Africa is the youngest continent in the world with almost 200 million people aged 15-24, and this number is expected to double by 2045. However, unemployment among East African youth is already high, at an estimated 51-57%. With a rising youth population and unemployment rate, young people are turning to entrepreneurship as both a means to generating income and jobs. 79 of every 100 jobs created by young entrepreneurs in East Africa have been for youth aged 18-34, however only 17% of entrepreneurs on the continent believe they will create a medium to high number of jobs over the next five years. This youth bulge is leading to a more nascent market of start-ups in the region, contributing to a less encouraging investment environment for prospective investors. More than 60% of enterprises in East Africa are reported to be under five years old, with 67% of these start-ups earning revenues of less than US$100,000. Consequently,accelerators are feeling the pressure:for East African entrepreneurs to grow and create necessary jobs, how can they improve investor engagement to facilitate this progress?
60-75% of small and medium-sized enterprises (SMEs) are underserved by banks in Sub-Saharan Africa, further challenging access to growth capital. Less than 20% of young entrepreneurs are able to access equity or debt to start their businesses, resulting in 86% using personal funds or borrowing from family and friends. Banks view these investments as risky, and the high cost of debt and lack of tax incentives deter young entrepreneurs. Most banks also require high collateral ratios, making it particularly difficult for early stage enterprises with limited assets. There is a growing need for capital that takes risk, is patient and also offers adequate enterprise support, specifically for early stage businesses requiring US$10,000-$500,000 in financing: the challengingmissing middle.In an improved market, entrepreneurs would have a smooth path to raising capital and investors would disburse more capital into opportunities across the region, even at the early stage and in the missing middle.
The good news is that impact investments are growing, and continue to grow. In 2017, a reported US$35.5 billion was invested into over 11,000 deals, and these respondents planned to increase the amount of impact capital by 8% in 2018. However, the majority of these are foreign investors headquartered in the U.S., Canada and Europe, adding an additional barrier to emerging market investments. To close the funding gap in East Africa, investors need to be encouraged to change their approach to investment to adequately serve mounting demand and impact of enterprises in the region. Accelerators seeking to stimulate investment would be better served by developing anintegrated framework of investor support. Building on brand presence, trust in service provision, awareness of investment realities and a culture of collaboration among entrepreneur support organizations (ESOs), can help facilitate this growth.
If you build it, they will come.
With multiple players in the start-up ecosystem, there is often limited awareness about who is working in East Africa and how best to engage with them. Building presence to showcase how accelerators create value is key to the strength of their network and ultimately, impact.
Form Investor Networks: Accelerators often approach investors with animpact firstmessage. However,impacthas varied definitions based on varied contexts. Commercial deals may not invest directly in social ventures, but non-social ventures can still have a social spin, like employment. If the goal is to build access to appropriate investment opportunities, then it is imperative for accelerators to broaden their approach and diversify their funders. Interest in impact investing has grown among individual investors, with increasing interest in emerging markets, specifically Sub-Saharan Africa. Fund managers are also reporting significant interest in products with a specific impact theme, sector or geographic focus, indicating investor preference for specialization in terms of investment strategy. Building investor networks grants accelerators access to these interests, including preferences regarding deal size, risk profile and focus on impact, supporting improved matchmaking between enterprises and investors.
Accelerators can broaden investor channels by forming associations or clubs in target regions, open to the field of potential investors – from high net worth individuals and family offices, to foundations and venture capitalists – whether their interest is awareness, impact or returns. Networks should be based on location for easier access to community building, and to customize the approach to unique investor needs and dialogue in each region. As investor communities emerge, accelerators can tailor networking efforts to target investment growth.
83% of investors agree thatblended finance de-risks transactions and improves impact performance, however many comment that they have yet to find the right deals or co-investors. As networks distil investment interests, there is increased likelihood of direct linkages between investors and investees, and opportunities to develop and report on successful funding structures and co-investment models. This also supports cost and time savings, as forming networks minimizes the need for teasers and heavy due diligence.
Leverage Existing Networks: Multiple investor networks exist globally, and are emerging across the region to address growing funding gaps. Engaging with these networks supports relationship building with investors, and between investors and early stage opportunities. Examples of existing investor networks with a focus on East Africa include:
- African Venture Philanthropy Alliance
- Angel Africa List
- East Africa Venture Capital Association
- Global Business Angels Network
- Intellecap’s Impact Investment Network
- Transformational Business Network East Africa
Accelerators can also build networks by producing or contributing to online communities and offering research, reports, stories, infographics and related material about the start-up environment in East Africa. Accelerators can contribute through targeted digital media channels viaTwitter andLinkedIn, and global platforms likeImpactAlpha to limit costs, increase reach and participate in online dialogue with impact investors and ecosystem players. However, to maximize the potential of digital channels, it is necessary to strategically apply community-building tactics such as following, tagging and sharing content of relevant investors, funds and organizations, and joining online groups supporting impact investment in East Africa and emerging markets. Regular and meaningful content creation will raise the profile of accelerators as influencers, while promoting who they are, what they do and why they create value. Contributing through online and partner channels also extends reach beyond current networks, facilitating organic lead generation.
Investors often comment on the additional risks of investing in emerging markets, due to complex and changing economic and political environments, corruption and climate change. Limited tax incentives are also a reality for investors, creating further barriers to entry. Accelerators should be more active in areas of policy reform and development, to be recognized as advocates for an improved investment environment and culture of entrepreneurship in East Africa.
Launch Signature Programs:Young entrepreneurs specifically highlight their need to engage with more experienced entrepreneurs and investors, with approximately 70% citing the need for access to business plan competitions and start-up awards to enhance their visibility. To create more active deals faster, accelerators should consider developing signature programs that support improved linkages between early stage businesses and investors, while building their profile across the region and continent.
Intellecap’s Sankalp Summits, KCB’s Lions’ Denand UberPITCHare some examples of signature programs that are well branded and support early stage investment. Start-up and entrepreneurship awards, business plan competitions as well as investor roundtables, business fairs, and mentorship and partnership programs also facilitate network building and direct opportunities to capital. Investors are more inclined to provide their time and support through these channels, as they filter access to more relevant investments while raising the reputation and relationships of investors in the region.
However, young entrepreneurs who require this support complain that awareness and access to such events is still low. Services are often limited to urban centres, inaccessible to thousands of local entrepreneurs situated in more rural areas. Signature programs are an opportunity for accelerators to differentiate themselves by removing barriers and providing direct exposure to the unique challenges of entrepreneurship and business needs across the region. For those with more limited access to enterprise support, or in areas of growth potential, accelerators should consider raising visibility at the county-level and launching targeted programs that encourage innovation and entrepreneurship among children and youth. These programs prepare the next generation of entrepreneurs, while building an easier route to future investments. Programs such asAshoka’s Changemaker Schools,GMinand theAnzisha Prizeare designed to facilitate this preparation for very young entrepreneurs across East Africa.
Often, accelerators are focused on raising investment capital before the start-ups they support are investment-ready – the proverbialcart before the horse. Investors are not incentivized to support enterprises that are not viewed as investment-ready, which is often the case in more nascent emerging markets. The idea of pre-investment support is counter-cultural to investors, as they typically do not see a responsibility to spend time and money on enterprises before they invest in them. However, incubator and accelerator programs in East Africa are viewed as doing an ineffective job at bridging the gap between these enterprises and investors, due to the low rate of investment into program participants. Accelerators require catalytic capital to support investment readiness, build investor trust and further deal flow.
Prepare Today, Plan for Tomorrow:Approximately 50% of entrepreneurs cite lack of business knowledge as a key barrier to scaling their operations. Accelerators need to focus on a system of raising funds for pre-investment incubation, particularly those with a focus on more rural and less developed geographies. This not only directs attention to building more investable businesses, but promotes a culture of trust between accelerators and investors. Accelerators that are seen to invest seed capital in program participants, are also seen to believe in the businesses they support.
To facilitate seed funding, accelerators should direct efforts towards philanthropists, foundations, crowdfunding and angel investors who are not primarily focused on commercial returns, but interested in ecosystem building. Funds should also be structured for this purpose – for example, capital disbursements can be based on achieving pre-defined milestones – to ensure they are used in service of impact. In turn, this reduces the pressure of accelerators that are often compensated on a deferred success fee model, and increases support across promising but more challenging engagements. However, this capital is not meant to be a substitute for formal investment, but for achieving specific growth objectives. An example of catalytic funding is USAID’sPartnering to Accelerate Entrepreneurship (PACE) initiative. PACE directs private-sector investment into early stage enterprises, to identify innovative models that support the missing middle and unlock growth potential. Additional examples of funds that prioritize investment in early stage East Africa include:
- Aavishkaar-Intellecap Group
- Acumen Fund
- Business Partners International
- Fanisi Venture Capital Fund
- Root Capital
- Savannah Fund
Accelerators need to better define and represent their market of portfolio companies, to identify – and be identified by – prospective investors. There are approximately 40 incubators across East Africa that can collectively support about 600 enterprises per year, however current incubation capacity cannot support demand of the approximately 18.2 million early stage enterprises that require this support. Initially, accelerators need to incubate and invest in businesses they believe to be investment-worthy, focusing on growth potential or social impact businesses thatreplicate successful models, to prove the seed funding to capital raising continuum. For example,Village Capital‘s method supports selective groups of 10-12 entrepreneurs with investment readiness training, however at the end of each program the entrepreneurs assess each other with the two highest-ranked ventures receiving seed capital. As the value for pre-investment services is established, investors will become more comfortable with funding the costs of such services, specifically where local incubation is serving to close the investment gap.
Proven models of incubation and investment have the potential to increase early stage investor engagement. However, to move from catalytic seed capital or grant funding to formal investment, accelerators need to effectively communicate early stage successes to investors during the pre-investment phase. This validates the value of accelerator services and protects their relevance in an increasingly commoditized market of ESOs, while facilitating deal making as start-ups become investor ready. 65% of all private equity deals in East Africa are in early stage SMEs, often with specific sector targets. As network building efforts define investment interests, they can also provide direct exposure to incubated enterprises and inspire pipeline growth.
On the sometimes-elusive topic of impact investing, there is still consensus that impact investors care about revenue generation. However, given the more nascent market of entrepreneurs and businesses, investors require deeper insight into the realities of investment in East Africa. Often, investors reference theSilicon Savannahas their approach to investments in the region, but accelerators agree that investors searching for Silicon Valleyunicornsperpetuate the funding gap for SMEs – the missing middle – to grow income and create jobs. There is increasing need for accelerators to build awareness about early stage East Africa, to influence investor behaviour and encourage more supportive engagement.
The Realities of Early Stage East Africa:90% of investments in East Africa over the past two years went to foreign-owned start-ups, often because the majority of investment capital was also international. A common sentiment across the ecosystem is that a balance is required: East African entrepreneurs need to articulate themselves and their businesses in a language that promotes value to these investors, while investors need to adjust their approach to entrepreneurs and investment in the region. Given the burgeoning number of start-ups, impact investors need to be made more aware of, and even trained on how to evaluate investment opportunities based on future prospects rather than historical cash flows.
With a rising youth population and limited employment opportunities, entrepreneurship in Africa is largely defined by necessity-driven entrepreneurship, or entrepreneurship for survival. The impact of a necessity-driven reality is amplified by a lack of formal business, let alone entrepreneurial education and training. The situation is made worse for entrepreneurs located in rural areas or smaller cities, as incubators and accelerators often target more established entrepreneurs in more accessible urban centres. As a result, ESOs often focus on the number of enterprises supported rather than those that have become profitable.
Without representation on the ground, investor decisions are also made internationally, resulting in already difficult deal making becoming more difficult. In a region dominated by international capital, there is limited exposure to the realities of the African entrepreneur, early stage growth and timelines, successful funding models and entrepreneur success stories that encourage awareness, engagement and investment. It is imperative for accelerators to not only share information about the East African context, but to reflect on how this information is being disseminated, to promote their value aslocalintermediaries. Over time, this has the potential to address existing skills and funding gaps at scale.
Communication is Key:Experiential learning is invaluable to investor engagement – particularly foreign investors – and encourages a pull versus push relationship. Pull strategies promote more engaged and loyal partnerships. Accelerators should curate entrepreneur impact stories and documentaries, whether in the form of in-person presentations or print and digital media, for investor facing communication channels. As accelerators identify target investors, engagement can be reinforced by organizing awareness trips to communicate early stage realities that are rarely experienced. Awareness trips are also valuable to securing follow-on funding, where intermediaries can showcase how seed funding has supported growth and long-term investment has the potential for future gains and impact. This is particularly helpful where there is a tight investment focus, to either inform or influence investment by sector, ticket size and stage of the enterprise.
In East Africa, traditional television, radio and newspaper channels are still widely used, in addition to formal seminars and dialogues. To take full advantage, accelerators can use these mediums to tell stories or provide insights, specifically where this information influences local communities or diaspora who are potential conduits to seed or angel capital. Philanthropy is embedded into the culture of East Africa; Kenya and Uganda were both ranked in the top ten most generous African countries, with Kenya being in the top ten most generous countries in the world according to theWorld Giving Index 2018. However, accelerators need to develop campaigns that communicate impact and build trust to unlock this capital.
As investors become engaged, accelerators should offer information and services that support the deal process. Intermediaries should leverage their local footprint, highlighting experience with managing the investor-investee relationship in addition to their incubation services. For enterprises to engage more strategically with investors, accelerators can provide entrepreneurs with fact sheets and support guides that communicate investor expectations and aspects of the deal process such as due diligence, term sheet negotiations, valuation and tax advice. Accelerators can also share best practices on areas such as scoping and diagnosis processes, ways to engage investors and entrepreneurs, change management strategies, and lessons learned to earn their place as influencers in the ecosystem. Publishing quarterly and annual reports on missing middle deals can also stimulate smaller and less conventional investments. More directly, accelerators can facilitate meetings and provide strategic support on the aforementioned areas. Investors will pay attention to the regional focus of accelerators, and bepulledby those that can illustrate their portfolio, track record and expertise with linking companies with investors and those who provide value-addition on the ground.
Metrics Matter:Of particular importance to impact investors is reporting on investment performance, specifically in connection to theSustainable Development Goals (SDGs) and gender equality. Several trillion dollars in investment will be required each year to meet the SDGs by 2030. As a result, impact targets are increasingly used to attract investors, inform investment decisions and hold investees or investor teams accountable. In addition to the SDGs, approximately 70% of impact investors apply a gender lens to their investments and seek out investees addressing gender equality. However, despite numerous available tools such asIRIS and GIIRS that attempt to streamline impact measurement, most funds are not utilizing these tools and largely report on outputs versus outcomes. To provide meaningful and more influential data, intermediaries also need to consider capturing inputs to report at the fund level on areas such as the type of financing, context and geography, support offered, management experience, and impact and financial returns. As investments are made and follow-on funding considered, more consistent and thorough reporting will encourage long-term engagement. One accelerator in East Africa reported it will be introducing investor access to live reporting through its customer relationship management system starting in early 2019, to support with this. As feedback mechanisms are formalized, accelerators can incrementally improve their services to entrepreneurs while furthering their pipeline and value to investors.
Community-minded philosophies such as the South African concept ofUbuntu can be applied to lead East Africa – and the continent – towards more stable and sustainable development. Since 2016, tech hubs across Africa have grown by more than 50% to 442, with dozens more planned. With the rising number of ESOs and funds emerging in a still nascent market, an opportunity exists for accelerators to lead collaboration in East Africa and build a system ofcollective impact. Having isolated organizations, often offering duplicate services, commoditizes their value, reduces efficiencies and opportunities to scale impact, and limits their ability to survive as interventions encourage monopolies among providers. Collaboration allows ESOs and funds to share best practices and build a continuum of support, improving linkages to and between investors and investees.
The Whole is Greater than the Sum:A common point of discussion is how incubators, accelerators, tech hubs, angel networks, funds and the like can form alliances for the benefit of the start-up ecosystem, without compromising value to their individual organizations. ESOs view one another as competitors, however dialogue around pipeline and resource sharing has started in East Africa, and continues to be a topic of interest. Given the diverse nature of early stage start-ups supported by accelerators, more referral between organizations allows for better linkages between enterprises, their incubation needs and impact funding. However, although models for collaboration exist (i.e. revenue sharing agreements, due diligence syndication, etc.), accelerators will need to create clarity around areas of cooperation versus competition and prove these models, to replicate similar efforts across the region. Over time, collaboration can also provide a shared view of challenges and needs in the market, promoting more informed, influential and impactful advocacy and policy development for the benefit of the ecosystem.
Collaboration allows accelerators with already minimal teams and resources to focus on their strengths. Often, accelerators are building similar training and tools to achieve similar goals, however building a network of high-quality specialized service providers can improve reach and impact. Local systems of collaboration also have the potential to expand knowledge exchanges across geographies and sectors, providing access to networks and communities that can introduce best practices and opportunities for young entrepreneurs. Collaboration also alleviates pressures of time and cost. Multiple tools exist among East African ESOs that can be leveraged or used as centralized platforms for information gathering and sharing. For example, accelerators can offer Intellecap’sStartUpWave
The growing number of regional angel and venture capital networks, as well as crowdfunding platforms are also a valuable opportunity for collaboration. Accelerators should consider linking fundraising efforts to these channels, to facilitate broader reach and faster matchmaking between enterprises and investors, specifically for the early stage context.VC4Africa – with more than 600 investors from angel investors, venture capital firms and social impact funds registered – is an open source online platform that links early stage enterprises to capital between US$25,000-250,000. In addition, the platform supports in-person collaboration where members can access start-up support and exchange insights that drive entrepreneurship in East Africa. Crowdfunding platforms also fill critical funding gaps for missing middle enterprises, and can facilitate both grants and equity investments. Collaboration with digital platforms provides access to fundraising tools that target investors – from high net worth individuals to venture capitalists – with awareness campaigns about early stage start-ups. Building a coordinated network of collaboration strengthens the system of support offered to entrepreneurs, including improved access to appropriate capital needs.
About the Author:
Safia Abji consults as an intermediary for impact investment and development organizations, with a focus on youth and entrepreneurship. She was the Start-Up Advisor for Aga Khan Foundation East Africa’sCivil Society Initiative, and launched the Scale Youth Social Entrepreneurship Forums in Uganda, Tanzania and Kenya. Scale’s collective impact approach brought together the stories of 28 young East African entrepreneurs, 534 ecosystem stakeholders and 26 strategic partners at local innovation hubs. View the Scaledocumentary series to learn more.
To discuss implementation please contact Safia on Twitter @safiaabji or via LinkedIn athttps://www.linkedin.com/