funds.
Based on my experience of watching their performance over the past 18 years, I would issue some words of caution. Some entrepreneurship support models work better than others. And how they are set up – particularly the governance structures put in place to manage them – is key to their success, or failure.
Funding gapAccess to financing is consistently listed as the biggest obstacle to business for SME’s in African countries. They often face double digit interest rates from local banks. And venture capital penetration is still extremely low. Top end 2018 estimates put it at about $725 millionfor the whole continent.
To tackle the problem, African countries continue to start new entrepreneurship funds. In July 2017 Ghana launched the National Entrepreneurship and Innovation Plan. The aim is to provide integrated national support for start-ups and small businesses.
Almost a year later, Rwanda secured a $30 million loan from the African Development Bankfor the establishment of the Rwandan Innovation Fund. This will focus on investments in tech-enabled SMEs.
As new funds are started, African countries must look to the successes and failures of both global and regional funds to replicate best practices and avoid common pitfalls. African governments should explore replicating models similar to Small Enterprise Assistance Funds and the USAID backed enterprise funds. Both include robust investment selection criteria for funds.
In doing so, African government-backed entrepreneurship funds would operate as fund-of-funds – where a fund invests in another private equity or venture fund rather than directly in businesses themselves – as do many development finance institutions globally such as the UK’s CDC or FMO of the Netherlands.
The what and the howThe fund of funds structure creates an arm’s length relationship between the government agency that houses the entrepreneurship fund and the businesses that eventually receive investment. In between, sits a professional fund manager that earns the majority of its income from making good investments, growing companies and exiting them after a period of five to seven years. In this way, there are natural disincentives for corruption and market-based selection criteria for the entrepreneurs who receive investment.
How the fund managers are selected also matters. To ensure true investment independence from the government, fund managers and board members must be chosen in a transparent and competitive process. And once selected, representatives of the government entrepreneurship fund agency can sit on the investment committee for oversight purposes but should respect the fund managers’ independent decision-making.
There are examples of funds being set up without the necessary independent, accountable fund managers. One is the YouWin program in Nigeria. Created in 2016, it was set up to help youth entrepreneurs grow businesses. But senior civil servants handed out awards to friends and relatives.
Government supported fund managers through the FoF model can also catalyse additional investment. By operating in markets and sectors often ignored by traditional private equity funds, Small Enterprise Assistance Funds and enterprise funds have mobilized additional capital for investment-starved companies. African government-backed entrepreneurship funds could do the same by participating in blended finance deals with development finance institutions, social-impact investment funds, local banks and other market players to back growing firms.
Measuring successWhile not actively managing the funds’ portfolio investments, governments have a key role to play in guiding the funds priorities. Priorities may vary by country and given Africa’s growing rates of unemployment, funds should prioritise job creation by evaluating investment on key performance indicators. These would include the number of jobs created per dollar invested, indirect jobs created per dollar invested, and average salary of job. In addition to job creation, governments can direct funds to focus on specific sectors either in need of increased capital or high-growth areas in local economies.
Beyond establishing investment criteria, government-backed funds should prioritise rigorous measurement of investment results and long-term data tracking to inform future investment decisions. The UK British Bank regional growth fund found the cost per job created varied considerably by project from £4,000 to over £200,000. It concluded that a better allocation of funds could have led to thousands more jobs created for the same resources.
Data driven investments can not only lead to a better results, but further curtail issues around potential mismanagement of funds.
Tackling Africa’s job creation challenge requires innovative thinking and initiatives that support private sector-led growth. Looking to the model of Small Enterprise Assistance Funds and enterprise funds, African governments can spur local ecosystems and drive new private capital to regions today seen as unfriendly or too risky to outside investors.
Properly structured investments today could yield much larger dividends tomorrow
African startups can now score capital commitments real time―so long as they convince a venture capitalist to give it to them in front of a live audience.
That’s the format for Face The Gorillas, a Rwandan IT pitch series that runs several times a year on local TV, YouTube, and at select events.
The competition was originally conceived in 2013 by Yariv Cohen and wife Angela Homsi―who became engaged in Rwanda’s tech scene through impact investment firm Kaenaat and the Ignite Power Solarinitiative.
“We were supporting the ICT sector, brought a group…to invest in startups, then turned that into a show,” Cohen told TechCrunch in his Kigali office. “The idea was to provide Rwandan startups business pitching tools and an understanding of what investors are looking for,” he said.
Face The Gorillas has since teamed up with Rwanda’s ICT Chamber and partners such as kLab to produce the series several times a year. Since 2013 it has run 8 instalments, financed 8 startups, and had 3 deals rejected, according to Cohen. Ventures can gain up to $200,000 in investment, including accelerator type partnerships.
In 2015 Rwandan fintech venture VugaPay, founded by college age brothers Patrick Muhire and Cedrick Muhoza, received mentorship and $20,000 for 10 percent equity from two VC gorillas. The exposure led them to a subsequent investment from Silicon Valley investor Tim Draper.
According to Cohen, Face The Gorillas is open to startups across the continent. Once a date and venue are set, “We put out requests for proposals to all the ICT hubs. Select the ones we think are investible―coach them, train them―then they come and pitch,” he said.
While the series’ on the spot equity deal-making is similar to America’s Shark Tank, there are a few distinct differences. Face The Gorillas is only open to tech startups. The show takes a more constructive tone: “we select VCs who focus more on help and mentorship than just the investment itself,” said Cohen. Face The Gorillas also customarily gives investors in the crowd a chance to make competing offers to the VC panel. “The last three shows have had deals from the audience,” according to Cohen.
Rwanda’s Transform Africa Summit has become one of Face The Gorillas’ more visible venues. At the May 2017 event, young startup founders such VugaTVentrepreneur Ines Muhoza, gave 5 minute pitches to Cohen and the investor panel before navigating questions toward possible offers. While the CEO of the content streaming app didn’t receive a deal, she was positive about facing the gorillas. “The resource I got today was knowledge…to come up with convincing factors so investors will invest in me next time,” she said.
One investor who offered Muhoza counsel was Eugene Nyagahene, a Rwandan media executive and entrepreneur with a $500,000 fund. As a VC gorilla, he said he looks “first for the entrepreneur’s passion for their business, then their figures. If one of these two does not work, I don’t invest,” he said.
Both appear to have aligned at Transform Africa 2017, where Nyagahene joined a $35,000 investment for 18 percent equity in solar utilities startup Ibaze Group―the closing of which drew enthusiastic applause.
So could Face The Gorilla’s soon syndicate across Africa? “We’ve had requests and are looking at that,” said producer and investor Yariv Cohen. “If we do, we just want to make sure we keep the same theme of education…and a focus on the entrepreneurs rather than just the investors,” he said.
Cohen expects the next Face The Gorillas to take place sometime in fourth quarter 2017. Interested African startups can keep an eye out for details and application info on kLab’s website.
The Board of the African Development Bank Group has approved a loan of US $30 million to support the establishment of Rwanda Innovation Fund (RIF). The main objective of the project is to promote innovation economy in Rwanda and the East African Community (EAC) region. The resource will be used to establish an investment vehicle focused on funding Tech-Enabled Small and Medium-Sized Enterprises (SMEs) and to develop the country’s entrepreneurial/innovation ecosystem capacity.
The project is of strategic national importance to Rwanda as the country seeks to unlock its fast-growing innovation economy and expand and diversify growth in a low-carbon, climate-resilient manner, in line with its Vision 2020 and its current strategy to drive private-sector-led inclusive growth. There is no Venture Capital Fund vehicle in the country for supporting its promising young entrepreneurs, and local investors struggle to service early stage ventures, including follow up on investments, due to limited funding capacity and liquidity issues.
“By extending this loan to the Government of Rwanda, the Bank wants to enable the country to develop the sector and attract private investors. The project will enable the Bank to play a leading role in helping Regional Member Countries develop sustainable innovation ecosystems, spur entrepreneurial growth, address funding gaps, reduce poverty, and promote socio-economic growth,” said Abdu Mukhtar, Director at the Bank’s Private Sector, Industrialization and Trade Development Department.
The Fund will support and provide equity financing for SMEs, train tech-oriented entrepreneurs in business planning and management, and increase awareness and sensitization with respect to intellectual property rights in Rwanda, the East African Community and beyond. It aims to mobilize at $100 million in direct commitments from the Rwandan Government and private investors, while targeting a leverage multiplier effect of up to US $300 million in follow-on investments. The project is expected to support more than 150 companies at various stages and invest in about 20 early growth stage opportunities. It will create more than 2,000 direct jobs and over 6,000 indirect jobs over its 10-year life cycle. It will provide capacity-building to 7-10 incubators and accelerators, facilitate 3-5 additional angel networks, and training to about 30,000 entrepreneurs across the region.
The project aligns with the Bank’s High 5 priorities and the Ten Year Strategy in leveraging innovation across sectors to promote inclusive growth, youth empowerment, and the creation of high value jobs. It also supports the Bank’s Information Technology and Human Capital strategies with regards to skills development for competitiveness, enhancing technology’s contribution to GDP and unleashing innovation economies across Africa.
Tech innovation fund to be available by end of yearThe delayed tech innovation fund is likely to be operational by the end of the year.
The $100 million (Rwf79 billion) announced last year was expected to be working by June, but minister of Youth and ICT Jean Philbert Nsengimana has said the much awaited fund will likely start by the end of this year.
Considering that there are few investment opportunities for ICT start-ups and SMEs; the Tech fund delays means tech entrepreneurs could continue suffering to access finance.
Steve Mutabazi, chief investment strategist, ICT sector at RDB said there are enough investors who have shown interest in contributing to the fund.
But he adds that the fund establishment is a journey with various steps. “There are legal frameworks and documentation the investors have to follow,” he said.
The Tech innovation fund which could be the biggest in the country’s history, raised hopes among ICT business community of alternative financing opportunity.
“Many investors are not the right investors for early stage startups and will negatively affect the later stages of the company,” said Nash Barret, the co-founder of Safemoto, a tech startup based in Kigali.
“Many novice investors believe every startup will be Facebook in one year and then are disappointed and suck energy from the company,” he said.
On the other hand technology companies have their own business management issues.
“My opinion is that too many startups try to access investment money too early, then are frustrated when investors give them the cold shoulder,” said Mr Barrett.
According to the Minister of ICT, the money is no longer the main issue, but he did not mention the amount mobilised in the fund so far.
“Now the issue is to have good pipeline of candidates’ projects which are finance ready,” said Mr Nsengimana.
“When you talk to the entrepreneurs they always say that the first constraint is money, now the money issue is going to be resolved,”
Funding is still a stumbling block for many tech SMEs and start-ups as many banks don’t believe in the profitability of their projects; while serious investors are few.
Many regional investors are predatory or non-sophisticated and will make deals or write paperwork that future investors would turn their nose at, explains Mr Barret.
According to the co-founder of Safemoto, many of the ‘elite’ investors who come to startup challenges and other events forget about the startup the moment their cheque clears, if they remember to write it.