Outsiders get the bulk of venture capital in Africa. Peer-selection can change the game.

Guest Author

Meg Massey

Guest Author

Ben Wrobel

It’s a warm April day in Lagos, Nigeria. Fifteen people are sitting in a circle in a conference room, for a ceremony called “the hot seat”. In the center is a Nigerian woman in her late twenties, Odunayo Eweniyi, known to her friends as Odun. She is getting ready to answer tough, incisive questions about the investability and social impact of her fintech startup, PiggyVest—with tens of thousands of dollars on the line.

Eweniyi needed $150,000 for her startup, and fast. She had launched PiggyVest a few months earlier with her friends Somto Ifezue and Joshua Chibueze, and it was taking off more quickly than expected. It started as a thought experiment and a bit of practice coding; the idea was to build an app to help millennials like Eweniyi’s friends build a nest egg by stashing away a few dollars every day or every week. They’d shared the beta version of the app with friends on Facebook. Within two days, they had three hundred sign-ups. Now they were pushing two thousand, mostly thanks to word of mouth.

Eweniyi and her friends were operating on a shoestring budget, with no employees and a tiny office. With their user count steadily growing, they needed a license from the government to operate as a microfinance business. The license would cost $150,000 – 25x the average annual income in Nigeria.

Eweniyi had reached out to some investors to get the money for the license. But as a Nigerian-born fintech founder, she faced a tough statistical reality. A 2017 study found that more than ninety percent of funding for East African fintech startups went to expat entrepreneurs. Other data showed that traditional investors in Africa were less likely to back female founders.

But right now, Eweniyi wasn’t pitching to traditional investors. In this hot seat session, part of a Village Capital startup accelerator, she was pitching to a cohort of other African fintech founders. And by the logic of the peer-selected investment model, those entrepreneurs would have the final say over whether or not she received investment.

This peer-selected investment process is an example of a relatively recent phenomenon called participatory funding – ceding decision-making power from traditional “experts” or investors, and giving it to non-profit leaders or social entrepreneurs who are closer to the ground. It’s also quite unusual – particularly on a continent where foreign VC investors have started to show up with their money, and their biases.

Digital recolonization

The conversation about tech and foreign capital in Africa has been brewing for some time, but it hit a fever pitch in April 2019, when the leaders of e-commerce company Jumia rang the bell on the New York Stock Exchange to mark their initial public offering. It was a major moment; Jumia was the first billion-dollar company to come out of Africa. Dubbed the “Amazon of Africa”, the unicorn at the time was generating hundreds of millions of dollars Jeff Bezos-style, selling everything from phones to blue jeans on a continent with a young population and growing purchasing power.

Headlines called Jumia “the first African IPO.” But for many leaders in Africa’s tech scene, that distinction rang false. The company’s African co-founders had exited the company years earlier, and the Jumia leadership that showed up at the New York Stock Exchange primarily hailed from outside Africa.

Issam Chleuh, a tech leader and accelerator founder based in Mali, summarized the situation in a widely shared op-ed. He wrote that the so-called first African IPO was actually “registered in Germany [and] founded by French entrepreneurs, who chose to base their engineering team in Portugal after claiming that there was no tech talent in Africa.”

Chleuh was one of the African tech leaders who had painted a worrisome vision of the future that contrasted with the celebratory one in the news: a future in which Africa’s tech scene is dominated by investors and players from outside the continent at the expense of native-born entrepreneurs. In his op-ed, he dubbed it extractivism. Others have called it digital recolonization.

Digital recolonization is a legitimate fear, a version of neocolonialism playing out through the lens of impact investing. Much has been written about how Western countries plunder billions of dollars each year from Africa’s natural resources like minerals and natural gas. If foreign investors ended up owning the continent’s entrepreneurship ecosystem, it would be one more example of a valuable African resource controlled by forces outside the continent at the expense of those in it.

Indeed, by the time of the Jumia IPO, many impact investment committees consisted largely of white investors from California or France who were either staying in highly guarded hotels or living in Africa as expats. Some spoke Swahili or several other of the dozens of languages that are spoken on the continent, but many more spoke only English. They brought their culture, their values and their priorities.

They also brought a certain level of implicit racial bias. For instance, there was the troubling trend of “whitefronting,” or hiring a white CEO for an African-founded company to appeal to foreign investors. Abdul-Karim Mohamed, an investor who manages Acumen’s East Africa portfolio, did some digging to try to put a number to the problem. In 2018, he dove into the Global Impact Investing Network’s annual database and pulled out two hundred eighty-six total transactions that occurred in sub-Saharan Africa the previous year. He broke down the deals by the race of the founding team.

Mohamed found some astonishing results. Out of those two hundred eighty-six deals, more than half went to companies that had only white founders. Overall, he estimates that white founders in Africa received funding at a rate eighty-seven times higher than their Silicon Valley peers. “In an effort to create Silicon Savannah and Yabacon Valley,” Mohamed wrote in his analysis, “impact investors are fueling a system fraught with inequality, onto a continent that’s not in need of more external meddling.”

The lack of investor diversity is problematic enough in the United States, with its long history of institutional racism. (In a country that has hundreds of billion-dollar valuations, only thirty-four Black female founders have ever raised a million dollars for their startup.) When applied to Africa, the stakes were even higher. The entrance of white investors risked recreating the colonial power dynamics of not so long ago.

Peer selection

This was the context in which Odun Eweniyi sat in front of her peer entrepreneurs during Village Capital’s accelerator in Lagos. Sitting in the hot seat on the final day of the program, she wasn’t sure if she would get selected for investment in the peer review process. But she was glad to be part of a startup funding model that flipped the traditional power dynamics of neocolonialism.

Three months before the hot seat, Eweniyi had flown to Ghana for the first meeting of the accelerator program. Rather than pitching to potentially foreign investors, she was pitching to people who were just like her: founders of early-stage fintech startups in Africa focused on improving access to financial services. While not direct competitors, they had enough in common to understand the basics of each others’ technology and customer base.

Over the course of several marathon sessions in the winter of 2017, the founders in the cohort spent more than one hundred hours getting to know each other, debating business models and acquisition strategies and offering frank advice. In January, they met in Accra, Ghana, where they spent four days presenting their business models and growth strategies in a conference center. In February, they met for another stretch in Nairobi, where they helped each other set milestones for growth.

“The month-long break was important, because you were able to internalize the feedback you got from the previous round,” Eweniyi remembered. “We were able to really see whether the other entrepreneurs made progress and whether they had responded to constructive criticism.”

On that final day of the program in March, the group gathered behind closed doors for the hot seat, where each entrepreneur took a turn getting peppered with tough questions posed by their peers. After the final member of the cohort had their turn in the seat, Eweniyi and the other founders retired to their rooms to put on their “investor hat” and rank each of their peers according to several criteria (entrepreneurs are not able to vote for themselves). When the final ranking was tabulated, Eweniyi’s company PiggyVest came out on top. Along with a Keynan startup, Olivine Technology, Eweniyi was guaranteed an offer of investment from VilCap Investments, Village Capital’s affiliated venture fund.

A few months after the program, Eweniyi raised $1.1 million in seed funding from venture capital investors. With this funding, she and her partners were able to obtain that government license and further develop their product. The company has helped their more than one hundred eighty-five thousand users save more than $14 million.

The above post is the second of three excerpts from “Letting Go: How Philanthropists and Impact Investors Can Do More Good By Giving Up Control” from authors Ben Wrobel of Village Capital and Meg Massey of Sanspeur. Read the first here.