A few weeks ago one of Kenya’s finest digital heads, Mark Kaigwa, joined Musa Kalenga and myself on the African Tech Round-up podcast for two glorious hours of straight talk. The taping produced a busload of accidental hot takes on the state of Africa’s tech industry, but none would prove more controversial than our deliberations regarding the thorny issue of investor bias, apparently prevalent across the continent.
During the discussion, Kaigwa cited a blog post entitled "It’s time to fix the start-up funding landscape in Kenya", penned in May by an East African entrepreneur writing under the pseudonym, Thomas Sankara.
In this fierce piece, Sankara rails at the prejudice and mistreatment he claims to have frequently observed and personally experienced within Kenya’s start-up investment scene.
He points to ills such as poor capital allocation, nepotism, racial bias, and misplaced pattern matching - issues he says influence which start-up founders are able to access the capital they need to launch or grow their businesses. Sankara goes as far as arguing that the quality and soundness of business ideas is rarely a consideration in this context.
Up until recently, it was all too easy to dismiss such assertions as anecdotal or as sensationalised gossip fuelling the fires of Kenya’s buzzing blogosphere.
However, Sankara’s article referenced findings published in a Bill & Melinda Gates Foundation-funded report called Breaking the Pattern: Getting Digital Financial Services Entrepreneurs to Scale in India and East Africa. This fintech-focused research, which has since been released by the Washington DC-based venture capital outfit, Village Capital, pretty much validates most of what Sankara laid out in his blog.
According to the report, over 90% of funding for East African fintech start-ups typically goes to expatriate founders (European or North American), and despite East Africa posting a record haul in terms of start-up investment ($84.7 million) over the last two years, the fact is, 72% of that funding has gone to three companies - M-Kopa, Off-Grid Electric and Angaza. The balance went to 57 other companies.
After interviewing dozens of digital financial services stakeholders, including entrepreneurs and investors, it appears Village Capital has been able to identify at least four reasons for the existence of this discrepancy.
The first is what they call the “the human capital trap” - a phrase that describes the dilemma faced by home-grown start-ups that fail to raise capital because they don’t have the right team but yet can’t afford to assemble the right team without raising capital.
The second factor is “business model constraints”. This speaks to the challenge start-up founders face in coming to terms with how far behind the digital adoption curve some African markets are, relative to more developed countries, in terms of active participation in the new digital economy.
While investors typically want to see evidence of traction and profitable business models right away, in Africa, time, capital, and agility are required for founders to overcome key structural environmental factors in order to demonstrate the scalability of their efforts.
Then there’s the “debt capital gap” which relates to the uphill struggle local founders face in attracting the capital they need to achieve proof of concept.
Start-ups on the continent lack access to innovative and risk-tolerant backers who can provide them with working capital to substantiate the viability of their ideas by demonstrating traction.
The fourth and final issue flagged by the study is what Village Capital calls “the pattern-recognition problem”.
It turns out African start-ups don’t fit the investability mould that investors recognise, and founders lack the academic pedigree and elite people networks investors favour.
The most commonly expressed frustration in chatting with start-up founders who are on the hunt for venture capital is the fact that, as Sankara puts it, “bad business ideas from foreign founders get capital and good ideas from local founders do not”. I'm told investors betray their deep-seated biases by turning up their noses at African investment prospects due to a perceived “lack of experience”, or the belief that locals “do not understand corporate governance”, and often cling to the dense notion that local founders are inherently poor executors who aren’t up to building “the next Facebook”.
It’s impossible to deny these issues are confounded by the fact that the majority of the continent’s most active venture capital firms, as well as key sources of alternative investment like high-profile investor networks, consist of a tightly-knit community of expats and Ivy League-educated Africans.
Via their handy Silicon Valley connections and strong affiliations to leading start-up accelerator programmes, they are well-positioned to set a continental investment agenda that favours people who look, sound and behave European or North American.
By dragging these issues into the sunshine, I hope to enlighten us to how empty the rhetoric around Africa taking charge of her own future is if we don’t face up to the damaging impact of allowing investor bias to persist.
It’s clear that we can’t expect foreign interests, however well-meaning they are, to adequately address the partiality that exists. Case in point, at the recent G20 Summit in Hamburg, Germany, French President Emmanuel Macron expressed the widely-held prejudiced view that Africa is suffering a “civilisational” crisis.
Right. Clearly, we need to be setting our own investment agenda and solidifying our own king-making criteria. We simply can’t afford to leave that up to Ivy League alumni, Silicon Valley club members, or even “Africa-friendly” presidents like Macron.
In a recent chat I had with AppsTech founder and chief executive, Rebecca Enonchong, she highlighted the importance of promoting the formation of angel investment syndicates across Africa. That’s a message I believe we need to spread aggressively if we are ever to see real change start to take root.
As the co-founder of the African Business Angels Network, Enonchong is one of the dozens of individuals who strongly believe that home-grown syndicated angel investment efforts ought to be the bedrock of the continent’s start-up ecosystem. While it’s true that most major African markets are under immense pressure right now, and that the continent represents a tricky proposition in as far as being a serious global tech investment destination, the record investment Africa’s tech industry has been attracting of late is proof our potential is clearly too much for foreign interests to ignore.