The Silicon Valley model of venture capital (VC) does not work in Africa, which faces issues with teams, the size of markets and the difficulty of making a successful exit, according to Paul Cook, managing partner of Silvertree Capital.
Cook told the U-Start conference in Cape Town on Friday that the Silicon Valley VC model was extremely difficult to make work in Africa due to a number of factors, but there were opportunities for startups and investors regardless.
“Our opinion is that the Silicon Valley model doesn’t work that well in Africa. Can African startup hubs compete with Silicon Valley? There is a huge amount of money coming through Silicon Valley. Can you compete with that?” he said.
According to Cook, problems existing with all three steps of the Silicon Valley-style, with difficulties in building good teams, finding large enough markets and making exits.
“The problem in Africa is that all three of those steps are more difficult. Investors have to put a lot into making the plan investable. Markets are still small. And there are no easy exits in Africa at the moment. It is not easy to do exits, so if you’re trying to run a Silicon Valley-style VC in Africa it is a difficult job. It is not impossible, but it is very difficult,” he said.
However, he said Africa should not be trying to emulate Silicon Valley and could find its own way.
“We have a huge advantage here in Africa. Because we know where our economy is going. We know what consumers will want in 10 years time because it is what consumers in the United States and Europe want now. We don’t have to take a risk on a concept, it is just executing,” Cook said.
“What makes a business successful is a lot of talents, people of corporate background and tech background, and a focus on sales.”
He said there had been positive steps in recent years towards economic growth, more Africans becoming consumers and a growing, youthful workforce.
“The important thing is it isn’t just a resource boom. Over the last decade inflation has come down, government debt has come down. They face huge challenges, most definitely, but the trend is in the right direction. Governments are getting better,” he said.
Consumers, meanwhile, are moving above the threshold where they can spend on discretionary products.
“The block of people in Africa are moving from below that threshold to over that threshold,” Cook said. “We’re more than doubling the number of consumers, and that’s a huge opportunity for startups.”
Cook said many startups, when considering the opportunities offered by Africa, were overwhelmed by the continent’s size and diversity. However, he said startups should break Africa down into the areas that really mattered to their businesses in order to gain a clearer picture.
“There’s only a few clusters of cities that really matter,” he said. “A cluster in Nigeria, some stuff in Ghana, a huge city in Angola (Luanda), a bit of stuff in East Africa, and obviously South Africa. If you’re thinking about your strategy in Africa think about it as a few clusters of cities and it becomes much more obtainable.”
He said there was a lot of hype at the moment around African startups, but hard work was needed to make sure the reality matched that hype.
“The question for us and the investor community is how do we make sure we are channelling funds and skills into the entrepreneur community,” he said.
Pointing out the different ways investors were operating in Africa by comparing the traditional VC model of taking an existing team, incubating the idea, offering capital and taking a small stake with the Rocket Internet way of assembling its own team, taking pre-chosen idea, focusing on execution and taking a large stake, Cook said Silvertree was trying to do something different.
The company takes big stakes and spends a lot of time working with their portfolio of startups in order to build the businesses.
“We of course play a penalty, because we can only work with a few startups at a time, but that’s the model we’re gambling on,” he said.
