Almost every fund manager in Africa wants to build and support scalable businesses that not only help homegrown start-ups flourish but also have profit at the heart of these investments.
In recent years, Africa has captured the appetite of international investors. As per a report by Africa Business Central, venture funding jumped over 50% in Africa over the last year. Another report by TechCrunch brings in good news on increased local venture capital fund formation in Africa. As Africa’s investors march towards development, the early-growth fund managers have a unique set of problems that need to addressed. Almost every fund manager in Africa, be it in impact or otherwise wants to build and support scalable businesses that not only help homegrown startups flourish but also have profit at the heart of these investments.
While the entrepreneurial wave is a blessing, there are certain roadblocks that need to be addressed. The lack of exchange, skills and experience acquisition or a platform to help with over 100 different aspects of fund management and investment that will enable fund managers to freely access and share their knowledge, doesn’t exist.
With over 10 years of experience and interaction with multiple fund managers across various investment stages, there are a few common problems that stand out. Fund managers from Kenya or Nigeria or any other part of Africa, especially into early-stage investment, face similar problems that don’t get talked about because they are taken as a “given” because of the nascent early stage of investment in the region. There are visible signs everywhere that many investors across the globe want a piece of pie in Africa’s growth journey. Beyond parachute investing, there are really deep day-to-day and functional problems that African fund managers face that require urgent attention in order to reap the promised outcomes and returns.
Finding and developing a successful pipeline
Fund managers have to find strong businesses that fit their investment thesis an execution strategy. Many businesses identified look good on the surface, but have issues found once looking under the covers. That is why over 75% of venture investments fail. Inexperienced funds get caught after making an investment due to underlying issues with an investment that they didn’t initially see. This is especially true because there are not that many “investment-ready” businesses that pass diligence.
The resulting lack of investible pipeline slows down the deployment process, reducing investor confidence. More importantly, shallow pipelines limit the choice of investments, potentially leading to compromised selections or overpaying, thus reducing the odds of strong returns. This is where Capria comes in. Capria works closely with its partners across Africa to build and execute strategies to increase pipeline depth and apply rigorous investment discipline to ensure only the best deals are made.
Optimizing cost of doing businesses across countries
Within Africa, early-growth investments are often lucrative at the top line but can be expensive to transact and manage, substantially depressing net returns. Challenges include dealing with opaque and fragmented laws, leadership capacity building, taxation complexity, disperse segmented markets, and country-specific regulatory frameworks. Most LPs prefer to invest in fund managers that are domiciled in tax/regulation friendly jurisdictions, further increasing operating costs for funds. These challenges are just the tip of the iceberg, but if addressed using regional and global best practices, it’s possible to find opportunities for outsized returns.
Effective regional and global fundraising alternatives
As funds grow, managers need to seek multiple new channels for fundraising; they can’t rely solely on small local family offices and DFIs. The clear option is to have a blend of both global investors and regional LPs. But these potentially highly-effective alternate fundraising options that would enable managers to keep pace with Africa’s growth potential continue to be out of reach for many. Why? Because managers have not adopted global best practices that regional and global investors expect.
Capria partners with fund managers to enable them upgrade their operations to adopt global best practices, across everything from team building to governance and branding. Then it coaches teams on presenting to investors to their expectations and in a form they resonate with. Once operating at a high level, fund managers have a much stronger ability to prevail in the increasingly competitive world of fundraising from regional and global LPs.
Currently, there are a few business initiatives that are helping early-growth fund managers tackle their operational problems. One such is the Capria Network. The fund managers learn from each other about the problems they face and the support they need in solving them. Capria works closely with fund managers to facilitate them in the process of becoming top-class investors in emerging markets.
The Africa PE/VC space is dynamic and complex, yet simple if understood. First Africa is a continent and not a country, with clear and distinct diversity in culture, language, way of doing business etc. We should own our space and share our knowledge and truth as we live, experience and see it and that’s when we will begin to see the meaningful effect of any investments made in Africa.
Two immediate calls are:
1. Creation and nurturing of local fund managers to collaborate with externally founded fund managers
2. Deepening of access to local capital, blending this with external funding
The growth of the latter will spur growth of the former as fundraising is one of the main roadblocks that fund managers struggle with and strangles many fund managers dreams before they become a reality.