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African business opportunities differ from what the developed markets expect
27 September 2022The need for change of VC strategy in Africa, due to wide misalignment between traditional models of venture capital and the African market, highlights an interesting report published recently. The report, titled Chasing Outliers: Why Context Matters for Early Stage Investing in Africa reveals the significant differences of Africa compared to the western world, which is reflected in the multiple discrepancies between key characteristics of Silicon Valley VC and African markets.
Two years ago (during WEF2019), our founder and CEO Bassim Haidar in his interview to DW argued that “the secret of success for doing business in African countries is individualized knowledge of the market and localized engagement”, emphasizing on the need of any western company to physically come and understand local rules as well as the culture in Africa. Μr Haidar’s view, as the new report shows, also applies to the way venture capital should invest in African startups.
Authors argue that African markets’ common characteristics of price sensitivity and low purchasing power clash with an expectation of Silicon Valley-style high growth and super returns.
This, in turn, influences how startups and funds maneuver as well as what outcome they expect and produce. “Τhe VC cut-and-paste method doesn’t work and must change” they suggest.
Those who know how to go deeper, will discover large, unexploited opportunities within African markets, the report argues, adding that many of them will be discovered through experimentation and exploited through stellar execution. “While African markets are not always able to provide the outsized returns that Silicon Valley typically looks for, in high-growth companies, a more focused strategy here could unlock real gems, as has been proven by some of the startup successes the continent has seen over the years.”
As a result, investors should prioritize investing structures and practices that reflect the realities of operating in Africa. This includes adopting more flexible investing structures with longer time horizons. “A more measured perspective is that significant, profitable opportunities exist despite, and arguably because, of the challenges” the report underlines, recommending that allowing a longer time horizon for returns, understanding that growth could be slow and difficult to achieve for many companies is the right approach for Africa’s market. Tony Chen (managing director of Kinyungu Ventures) writes in his comments of the report: “most investors working in Africa overestimate what can be done in 5 years, but underestimate what can be done in 15”.
