Venture capital investments can bridge development finance gap

Venture capital investments can bridge development finance gap. FILE PHOTO | NMG 

By RUFUS MWANYASI
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Summary

• In 2019, we saw a new record for Venture Capital (VC) investments in Africa at $1.4 billion (Sh149.8 billion).
• There was also a 22 percent increase in the number of reported deals last year compared to 2018 up to 139 from 114 deals in 2018, according to Africa Private Equity and Venture Capital Association (AVCA).
• This not only gives us a glimpse of the huge potential for investors in Africa, it also allows us to see VC as an essential and credible driver to meet the development challenges on the continent.
• Countries such as Kenya, South Africa and Nigeria are already considered as hubs conducive to the emergence of start-ups.

In 2019, we saw a new record for Venture Capital (VC) investments in Africa at $1.4 billion (Sh149.8 billion).

There was also a 22 percent increase in the number of reported deals last year compared to 2018 up to 139 from 114 deals in 2018, according to Africa Private Equity and Venture Capital Association (AVCA).

This not only gives us a glimpse of the huge potential for investors in Africa, it also allows us to see VC as an essential and credible driver to meet the development challenges on the continent. Countries such as Kenya, South Africa and Nigeria are already considered as hubs conducive to the emergence of start-ups.

A quick snapshot of the report reveals a growing industry; total number of and value of VC deals reported on the continent reached a six-year record high in 2019.

The total value of reported VC deals between 2014 and 2019 stood at Sh390 billion, with Sh200 million being the median deal size.

In the same period, Southern Africa attracted the highest volume of VC deals (25 percent) with 79 percent of those headquartered in South Africa.

East Africa accounted for the second highest share of VC deals (23 percent) followed by West Africa (21 percent). Financials (19 percent), information technology (19 percent) and consumer discretionary (18 percent) accounted for the largest share by volume.

The same sectors accounted for 57 percent share of VC deals by value. Notably, Africa-based investors accounted for 20 percent.

North American investors led with a significant (42 percent) of the total number of investors followed by European-based investors at 23 percent.

Though the success is clear, some in the industry have posed serious questions; why with all this interest, are there so few unicorns (VC backed start-ups that reach a valuation of Sh100 billion in a financing round or exit) in Africa?

Is mobile technology the key to solving Africa’s problems? Will start-ups scale up fast enough to serve local markets? Is there enough talent? Do investors, entrepreneurs and VC investment teams have realistic return and time horizon expectations? These and more critical questions remain inadequately answered.

On top of these, it’s also critical to note external challenges stand in abundance.

For example, it’s well known that the African VC ecosystem requires longer times for financing. Further, less guidance from angels, VC consultants and repeat entrepreneurs often result in business models that are less market-driven.

In addition, management talent is also scarce. Demand (most of it) is also low income, necessitating business models based on low-cost positions. Lack of favourable policies geared to start-ups is also a big drawback.

That said, the success so far regardless of the obstacles is worth noting. It’s also important to consider that the African VC ecosystem is still young and small (many players regard 2010 to be the beginning of the African VC ecosystem).

More importantly, it’s just hard to argue against the fact that VCs are formidable tools for development and job creation. Safe to say, although Africa’s VC world is starting from a lower base, it’s only a matter of time before it shines like the rest.

Mwanyasi is MD, Canaan Capital Ltd