Primer on venture capital in Africa
If you've ever heard of the term "venture capital," there's a good chance you've also heard it paired with the word "Africa." It's not uncommon for investors to talk about Africa's potential as a hotbed for VC. In this primer, we'll explore the basics of venture capital in Africa, including its history, key players, and the challenges of investing in the continent.
What is venture capital?
Venture capital is a type of private equity, which is an investment in a company with high growth potential. Venture capitalists provide funding for startups and growing companies that need capital to launch their businesses, but don't have enough collateral to secure a loan from a bank or other financial institution. Venture capital investments typically last five years: they're long-term investments with high risk associated with them because there's no guarantee that the company will succeed during this time period.
Venture capital in Africa is a relatively new industry, but it's growing rapidly. It can help build capacity in Africa by investing in local companies, and it can help build the ecosystem for startups by providing mentorship, training, and networking opportunities.
Why invest in Africa?
The African continent is a growing market, with a population of 1.2 billion people and an average age of just 26. The middle class is expected to triple in size by 2030. And this is just the beginning: Africa's youth are tech-savvy, educated and ready for business opportunities - making it an ideal place for venture capital investment.
African startups may be able to get funding from investors who want to see them succeed but also have a social conscience. This type of investor is not new, but it's becoming more common as investors become more aware of the impact their money can make on society.
The Bill & Melinda Gates Foundation has been an example of such an investor since its inception in 2000. The foundation invests heavily in African healthcare projects such as vaccines against diseases like malaria and HIV/AIDS, which affect millions of people every year. It also provides grants for education programs that focus on improving literacy rates among young adults (especially girls) across Africa's most impoverished nations.
What's the outlook for Africa's VC industry?
Venture capital in Africa is a relatively new industry, with the first funds established in the early 2000s, and there are still only about 200 active venture capital funds on the continent - compared with more than 8,000 in Europe and North America.
But it's growing fast! In 2016 alone, African companies raised $2 billion from international investors. And while most of those funds come from abroad, local players are starting to emerge as well: Nigerian startups raised over $1 billion between 2011-2016 - more than any other country in Africa or Southeast Asia during this period.
As with any emerging market, there are challenges ahead for entrepreneurs looking for funding.
VC firms in Africa
While initially focused on South Africa, the industry has now expanded to include other countries such as Kenya, Nigeria, and Egypt.
There are several key players in the African venture capital industry. These include local and international funds, angel investors, and crowdfunding platforms. Some of the most well-known funds include:
- Helios Investment Partners - a private equity firm based in London with a focus on Africa.
- Naspers - a South African media company that has invested heavily in African tech startups.
- TLcom Capital - a venture capital firm that invests in early-stage technology companies across Africa.
- 4Di Capital - a South African venture capital fund that invests in early-stage startups in the technology sector.
Challenges and Opportunities of Investing in Africa
Some of the main challenges include:
- Lack of infrastructure. Africa still has a long way to go in terms of developing its infrastructure, which can make it difficult to operate and invest in certain sectors.
- Political instability. Political instability is a common issue in many African countries, which can make it difficult for investors to operate and make long-term investments.
- Limited exit opportunities. There are still relatively few exit opportunities for investors in Africa, which can make it difficult to realize returns on investments.
Investing in Africa also presents many opportunities, including:
- Young and growing population. Africa has a young and fast-growing population, which creates a large market for many different products and services.
- Rapidly developing tech scene. Africa has a rapidly developing tech scene, with many innovative startups emerging across the continent.
- Untapped markets. Many sectors in Africa are still relatively untapped, which presents huge opportunities for investors.
So, if you're looking to raise capital in Africa and want to know where the money is going, this post might be helpful. We hope that it provides some insight into how much progress has been made in developing the private equity and venture capital markets on the continent.