Africa special: Africinvest on going from gazelles to unicorns

In 2016, the world saw the rise of the first African unicorn: Jumia. An online marketplace based in Lagos, Nigeria, Jumia operates in 23 African countries and was recently valued at $1.1 billion after a capital increase provided by investors such as Goldman Sachs, Rocket Internet, MTN Group and AXA.

Meanwhile, a handful of the top US-based venture capital funds have been taking the plunge with their first investments in Africa:

– Branch.co, a start-up providing credit scoring solutions and mobile microfinance, received a $9.2 million Series A financing round led by Andreessen Horowitz.
– Seed funding for BitPesa, a Nairobi based start-up offering alternative FX solutions adapted to the African market, was underwritten by Khosla Ventures’ impact fund along with Greycroft Partners and Draper Associates.
– Mark Zuckerberg made his first entry into Africa leading a $24 million investment round for Andela, a Nigeria-based venture that connects companies around the world with trained software developers in Africa.
– Alphabet, the parent company of Google, partnered with five tech hubs in Africa through its program Google for Entrepreneurs.

“When we made our first venture capital investment in Africa in the mid-90s, the VC market was a desert. We were among the earliest ones on the ground, which meant little potential for partnerships and co-investments. Today, the industry is at a tipping point. The market for VC deals in Africa is growing fast and venture capitalists from across the globe are increasingly interested in the growth opportunities the continent has to offer,” says Khaled Ben Jilani, executive partner at AfricInvest, a pan-African private equity and venture capital firm active on the continent since 1994.

THE UNTAPPED POTENTIAL
Today, the sands of the “desert” are shifting as investors are recognising the budding prospects for small and innovative projects in Africa. Socio-economic gaps, once seen only through the lens of development challenges, now look to some entrepreneurs as opportunities to leapfrog the developed world’s paradigm.

Over half of the population in Africa has no access to electricity and 80 percent of the population is without a bank account. Africa also has a significant lack of basic and reliable services including access to education, healthcare, transport and efficient agricultural practices. Over one half of the sub-Saharan African population is without access to proper sanitation.

Yet, the continent is rich in natural resources, with a fast-growing and young population, expected to reach 1.6 billion by 2030 (up 40 percent from 2016). This abundant workforce and remittances from the continent’s diaspora are key pillars of Africa’s potential. Moreover, the continent’s growing middle class and high urbanisation rates (the second fastest rate of urbanisation after Asia) are fuelling increased levels of consumption and expectations for better services.

Africa has an increasing level of mobile and Internet connectivity with half a billion individual mobile subscriptions today. Smartphone users are projected to triple by 2030.

INNOVATION AND NEW BUSINESS MODELS
While Silicon Valley’s technology innovations have provided a model for start-up success by disrupting several sectors, Africa looks to be taking this model a step further using its increasingly educated diaspora, tech-savvy population and penetration of Europe and America’s key tech forerunners. African entrepreneurs are developing and implementing technologies and new business models to bridge the continent’s socio-economic gaps.

Over 300 tech hubs have emerged across the continent, some benefitting from global partnerships, with the innovation ecosystem continuing to develop rapidly from Cape Town to Cairo, Nairobi, Tunis, Casablanca, Lagos and beyond.

A number of sectors have generated true “disrupters” in Africa, including in the fintech, cleantech and software spaces. Vermeg, a Tunisian financial solutions software company, is now the European leader in insurance management solutions with 150 clients in 20 different countries. M-Pesa, the Nairobi-born mobile-based financing company founded in 2007 by Vodafone and Safaricom, has over 30 million users, helping to reduce financial exclusion in East Africa. Nigerian companies Lidya, which provides mobile microfinancing, and Paystack, which offers mobile payment services, are also receiving increased attention.

Off-grid technology ventures enabled via mobile payment – such as M-Kopa in Kenya, Off Grid Electric in Tanzania and two providers of solar power solutions PEG in Ghana and Juabar in Nigeria – have also grown significantly in the past few years. These have provided electricity access to hundreds of thousands living off the grid.

Many more ventures offering innovative solutions are emerging, growing and looking for funding.

FROM SEED TO PLANT
International and local accelerators and seed funds are mobilising the growth of venture capital pipelines in Africa. Y Combinator – a US-based seed funding platform for start-ups – has over 15 Africa-based ventures in its alumni including Nigerian Paystack, Ghanaian OMG Digital, the BuzzFeed equivalent of West and East Africa, and WaysToCap, a Moroccan e-commerce service. North African Flat6Labs gave rise to Instabug, an Egyptian crowdsourcing platform for mobile engineers that received investment from International VC fund Accel. Several local accelerator and seed funds have gained International exposure and partnerships including B@Labs in Tunisia, Jokkolabs network in West Africa, Savannah Fund in Kenya and ccHub in Nigeria, to name a few.

Yet there remains a gap in the VC investment chain in Africa with few funds considering later stages of venture investment. While the growth rate of VC investment in Africa is promising, averaging over 25 percent year-on-year growth since 2009, 90 percent of the VC deals are concentrated in early-stage rounds of funding, compared to 70 percent for US VC investments. Opportunities for funds that can provide ventures with follow-on investments and take these beyond their early stages have surfaced.

BILLIONS WORTH OF POTENTIAL VC INVESTMENTS
The number of VC funds with a focus on Africa is rising. These are bringing forward a dual Afro-European and Afro-American positioning to lead on cross-border initiatives. Among these, AfricInvest, an Africa-based PE and VC firm, has operations all over the continent as well as in Europe.

Other European and American-based funds such as Energy Access Venture, eVentures, Partech and Vested World are rapidly increasing their exposure to African ventures and, in some cases, raising Africa-dedicated funds.

DFIs are increasing their input in the ecosystem, either through direct funding of ventures or by backing impact and regional VC funds. The IFC has funded CRE Ventures, Oasis Capital and Algebra Ventures, which are sub-Saharan Africa-focused, West Africa-focused and Egypt-focused VC funds. The CDC Group has funded the East Africa-focused Novastar Ventures VC fund and co-invested with Kenya-based Savannah Fund, among others. It is expected that the value of VC deals in Africa will reach over $1 billion by 2020.

Continued venture growth is expected in the cleantech, fintech, electronic/mobile/social commerce and software industries as a result of an increasing expertise base and demand. Edutech and healthtech are also key sectors for venture growth in Africa, through the digitalisation of education with mobile-based tutoring and language development apps (there are over 1,500 African languages) as well as digital and instant health diagnostics. In response to low yields in farming and a lack of crop security for local farmers, agritech ventures are expected to grow as well.

Africa’s myriad of opportunities for development and modernisation coupled with the emergence of innovative technologies are resulting in a growing need for financing. A range of funding structures to provide venture capital for multiple rounds of investment will become increasingly necessary to support the ecosystem if it is to keep pace with the rest of the world.

AFRICINVEST
AfricInvest is one of the first and most successful private equity and venture capital firms in Africa with over $1 billion of AUM invested in over 150 companies across 25 countries. AfricInvest’s unparalleled presence with 66 investment professionals on the ground and a unique strategy has earned the team long-standing relationships with a large network of partners in Africa, Europe and beyond.

AfricInvest has already made over 30 venture capital deals on the continent, with an average multiple of 3.4 for 20 exits. Today, AfricInvest is exceptionally well positioned to launch a global venture capital fund targeting companies with strong ties to the African continent as well as a network of innovation hubs, the first one being in Tunis.

With offices in Abidjan, Algiers, Cairo, Casablanca, Lagos, Nairobi, Tunis, Paris and London, AfricInvest will leverage its extensive experience developing new products and geographies to be at the forefront of the emergence of venture capital in Africa and beyond.

This article is sponsored by AfricInvest and appeared in The Africa Special 2017 published in Private Equity International in September 2017.