At the Africa CEO Forum in Abidjan earlier this summer, a striking consensus emerged: Africa is at a new investment crossroads.
Venture capital has been pouring in at an unprecedented scale. Early-stage investors allocated more money to African innovators during 2021 than in the preceding seven years combined – a stunning $5.2 billion, according to the April 2022 AVCA report.
And in contrast to many other geographies, there are indications that the VC funding is still flowing to Africa, even in 2022’s more tumultuous macroeconomic climate.
These historic capital inflows are largely a positive sign, highlighting post-pandemic optimism and maturity in Africa’s entrepreneurial space. Beyond the financial world buzz, the headline-grabbing numbers have major real-world implications for African workers, consumers, communities, and for the future of the African economy, more broadly.
This flood of venture investment represents a tipping point. If venture capitalists think holistically and ask the right questions, the continent can make a vital leap of progress – socially, environmentally, and economically – with this influx of capital.
As an investor with deep experience in Africa and deep experience in considering the real-world outcomes of investments beyond financial return, we have learned important lessons about success on the continent.
With that experience as our guide, we offer three pieces of friendly advice to investors newer to the African investment landscape: First, ask who will really benefit from an investment. Second, consider the investment’s potential negative impacts. And third, question whether the problem can truly be leap-frogged.
When investing in African start-ups, investors should consider whether the benefits of the investment are spread fairly across the chain of value creation, accruing to employees and to the surrounding community, along with the investors and the owners.
This preliminary question is essential.
But we suggest that VCs go even further and consider how much the end-consumers truly benefit from the products or services the company offers. Africa needs businesses that transform lives with solutions aligning to the SDGs – businesses that provide medical care where none previously existed; businesses that support basic hygiene needs, like clean water access; and the like.
This realm of “transformative impact” is replete with business potential. When vast sums of venture capital flow to enterprises that merely add small conveniences around the margins of African lives, it is a missed opportunity – both for the investor and for the end-consumer.
Negative impacts of business failure
As impact investors focused on both financial returns and real-world outcomes, we hope that all African entrepreneurs consider the social and environmental impacts generated by their work, whether they are backed by venture capital or not.
But certain potential negative impacts have shown up among venture-backed businesses. When these businesses fail – and by nature of venture investing, many do – they can leave a ripple effect of negative impacts in their wake.
Firstly, the failed businesses’ goods, services, or infrastructure are no longer available to the customers who have sometimes developed dependency on a business that eliminated other alternatives.
Consider the example of one venture-backed company that provided solar light kit charges (and charging capacity) by credit to rural areas. Many people paid for it in credit, adopted it, and stopped using other alternatives. But then, the business failed – leaving reliant customers with no back-up option.
Additionally, when such businesses fail, the entire community has lost valuable time that could have been used to invest in a permanent solution. In many fragile African communities, a business failure generates negative impacts on more than just the owner and employees. Such failures have broad ripple effects.
Venture capital is generally attracted to problems that affect large numbers of people. This scalability magnifies return potential in exchange for the risk that early-stage investors assume. So far, the largest concentration of venture capital money has gone to fintech and other internet-based offerings, less to other basic needs.
But problems that affect large numbers of people sometimes require slower, more complex solutions.
Sometimes, impact-minded investors should be stepping in with patient capital on a longer time horizon. In other instances, governments should be making these investments.
For example, “de-centralized solutions” for infrastructure – which are popular among venture capitalists – should not have the negative effect of releasing governments from investing in permanent solutions.
VC-backed telemedicine is not a substitute for permanent clinics. Decentralized water offerings do not take the place of central urban water and sewage infrastructure. And “energy as a service” is not an acceptable replacement for centralized affordable energy provision for civil and industrial uses.
In other words, venture-backed solutions often need to be complemented by – not replace – other types of investment. Not every gap in Africa’s development can truly be leapfrogged. Slow, steady, intentional progress is sometimes more responsible and more lasting.
A crossroads full of potential
By considering these important questions, venture capitalists arriving to the African investment landscape can benefit from the lessons impact investors have learned over years. Accounting for social and environmental outcomes of an investment beyond financial return can enhance an investment’s long-term value.
This broader, more holistic lens might be a different approach than such investors take when investing elsewhere, but we’ve learned that this approach maximizes the potential for investment – and stakeholder – success in Africa.
Across the continent, there is plentiful opportunity for all types of investors to meet their return mandates and drive progress on Africa’s most pressing challenges. We have a lot to do, together!
Nimrod Gerber is managing partner of Vital Capital