Africa, a Viable Investment Case with Promising Returns

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‍This article is featured in the technology information column of African Business, as well as in CIO Magazine’s October 2024 Edition‍

While some may paint a bleak picture of the African startup ecosystem, it is, in fact, brimming with potential for growth and alpha. Despite a recent global slowdown in capital flow, this nascent ecosystem offers a promising landscape for investors willing to adopt a long-term perspective and collaborate with local partners. The opportunities here stem from vast underserved populations who today are effectively non-consumers of goods and services they actually need rather than merely want - and from anti-fragile entrepreneurs who build life-saving, market-creating innovations. These entrepreneurs harness current economic headwinds to their advantage, building highly resilient companies.

We are seeing an increased formalisation of the informal sector, where startups are transforming offline businesses into traceable and connected participants in the digital economy- just as they are extending the reach of digital services to underserved rural and peri-urban areas. Asset-light models have proven particularly effective. There remains considerable opportunity to capture additional value from fintech, as seen in Moniepoint, a standout company in the financial technology space that continues to expand its market share and service offerings. Similarly, Omnibiz has demonstrated growth and profitability through an innovative approach to optimising supply chains and e-commerce. Companies like Sunfi are enabling the transition to renewable energy sources for thousands. Integrating AI and machine learning technology is also unlocking the continent's potential to enhance efficiency.

These trends clearly indicate an ecosystem on the brink of significant growth, with a proven track record of returning capital to investors, primarily through secondary sales and strategic acquisitions. Recent high-profile exits, such as InstaDeep, a Tunisian AI startup and Quicket’s acquisition by Ticketmaster, underscore this trend. These exits, along with earlier successes like Paystack and Wave, demonstrate the African startup ecosystem's potential as a lucrative investment destination. Despite being in its early stages, these examples of full and secondary exits highlight the potential for high returns, even if much of the activity remains unrecorded. Ventures Platform, for instance, has successfully returned four out of six investment vintages since 2016 by backing promising companies early in their journey and facilitating primary and secondary exits.

Contextualising the African Challenge

Africa has often been viewed as a risky investment destination plagued by political instability and inconsistent regulatory frameworks. However, the reality is more nuanced. Over a longer timescale, African governments have shown increasing stability. Each regional market within the continent and across the world has its unique dynamics. Africa demands a patient investment approach, distinct from other continents, due to its underdeveloped infrastructure and opaque markets. Some argue that many African markets are more permission-based than rule-based, necessitating a deep understanding of the local context, stakeholder management, and local partnerships. The less developed African capital markets make IPOs less viable, leaving strategic exits as the primary option for liquidity.

In the global West, the US has abundant capital and a culture that accepts failure, making it easier for startups that may even be viewed as “nice-to-haves” or “vitamins” to thrive. Public markets in the US are also deeper, facilitating the opportunity for IPOs. In contrast, Africa's diverse markets and less centralised regulatory environments present different challenges and opportunities. For instance, despite state-level differences, India's more homogeneous market structure contrasts with Africa's fragmented landscape.

Understanding these nuances is crucial for navigating the complexities and unlocking the continent's potential for successful investments in mission-critical “pain-killer” innovations targeted at the mass market consumer. An approach that has worked at Ventures Platform involves categorising markets into "large ocean markets," where we are flexible to back top-tier companies with the potential to be top 3, and "lake markets," where we back companies with the potential to be number 1 and where cross-border expansion is more feasible. 

The Story Beyond the Numbers

Investment in African tech startups offers more than financial returns; they drive innovation, social impact, and market creation. For example, the Ventures Platform Fund I launched in 2021 focuses on market-creating innovations that address non-consumption in Africa. Our portfolio companies have created over 4,264 direct and 20,650 indirect jobs, boosting economic opportunities and productivity. Companies like SunFi have extended clean energy solutions to over 36,000 users, reducing CO2 emissions by 2,766 metric tons. Companies like Fez Delivery are pioneering sustainable logistics through electric vehicle adoption and emissions-reducing initiatives.

Beyond Fund I, earlier investments like fintech PiggyVest have facilitated financial inclusion for over 5 million underserved individuals, contributing to a 13.5% increase in financial inclusion in Nigeria. Agritech solutions like ThriveAgric have provided $140 million in input financing to over 300,000 smallholder farmers, enhancing food security and sustainable agriculture. These success stories highlight the broader impact of VC investments in Africa, driving social and economic transformation.

Prospects: Not an Opportunity to Take Lightly

The World Bank projects that African economies will grow by 3.4% in 2024, up from 2.6% in 2023, and reach 3.8% in 2025. This upward trend reflects the continent's resilience and potential, reinforcing a promising trajectory for VC investments in Africa.

Firstly, the growing number of local fund managers across the investment value chain ensures a steady flow of capital. Unlike just five years ago, when follow-on capital depended heavily on foreign investors or programs like Y Combinator, there is now a robust local ecosystem with multiple growth funds.

Secondly, the quality of founders and business ideas has significantly improved. Entrepreneurs are building solutions tailored to local realities rather than replicating foreign models. This shift enhances the potential for success and sustainability. 

Additionally, governments and regulators across Africa are recognising the value of the startup ecosystem, as evidenced by the passing of various startup bills aimed at providing a more nurturing ecosystem or startup success. This regulatory support is crucial for the ecosystem's growth. Though in its infancy, the African Continental Free Trade Area (AfCFTA) framework will expand startup markets across Africa and facilitate cross-border trade and investment. 

So What Next?

With its unique nuance accepted, Africa presents the world's most exciting long-term investment opportunity. While exciting, the growing youthful population is not an end in itself but rather a starting point that requires a deliberate attempt at hard-nosed market creation that can convert millions of non-consumers into consumers, making for a potentially massive total addressable market. The continent's perceived challenges are opportunities in disguise. Engaging with regulators and understanding local markets are critical for success. 

We must move away from a story of charity as the future of African venture capital hinges on demonstrating that it can generate substantial returns. This approach will help increase Africa's share of global venture capital, moving beyond the impact narrative to showcase the continent's profit potential. The investing community must also hold founders accountable and prioritise governance to build a resilient ecosystem. Local capital participation is essential to sustain growth and attract more investments.

Investors should seize the opportunity to contribute to Africa's burgeoning tech ecosystem, recognising the immense potential for growth and impact. The journey requires patience and a long-term perspective, but the rewards are substantial for those who dare to invest in Africa's future.

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Kola Aina is the Founding Partner of Ventures Platform, an early-stage VC fund that invests in innovative startups across Africa.

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