Globally, there is a trend towards hyper-focus when it comes to venture capital investments, be that on certain geographies, or verticals. But in the nascent African tech ecosystem, that may not be the best approach.
In episode 15 of Disrupt Africa’s “The month in VC” podcast series, released in partnership with Atlantica Ventures and Goodwell Investments, we caught up with investors to discuss the pluses and minuses of focus, be that geographic, sector-based, or otherwise, when it comes to VC plays.
Investors can focus around geography, vertical, stage, or theme, say, financial inclusion, and the decision to focus is usually made around how they can add the most value. There are challenges around having a niche focus in emerging markets such as Africa, however.
Wim van der Beek is founder and managing partner at Goodwell Investments, advises funds that do choose to focus on one, say, sector, to be more general elsewhere.
“If you have a very specific sector focus, you can do that in multiple geographies, and in the same way if you focus on just one geography, you then are able to be more generic about the sector focus,” he said.
“If you narrow yourself as an investor down too much in terms of both geography and sector, and type of businesses, then I think that is a risk for our type of investment. You need to be clear that you have some sort of focus, but when you become hyper-focused and only do a certain type of business, and only a certain type of geography, then your ability as an investor to actually add sufficient value is going to be too limited.”
Let’s look at the different types of focus then, starting with geography. Justin Stanford is co-founding general partner of 4Di Capital, an early-stage technology venture capital fund manager based in Cape Town, South Africa. He believes that many firms, including 4Di, had come into the market with a stated geographic focus, but his company had eased up on that a little bit.
“We found that borders are blurring more and more, and almost all the companies that are operating in Africa are now in multiple different companies countries, sometimes spread across the continent,” he said. “It’s so difficult to really pin that down these days that we don’t even try anymore.”
So what about different verticals? van der Beek says there is an emerging generation of fund managers who have clear sector focuses, and that they tend to be successful in singling out and working with fast-growing businesses in areas like healthcare, and education.
“At the same time I’ve also seen that funds that have a certain focus on, say, mobility, logistics or financial services have actually been forced to broaden their focus, and adapt to that trend where you see convergence between sectors and industries,” he said.
“A lot of the financial services businesses, and mobility and logistics businesses, have started to broaden their own scope of operations. I’ve seen an increase in specific focus of certain funders, but at the same time I’ve also seen other funders broaden their scope because they see that what’s happening in the market is actually that those boundaries between sectors are disappearing a bit.”
The blurring of boundaries between different geographies and verticals, then, makes hyper-focus more challenging. Another challenge to focus has been the nascency of Africa’s tech ecosystems. Though Stanford says the startup ecosystem is now developing to the point where firms can choose to focus on just one vertical, he believes doing that is still a bit tricky if you are Africa-oriented.
“The market’s just still not quite broad or deep enough, and so if I think about, you know, the bigger VCs that focus on, say, fintech, most of them are also investing in other emerging markets as well. They’re not limited to Africa only. You are limiting yourself to quite a narrow slice if you’re going to pick both Africa and just one vertical,” he said.
Stanford says even those firms that do restrict themselves to one vertical are doing so in the broadest possible sense, and that it is only really later-stage funds who have the luxury of being able to hyper-focus.
“You might say fintech and insurtech, and any adjacent vertical, actually widens it quite a lot. So there is value in having specialists, having a focus, and having specialist skills, and building that up,” he said.
“But particularly if you’re like us in the early stages, you do need to be a bit broader. As you go later stage you can get more and more specialised if it then makes sense.”
There is another type of focus that some investors have, and that is on stage of a company.
“That’s something that we’ve adopted from more developed markets. You’ll have separate sets of investors – pre-seed, Series A, Series B, Series C…” van der Beek said.
“Diversity in that focus of investment firms on the stage of development of a company assumes again of having the entire ecosystem in place, but assumes that all the other investors that focus on the other rounds are also there, and that is not the case in Africa. If you look at the landscape there is a lot of concentration at a very early-stage.”
What that also means is that a lot of companies that have raised capital at, say, Series A, are struggling to raise at Series B, and C, because the funds that make those investments are simply not there.
“A lot of foreign capital has disappeared in the last year or so; there’s not enough international capital going into those routes. So what you see is that a lot of firms that specialise just in that early stage are actually struggling to help their portfolio companies when they need to to raise the next round of capital,” said van der Beek.
“There’s not enough other funders around to help raise funding, and so the funding crunch that you see in the market right now is also informed by the concentration of a lot of those firms on specific grounds.”
