Mobile payment gateways, location based data services and integrated multichannel e-commerce solutions are some of the most attractive ventures for venture capitalists in Africa, but challenges still persist.
Venture Capitalists are counting on the high mobile penetration rates and low PC penetration in Africa to identify ventures that are likely to yield higher returns from the mass market.
“VC’s are willing to invest in digital solutions simplifying e-commerce processes, like online payments, location based data services and integrated multichannel e-commerce solutions,” said Brian Hirman, founder of eVentures Africa Fund.
Technology has yet to attract huge foreign direct investments compared to other sectors, but angel investors, VCs and equity funds are focusing on Africa’s IT industry, mainly because most tech companies there are started by members of the African diaspora who have worked in some of the leading global tech companies.
“There is a lot of digital entrepreneurship in Africa, led by young ambitious Africans who have studied in the U.S. or Europe. They will drive the business tremendously in the coming years and I expect a lot of the digital developments in Africa,” Hirman said.
Most VCs and equity funds are not willing to gamble on start-ups but are looking at companies that have operated for two to five years and are making profits or are showing signs of profitability. The funds usually inject about $30,000 to $300,000 into the companies.
“This is understandable for several reasons: because of the risks involved; the high cost of doing due diligence relative to the risk of early-stage investments; a general lack of well-publicized success stories, and a lack of knowledge of relevant business models and market information,” said Bill Zimmerman, co-founder of Limbelabs in Cameroon.
As a result, most VCs mitigate the risks by investing in companies with products and services which already exist, and which have proven themselves in more developed countries. These companies get more capital if they are likely to be the leader or the second in the provision of such products and services.
“With a subscriber base of 450 million and a growth rate of 12 percent predicted through 2013, VCs clearly want to tap the vast potential of Africa’s mobile market. I have noticed several other funds recently investing in companies with media-related products or services,” Zimmerman said.
While most countries have connected to the fiber optic cables and developed terrestrial back bones, infrastructure development is still a concern for tech companies as well as investors who are concerned about the ability of the mass market to access some of the services.
“Africa’s communication infrastructure is still lagging behind. The potential use for data rich mobile apps and location based services is much lower than in the U.S. and Europe. As a consequence Africa is generally not yet the place to be for these kinds of investments,” said Joeri Poesen, co-founder of Bantalabs in Senegal.
Dependence on aid has blurred companies’ understanding of venture capitalists and their interest in profits rather than just “helping.” Local companies expect support from VCs but are put off by the requirement to cede control of the companies, which has been blamed on the culture of foreign aid.
“Africa is perceived as a place without resources and hence without much innovation. Though tech hubs are starting to form, Africa is still seen as a continent in need of aid rather than a continent that has something to offer,” Poesen said.
However, most companies have worked towards simplifying business set-up processes in order to attract more venture capital, which is expected to sensitize the business community about the role of VCs.
But some of the countries have been accused of offering incentives and then changing conditions or demanding more money once the investments are made.
Senegal is facing one of the biggest challenges after it withdrew the 20-year mobile operator license issued to Millicom, owned by American investors, demanding $200 million apparently because it realized the license was issued for a lower fee than it was worth. Millicom and the Senegalese government are still fighting over breach of contract.
“Stories like these are obviously detrimental to a healthy investment climate,” said Poesen.
With the challenges of accessing capital, local businesses and start-up have opted to launch small projects, co-working spaces or university spin-offs, and then taken a grassroots approach to marketing themselves using both traditional media and social networking channels.
Kenya, Cameroon, South Africa and Senegal are leading in setting up the co-working spaces and tech labs, hoping to demonstrate to local investors and get local financing for some of the ideas coming out of the tech labs.