With the right help, VCs can lead the innovation sector to new records
Yariv Cohen, Angaza Capital Partner. Published on The New Times
Although it can be a little hard to remember, only a few months ago we were living a completely different reality. One where face masks were only used by surgeons, social distancing was an unfamiliar term, and Corona was only a light, summery beer. In that reality, the field of innovation and entrepreneurship in Africa was growing on a daily basis, led by local and international investment funds. With their support, local startups broke capital raising records year after year while creating jobs, solving a wide variety of problems and needs, and establishing the continent’s status as a global innovation leader.
Just like every other aspect of our lives, the African entrepreneurship sector was severely hit by the coronavirus. It is still very early to assess how the global crisis will affect the sector, its existing startups and the emergence of new ones in the future, but it is evident that the sector’s downfall could have wide-scale consequences that could potentially affect the entire economy.
But before we start mourning, we must remember that the entrepreneurial field is characterized by its ability to turn every crisis into an opportunity. With the help of the local governments and smart investments, entrepreneurs can use the situation to advance the field to new heights, affecting hundreds of millions of people. In order for that opportunity to arise, one major player that must take the lead: VCs and investment funds.
800 percent increase in only 5 years
Over the past few years, investment funds operating in Africa have evolved, breaking records year after year. According to the Africa Tech Venture Capital Report published by research firm Partech, during 2019 the capital raising of African startups reached an all-time high: $ 2.02 billion.
Even more impressive is the increase of almost 100 percent from 2018, when the number was $ 1.1 billion, and almost eight times as much as in 2015 (when only $ 277 million was invested in local companies). The number of transactions also increased drastically over the years, reaching 250 different investments in 2019 (compared with 164 in 2018 and only 55 in 2015).
A particularly interesting statistic is the drastic increase in investments in growth-stage companies, with Almost half of the money invested in 2019 (total $ 912 million) - a huge jump compared to $ 602 million (2018), $ 189 million (2017) and only $ 38 million in 2015. Growth stage companies are considered by many to be the real growth engine of the sector, pushing the entire field forward. These are investments on a much larger scale (in 2019, the average investment in the growth phase was $ 48 million - almost double the average investment in all other phases (seed, A, B) combined.
In addition to the significant sums of money, companies at the growth stage have a much higher chance of survival and success. They also create far more jobs, affecting the entire sector.
But unlike earlier-stage companies that can raise small investments from a wide range of investors (such as private angel investors), growth-stage companies have no other option but investment funds. These are the only entities that are able to make investments of this magnitude and provide companies with real value which will help them grow significantly and expand.
Paretech’s report was published last January, while the news mentioned a mysterious virus spreading in China. Since then, Covid-19 has spread all over the world and disrupted the reality of our lives, with the investment sector being strongly impacted all over the world. But despite the challenges, African entrepreneurship and innovation now have the potential to turn the lemons into lemonade, and benefit from this new reality.
While economies all over the world are likely to enter a deep recession and face unprecedented times, many investors are looking for new, promising investment opportunities. If in recent years investors have enjoyed solid returns on relatively low-risk investments, the new situation is quite different. The Corona crisis and the expected economic recession may put an end to Wall Street and Silicon Valley’s inflated valuations, and many companies that have provided “nice to have” solutions may be severely hit.
On the other side of the spectrum, global companies that provide “must have” solutions are becoming increasingly sought after, and for Africa, this is great news. The vast majority of companies in Africa provide solutions to the needs of millions of people. These needs will continue to exist (on a huge scale) long after the corona crisis, and being an emerging market that is not yet saturated with competing companies, is the exact investment potential that is currently enchanting for many international investors.
Yet, the well-known challenges are still here. For the majority of international investors, investing in African ventures is considered risky and exotic, with the investors unfamiliar with the local needs or culture. For them, direct investment in a local company is too risky and therefore, irrelevant.
This is where the investment funds rise yet again. Being a professional entity, they serve as “gateways” for international investors, who want to take advantage of the huge investment opportunities that Africa currently offers while minimizing the risks. To do so, they need a local partner who is familiar with the culture, mentality and needs of the population, and can talk to clients, entrepreneurs and governments to best evaluate each company, invest where the odds of success are highest, and lead portfolio companies all the way to scale and success. For that, we must have strong, professional and backed investment funds.
It’s time to take the lead
Today, 85 percent of total investment in African ventures has been made in only 4 countries: Nigeria ($ 747 million), Kenya ($ 564 million), Egypt ($ 211 million) and South Africa ($ 205). That is a great opportunity, as with a high level of entrepreneurs and ventures and growing interest in the global investment market, Rwanda can become a world leader in entrepreneurship and innovation within a few years.
To do so, it is not enough to encourage entrepreneurs to start new businesses and provide early-stage startups with grants. There is a substantial need for government assistance and smart, planned investment in professional investment funds, designated for the local market, which will attract leading international investors and support local companies all the way to international success. By supporting these funds and with smart government investment, Rwanda can significantly upgrade its position in the African entrepreneurial arena, and become a force to be reckoned with in the field of innovation worldwide.