Venture investors seek to establish meaningful equity stakes in high-growth technology companies, which makes early-stage startups the ideal opportunity.
However, investors in Africa’s venture ecosystem face challenges, complexities, and nuances unique to the continent, even within the context of the emerging world.
The investment thesis on Africa is supported by fast-growing, young, and urbanising populations, an expanding consumer class, and significant gains in productivity spurred on by tech adoption.
By deploying capital into tech startups solving some of Africa market’s most interesting problems, investors can position themselves for outsized returns.
From an investor point of view, what separates the wheat from the chaff is not just the technology, but a new company’s ability to execute and operate. Early-stage investors are looking for a very specific type of startup: one whose team have demonstrated a potential to solve a large-scale problem across multiple markets.
Typically, this priority hinges around three questions:
- Is the market attractive enough?
Contrary to popular view, an attractive market is not just a large, growing market. It’s one in which:
- Technology can provide a huge competitive advantage.
- New ventures don’t require a lot of CapEx.
- The industry economics have a high gross margin, and technology can help achieve economies of scale.
- There isn’t a dependency on regulation and government spend to keep the sector afloat.
- Is the team good enough?
While passion is a prerequisite, it is no guarantee of success. A good team is one that can articulate a strategy that wins an attractive market with the potential to exit. It recognises that there is already someone in the market and leverages a business model where technology provides a defensive moat, and creates more value for customers versus the incumbents.
- Is the investment case strong enough?
A good company in a good market is not enough. It needs a compelling case for investment: a story in which the founders can wrest themselves of the leadership and ownership of a company to increase the size of the “pie” for all stakeholders. Valuation should not be considered relative to the existing company, but rather the company that could exist in three-to-five years’ time. Future upsides, not current upsides, will drive valuation.
The present-day environment offers a great opportunity to be an early-stage venture investor in Africa. Investments in Africa’s tech-enabled economy are enabling companies to hire competitively, develop innovative in-house technologies, and expand across the borders of a huge continental land mass. Whereas the start of 2022 saw competition with US firms to make early-stage investments in African companies, most international firms have since become cautious, as they have to deal with their portfolio valuations now dropping at a higher velocity than their African counterparts.
It’s a worthy reminder for investors with no more than a view on the African continent: “nothing is more expensive than a missed opportunity.”