Start-up Investments in Afrika

Start-up Investments in Afrika

Investments in afrikanische Start-ups stecken noch in den Kinderschuhen

• Der Kontext: Why do you invest in Africa?

• Lexi Novitske: I used to work in the U.S. and took a sabbatical, went traveling across 25 countries of the continent and really saw huge amount of potential. There is a large consumer population that hasn't had any access to digital services before. And there are also many high-quality entrepreneurs who are returning to the continent to start businesses. Besides that, the large investor landscape is untapped. Those are the aspects that made me originally being very attracted to investing in the local environment. It's certainly not as easy as I would have liked to think, given the macro-factors.

• Could you explain what Singularity Investments is investing in in Nigeria?

• The first aspect is the mobile sector.That could be payments infrastructure. It could be data insights and that could be networking connectivity, digital identity, these sorts of things. Then the second aspect is investing in companies that we feel have business models, that we feel are best incubated in a local African environment. Especially in Nigeria, we have a pretty unique telecoms industry. So, there's a lot of telecoms technology that are operating in a local only environment now but that could expand to the rest of the world and could be applicable in other emerging markets. Those are our two-underlying thesis. The investment group is backed by one investor who's built a pan-African telecom infrastructure company called IHS Towers. We've been operating for three years.

• Wouldn't it be easier to just stay in the Silicon Valley and invest there, invest wherever the big companies invest in?

• Of course it would be easier. But, I think that the African market is much more competitive. I mean, in the local environment it is really in its infancy. And probably a lot of the companies that are starting out now will fail just with the evolution of a local ecosystem. But we really believe that there can be huge wins. In our portfolio, we have already a couple of companies that have grown by 40x over the past year. I don't want to make it sound like it's easy, because doing business in Africa certainly is very difficult. There is a lack of regulatory clarity, infrastructure still isn't really built, customer acquisition costs are high, because we're dealing with a massive digital illiteracy rate. So, there's certainly a lot of challenges, but it's a market that really hasn't been explored very much from capital. Every other market has probably been well penetrated, but only now is Africa getting some interest from international investors.

• Who invests in ICT-companies in Africa? Do you compete with domestic or foreign investors?

• There’s a couple of different players in the market. In East Africa particularly, the capital that has come in, has been impact-driven. So, investors are coming and investing in clean water solutions, agriculture technologies, maybe some financial services products, but focus less on commercial returns and more on impact returns. In West Africa, there hasn't been anybody. So, there is just one investment firm that got involved early and invested in a couple of local companies. There is another angel group that's trying to do some early stage deals, but they haven't been very active either. Local angel investors can put their money into risk free bond and earn 15 percent. A lot of them prefer to just move their money out of the country and invest in real estate or investments outside of Nigeria. So, the angel investment community also hasn't really been active. I would say, in the past year there's been a lot more international players from Silicon Valley co-investing with local investors: Sequoia Capital, Andreesen, Draper. But that has happened very recently. Before then, there really was nothing. So there really wasn't that much of a growing functioning tech ecosystem until the capital started to really move.

• What are the factors that the capital started moving now?

• I think a couple of things have really changed. A lot of it has been driven by entrepreneurs that have maybe started other businesses or have been exposed to investors in the U.S. coming over and launching businesses. So, they could bring a couple of investors that are maybe just dipping their toes to get interested. I think that Silicon Valley investors see it a little bit different than local investors. They see it as an opportunity for them to co-in, earn a little bit and open the market which will continue to grow opportunities for them. They're not expecting to have every investment they're participating to be a huge win. Whereas local investors think that there's a lot of money that can be made quick from tech, because they compare it to other markets that they've seen. I think, the reality is in between, both are true. You should be able to put money in believing that you will lose a lot. But in the end, you will be developing an ecosystem that will continue to grow. Successful entrepreneurs out of some of the companies you've invested in will continue to build on more investable companies.

• In which stages are the startups you invest in, in? Why are you investing at that time?

• I usually invest in late seed series A companies. These companies have a minimum viable product and some traction. Whether that's revenue or not, it might just be some sort of predictable user growth. I'm coming in here for a couple of reasons. First, I think that by this point the founders are much more mature and the company is de-risked a little bit. And, because it's a lot less capital planning in this range. So we would go in at that stage and then follow on more aggressively on the best performers to the C rounds. There certainly is other capital coming from incubators or the early seed companies. It's great that this capital is there. But after that, there's very few other investment firms that are supplying that capital that can help those companies grow. So what we're bringing to the table is we're a local investor, we really understand the regulatory environment. We can help support companies there and we can help companies bring their contracts into partnership with major industries in telco and banking. And, we really can help identify talent and then support it with best practices and governance standards, and how they relate in a local environment. So, we'd really like to co-invest with other investors that bring something else to the table. Maybe they have technical expertise or they've invested in companies that have been in a similar business space in other markets. What has worked in the local environment is the collaborative business models working with major industries. In Silicon Valley for example, there's this huge mantra of disruption if a company goes in with a new technology and steals market share from the big incumbents. Well, in Africa what really works is that the startup companies are either selling some product or service directly to the major industries or partnering with them for customer acquisition.

• Do you co-invest so much because you already have some expertise from the past years?

• I've been in Nigeria for five years, so it's probably expertise from all that period. But also because of the investor that supported us: He certainly lends his relationships that he's had from building IHS towers. Those are relationships that span across many African countries. That really helps the local companies that we invest in to expand across the continent.

• Is the investment volume equal, higher or smaller compared to other regions in the World?

• I would say that the volume is quite high. But the stuff that's able to get beyond the seed stage and really develops a business model that has some serious traction is pretty low. That's something that's not well recognized by international investors coming in. There's this „big valley of death companies“ that have a great idea but can’t get into the major companies like the telcos or the banks. They can’t receive any sort of seed funding outside of friends and family. And so, a lot of these companies don't really have what it takes to get to the next level and die. I think that the volume on the seed stage is so high because it's a necessity. Unemployment rates are very high, people are looking for options to earn themselves out of those situations.

• Is there already competition between investors for the best ideas?

• Not yet. The few local players that are on the ground either have different thesis or work together. International investors coming in like to work with other investors that are on the ground because they understand that being local limits your risk. So, so far, I don't think there has been competition. But that will change because there's a lot of people trying to raise Africa focused investment vehicles now. And if all that money does come in there's not enough high quality business models to fill that pipeline.

• As an investor, do you also educate the entrepreneurs? Do you bring the expertise from Western countries to Africa as well?

• We certainly lend our expertise. In general, the entrepreneurs that we are backing are mature and have some experience running businesses before. But as well we do a lot helping much more early stage founders understanding what investors would like to invest in. We are also bringing in the perspective of maybe what has worked with similar business models and what has worked in other markets. So, we do a lot of that with the local ecosystem in general even if we're not investing in the companies.

• What challenges are typical for the digital ecosystem in Africa?

• At least for us it isn't really the entrepreneur talent. They have the skills, they have some education. But what is certainly missing in the local environment is the middle level management: Guys that have high quality talent, that can support these companies to scale up and grow. But that is a cultural problem. If somebody has the the skills and the resources, they're likely to go out and start their own business rather than want to work with another entrepreneur. It has been a major issue for us finding middle level management. Infrastructure of course is a huge challenge. I mean, network speeds are still low, we don't have consistent power. All these sorts of things just make it much more difficult to do business. As an investor and as an entrepreneur starting a business, the lack of data and information in the system is a huge barrier. I mean, in the U.S., you can research on your expected customer base – all that information is available. In Africa, that information just doesn't exist. So, you're trying to build a business case on information that a lot of times you would only be able to learn as you go. So that's definitely a difficult aspect of it. Digital literacy is certainly a barrier, too. I give you an example: We have a couple of major e-commerce companies but most people still don't really know how to order from e-commerce on their mobile phone. So, they'll go to one guy who is maybe in their friend group and he's the one that does e-commerce orders for everybody else. So, we are kind of bridging that gap to help people understand how to shop, how to pay, how to even engage in social media. It's another cost that you just add to your customer acquisition cost because it really is a long effort to try to get a lot of these people to understand and be able to use it. They are first time smartphone users and these services are brand new to them.

• How is the regulatory system set up in Africa?

• With the local regulation they certainly want to encourage innovation and support early stage businesses. But they're still learning a lot. So, when new technologies come, maybe new payment infrastructure that they haven't seen before, they tend to reflexively regulate against it just because they don't understand how that's going to affect the overall ecosystem. So, it's a role where we play a role in educating regulators and show what has worked in other markets. Also, the lack of clarity is certainly a big risk for companies that are doing business here.

• So, is it difficult to work with the African governments?

• I wouldn't say it's difficult. It depends on which regulator and which government you're working with. It's certainly time consuming. These are people that are probably been in their positions for a very long time and the Nigerian culture tends to be very bureaucratic. I do think that they want to help and understand that this is the best way to move forward. But it definitely is a learning process on both sides.

• Has there been a change of mind on the side of the governments who really want to develop their countries?

• Well, I think that there has been a change. Traditionally there's been a problem with long term view of thinking, legacy planning and reinvesting in your own country rather than not just padding your own pockets. But I think many countries, Nigeria is one of them, certainly have been much more of a nationalist. And tech is probably the best way to really leapfrog across the shortage of infrastructure to build up the country. Certain countries like Rwanda are incredible examples of that. They're small countries but they've done a ton to really innovate and build up the local tech ecosystems, to put regulation in place that can help support the early stage companies. I still think it does vary across person to person and which regulators you're dealing with. But I certainly have seen a positive change there.

• Are there any challenges you have never thought of before you went to Nigeria?

• I think timing is something that I think about and a lot of the things that I invest in. So, I think a lot of companies who are trying to start business models that have worked in other markets and just bringing them local, thinking that it reduces at least the business case risk. But there are so many more aspects that haven't been developed that would be a precursor for having these work well. E-commerce is a great example of that. It’s just far too early for that to work well. So, we've been looking at a peer to peer micro insurance platform. People in the local environment felt a little bit of superstition – „if you buy insurance and you're asking for something bad to happen then it probably will“. So, these sorts of aspects are challenging, learning how people really do think about these new products. It is very different. Consumer trust is also a challenge – and a huge win. People still don't feel comfortable putting any of their debit card information into a payment platform. So, we've looked at other alternatives for them to feel more comfortable about transacting. Sometimes it might be going to a local agent and paying that way, sometimes it might be paying with an airtime wallet or some other sort of mobile money wallet. In general, I think that when I came over here to do business on the continent all the kind of economic and macro factors made it look extremely attractive and made it look like you could do things easy – very low hanging fruit in terms of the number of products you could manage. In reality it's just been lot harder for all those factors. But on the other hand, there is just that huge gap in opportunity.

• Is it still an existing challenge that there should be first water and electricity, then maybe Internet and business models?

• I am not sure if those are the prerequisites. There are certainly real problems and there are some real solutions that are being built to solve them. But what really matters is that you as an investors are focusing on your capital behind the businesses. That they are long term sustainable and that they will have commercial returns and therefore attract and retain talent that eventually would serve their own businesses and international and local investment capital will return. And, I think, over the long term building that sustainable ecosystem is a lot more important for job creation and economic growth rather than just investing in popping up business models like a lot of impact investors have done in the past. So, I think that that's ultimately where the long term sustainable growth will happen.

• Are there hot spots where the tech ecosystem is growing faster in Africa?

• Fintech has been a huge hot spot. Lots of people develop services for payments for cross-border remittance. I mentioned to you the micro insurance, for example. There's one company that's using Bitcoin to allow people to move capital outside of their local countries. Fintec is really where there's been a ton of hype just the past year and a lot has really been done. I think that there's a couple of opportunities that are not as well penetrated yet and that we're looking at very closely. Digital identity is certainly one of them. Across the continent there's only a few countries that have to some extent a functioning national identification systems. But in all the other countries, there is a difficult environment for platforms like micro-finance to identify who they're working with. Even for Uber it’s a problem to see if the drivers are really who they say they are. Also, there's a huge opportunity in both rectech and analyzing and processing data for both telcos and traditional banks.

• Are all the countries developing in the tech ecosystem alike or are there huge differences?

• There are huge differences and probably differences also in terms of what business models are going to be the ones that really work early. I mentioned earlier that the landscape in East Africa has been impact driven. A lot of the founders that have started businesses there are coming from the West. Whereas West Africa and the founders are certainly local. Francophone West Africa is still coming into their own. There has been a couple of early stage companies that we've seen that are interesting. But I think it's still developing and not quite there yet. I think that West Africa, especially Nigeria and Ghana, has much more of a culture around creativity and trying out new businesses. They're developing new things that haven't been seen anywhere else in the world.

• The problems the startups are working on and are finding solutions for, are they unique or would they work anywhere else as well?

• I think they are unique but could potentially work in other markets. So, let's take for example the company that we recently invested in. They have built a 3-D facial recognition platform that works in an African environment. That means it can be used on very simple cheap Android phones that are sold for 30, 40 US-Dollars. It can be used in low network speeds and it captures dark faces where the lighting quality is pretty poor. So, these are all problems that are probably unique to Africa. It could be applicable to Latin America and Asia as well. But these are our problems that we're facing. Technologies in the rest of the Western world wouldn't really be solving those problems. Another example is based the telco industry. So, in Nigeria the telecommunication companies are being forced by regulatory standards to rollout in rural areas. But the average revenue per user is really low in these areas and declining across the population. So, there we’re looking for new alternative ways to really cut costs and to adopt new technologies that would allow that. For example, we've looked at a company that's doing remote SIM registration where a physical SIM wouldn't be necessary but a user could remotely register all their information and their biometrics remotely on their phone. So, these are a couple of new technologies that I think are best, maybe have started in a local environment but certainly as they're tested could expand to a global marketplace.

• What can we learn from investors in Africa and businesses starting there?

• I think there will be new business models that can come out and leapfrog the traditional way of doing things that have worked in the rest of the world. International investors need to understand that the business cases that have worked for them aren't necessarily applicable for a local environment. And that they can lose a lot of capital if they believe that. In Africa your business success and success as an investor is based on the local relationships that you have. Relationships are hugely important for trust and getting things done.

• Is there something we in the west get totally wrong about Africa?

• I had this perception before I moved to Nigeria, that it was a scary place that was dangerous where everybody was trying to rip you off and corruption was everywhere. Corruption does exist in a lot of these markets. But I also think that there are good governments, there are good business leaders and there are good entrepreneurs that are just trying to make a difference.