VC Opportunities and Challenges in Sub-Saharan Africa

September 2, 2015

Maurizio Caio, Founder and Managing Partner
TLcom

In 2013, we launched an international venture capital fund focused exclusively on technology-enabled services and innovation for Sub Saharan Africa across all stages of the venture capital cycle. The fund targets equity investments in the US$0.5 million to US$10 million range—where the lack of capital is more severe in the region—into fast growth enterprises leveraging technology and innovation to serve the market, with either the potential to scale globally, or the ability to profitably serve customers at the base of the economic pyramid, which continue to represent the vast majority of consumer demand in the region and in other developing economies.

We expanded our interest to VC opportunities in Sub-Saharan Africa, as we achieved two parallel milestones: (a) two successful exits of European-originated mobile technology companies primarily or exclusively operating in Sub-Saharan Africa (Upstream to Actis and Movirtu to Blackberry); and (b) the identification of more than 600 local qualified investment opportunities in our target space. The key source of upside is associated with the substantial local penetration gap of basic services, which instead enjoy near universal access in developed economies (such as financial services, commerce, energy and health care), and the significant penetration of mobile connectivity across all income segments: the investment opportunity is primarily about the application of existing technologies to major verticals via innovative business models, where technology and innovation are enablers and accelerators of access to core services enjoying massive structural, fast growing demand, pulled by attractive demographics and the need to fill core development gaps. This context results in significant return upside with very limited technology risk, facing otherwise standard venture risks associated with the relevance of a business model to a market segment, and the execution capability of management teams.

The entrepreneurial space in Sub-Saharan Africa is still relatively young, and needs to address some fundamental gaps typical of the current stage of venture financing in many developing economies, that are not properly addressed by the current supply of venture financing. These gaps are at the core of our venture capital approach, developed in the highly similar European venture capital environment, as opposed to the more sophisticated and “investment ready” model of Silicon Valley:

A fundamental need for business-building capability both at the entrepreneur and investor level, whereas most entrepreneurs and management teams have a strong product focus, but lack appropriate strategies and business plans, management and organization, cash flow and financial skills, internal systems and governance;
A strong dominance of debt and self-liquidating instruments in venture financing, with a risk profile often misaligned with the fundamental uncertainty—and upside—of fast growth, often cash-absorbing companies, and with cash flow/collateral requirements which make it virtually impossible to finance companies that are earlier stage, or lack collateral assets;
The lack of technology-sector focused investment teams covering all stages of the venture cycle, as most technology financing is concentrated either at the very early stage in the form of incubators or business plan competitions providing very limited financial resources, or at the more mature growth capital, revenue stage but with a generalist, non-sector-focused approach which only accepts lower risk—and possibly lower impact—investments.

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