By Déborah Vouche and Michael Steidl
The first Africa Venture Finance Programme, an African venture capital event in September at the University of Oxford, brought together 40 African venture capital managers from 15 funds, European fund managers, academics, economists, and consultants. The participants examined how to continue the growth of venture capital in Africa, where the record $5 billion raised by startups in 2021 looks set to be beaten this year. The aim: to truly meet the needs of the continent.
These key lessons gathered at the course answer the question: How to make venture capital work for Africa.
- Incubate more emerging fund managers (particularly women and those in frontier markets). These types of fund managers play a critical role in growing the venture capital landscape, particularly in Africa, because they often focus on overlooked markets and founders, many of whom are women. Despite all the hype around African venture capital, the story would be incomplete without mentioning that funding to all-female founding teams has been critically slow and remains in the single-digits. A 2021 World Bank study found that only 3% of early-stage funding since 2013 went to all-female founding teams, compared to 76% for all male-teams. This trend must be reversed to realize the industry’s full potential.
- Deploy more local institutional capital into funds alongside the international capital that has flowed in during the past two years. Currently, most capital flows into Africa are private and international, with the majority from the US. Africa is now the most profitable region in the world, yet African capital funds are sparingly deployed. Long-term sustainability requires domestic institutional capital and in-house expertise.
- Venture debt and mezzanine financing has a role to play alongside equity. Venture debt should be another tool in the box of African investors. Using debt financing for the right deals and at the right time prevents dilution of existing investors’ stakes and can be used alongside an increase in equity.
- The African market would benefit from more patient fund structures, though they are not attractive to limited partnerships. Until there is a mature and well-functioning exit market, the global standard investment period for funds puts unreasonable pressure on African fund managers and raises unrealistic expectations.
Access, inclusion and affordability drive the most attractive deals coming. Quality trumps everything. Access to the right deals is a critical success factor for investors. Inclusion is opening up opportunities across the continent.
Vibrant Africa venture capital scene
Africa’s start-up scene is vibrant and promises to solve many of the continent’s challenges, one of which is high unemployment, especially amongst youth. But the challenge of successfully scaling up African businesses remains. Key scale-up challenges are finding the right talent, access to markets, leadership capacity, accessing finance and infrastructure. Entrepreneurs often feel finance-related issues in particular are daunting.
The African venture capital industry is developing rapidly in response to the need for start-up financing, with many new fund managers entering the arena. However, African venture capital funds are still in the process of adjusting the typical Silicon Valley approach to the African context, in which “exits” (a sale of one’s shares to another strategic or financial buyer) are relatively rare. One important aspect here is that Africa is 54 countries with significant differences in regulation, infrastructure, talent, and financial markets. Since many fast-growing startups require scaling across different geographies, it is critical for funds to understand the context—or rather the 54 different contexts—of operations.
Catalyse and inspire
This is why a course like the Africa Venture Finance Programme is so crucial. The course was created and funded by Boost Africa, in partnership with AfricaGrow. Boost Africa is a joint initiative of the European Investment Bank and the African Development Bank that’s co-funded by the European Union. AfricaGrow is a fund of funds managed by Allianz Global Investors, with technical assistance financing from KfW.
“I can’t think of a better way to catalyse and inspire: convene lead players in the space and then let them take it from there and do their thing,” says Keet van Zyl, co-founder of Knife Capital, a venture capital firm based in Cape Town, South Africa.
The organisers of the course, which took place at the University of Oxford’s Saïd Business School, are already looking forward to the 2023 edition.
About the authors:
Déborah Vouche is an investment officer in the private equity unit of EIB Global, the European Investment Bank’s dedicated arm for investment outside the European Union.
Michael Steidl is a technical assistance expert in EIB Global’s advisory and blending unit.