Thought leaders persistently predict an increase in deal volume and deal values on the African continent, and yet the pace of foreign direct investment in this market remains slow, writes Rossie E. Turman III, chair of Lowenstein Sandler’s International Finance practice and co-chair of its Africa practice.
The Atlantic Council blames this reluctance in part on “dated misconceptions” and a “fail[ure]to recognise the mutually reinforcing trends that have over the past twenty years restructured many African economies and enhanced their resilience”.
After over two decades of experience negotiating and executing complex business transactions in dozens of countries throughout Africa, I have observed that the typical Western approach to venture capital investment often fails to capture the full breadth of opportunity in this promising market. Investors expecting traditional pitches supported by data and profit projections like those to which they are accustomed in the United States and Europe may be disappointed, because the African economy offers a dearth of what the West considers reliable corporate information.
However, this model is evolving – often in unexpected ways. In the same way that African communications technology skipped landlines and moved straight to mobile, the African VC ecosystem could bypass traditional models altogether and embrace an innovative, yet elemental approach based on the power and necessity of relationship-building.
Information sharing and collaboration amongst investors and entrepreneurs are integral to elevating and revealing the African market’s vast potential. When stakeholders talk to each other and share ideas, it speeds up the process of developing nations’ environments and ecosystems, building closer relationships between players in the market and leading to more efficient and effective dissemination of best practices.
The traditional American concept of ‘networking’ often makes founders from other countries nervous. In my work bridging the cultural divides in this sphere, I often advise founders that networking – in the style familiar to American investors – is an acquired skill, and each entrepreneur, no matter where they were raised, can find a networking approach that best suits their own personal style and business objectives. Whether you hold cocktail parties, meet for tea or coffee, or arrange for one-on-one meetings, networking is key to engendering trust – not only with potential funding sources but with others in your community.
Entrepreneurs should endeavour to encourage trust, even amongst competitors, in order to establish best practices. When you trust your compatriots in the industry, then you are better situated to collaborate. You can more easily compare and compile data to explore what is working, and what is needed. Once you have developed trust within the community, you can then look outward together in a mutual quest for investment and growth.
African entrepreneurs and investors still face obstacles to “traditional” VC networking. My partner Ed Zimmerman, founder of VentureCrush as well as both The Tech Group at our law firm Lowenstein Sandler and First Close Partners, a fund focused on under-resourced managers, often speaks about the “old boys’ club” of venture capital, which is centered around Ivy League colleges and investment bank elitism. Would-be VC participants from African countries and the diaspora generally still face racism, sexism, and provincialism. However, when confronted by instances of these stubborn biases, I always point out that numbers and results ultimately speak the loudest. We break down doors by demonstrating success over and over again, through continued past performance and past growth.
Investors willing to see beyond the old-school outlook of mainstream venture capital must be intentional. They must accept that entrepreneurs in countries like Kenya or Egypt may not be able to produce a fully documented 10-year track record like their American counterparts. By forging strong relationships and trust, however, they can realise many benefits and strengths beyond those laid out in the typical pitch deck.
It takes a high level of risk tolerance, vision, and intentionality to come in pre-revenue or pre-launch and recognise an amazing founder, a great technology, a great idea, and a growing market. Those who hesitate because of their risk profile, or their insistence upon massive quantities of data, will be forced to wait for later stages, at lower returns.
Gender diversity is also a challenge. Less than three per cent of African tech startup funding goes to companies led by female CEOs. Ironically, in most Sub-Saharan African countries, wariness of female leadership is not a tenet of the indigenous cultures, but likely arose from colonial-based relationships. This follows the US model: as Crunchbase News has reported, in 2021, Black female startup founders received just 0.34 percent of the total venture capital spent in the US.
The key to addressing these inequities is through building and maintaining relationships throughout the diaspora, including the United States. Participants must assume multiple roles: founders can become co-investors; mentors must support younger founders; more established entrepreneurs should facilitate contacts that they wish they had had when they were building up their own businesses. That’s how the ecosystem keeps getting bigger. Eventually, these ecosystems, angel networks, and new venture firms will start connecting the dots from early-stage founders towards larger acquisitions or exits.
Founders of African businesses or ventures will ultimately do better when they are linked up together. Collaboration can produce more robust solutions, a more reliable supply chain, and increased investor confidence. Coming together will create a better deal flow at the end of the day. Everything from data to relationships, from market understanding to networking, is like concocting a recipe: when you strategically assemble all the right ingredients into a pot, eventually there will be a line of people at the end of the day, asking for more.
In conclusion, it is by building a strong foundation through intentionality and equity in relationships that the VC ecosystem will thrive in Africa and beyond. Every company must share the burden, take the risk, and add to the ecosystem together. A tower that is built on a fragile foundation will topple over. But a building with a big, deep foundation and a broad base will develop a long-lasting, reliable ecosystem.
