Finding and Funding African Innovators

How do you find the entrepreneurs and innovators in Africa who need investment funding to scale?

Agosta Liko - web entrepreneur in Kenya

Agosta Liko - web entrepreneur in Kenya

That’s the question I was most intrigued by on my panel today at SoCap with Emeka Okafor, Nii Simmonds and Ashifi Gogo about identifying opportunities for innovation in Africa.

There are really two big issues at stake. First, how to find the right people. Second, what funding level is needed.

Boots on the ground

You’re not going to find the compelling African entrepreneurs while sitting in an office in the US or Europe. It’s only by spending significant time on the ground in the countries you’re wanting to invest in that you find the people you need to know. It’s there that you get past the first-level of non-expert opportunity profiteers and attention seekers and find the people who actually do the work.

Two examples:

  1. AfriGadget is a blog about finding interesting stories of African innovation. It’s not always easy to come up with the stories though. You have to look hard, teach yourself to see things, in order to find these extraordinary individuals. Without the great blogging team and the people sending in stories from the ground, we wouldn’t have anything.
  2. I grew up in Nairobi, yet it took me a solid two years of meeting people and networking within the city to get beneath the surface and find the people with the talent and drive to create actual businesses.

It’s generally not cost-effective for every funding source to have their own person canvassing the continent. The question then becomes, how do you find the trusted intermediaries who know the real story on the ground, know the players and can spot the talent?

The seed (angel) funding gap

Most of the individuals with the skills to create their own businesses in the high-tech space are working for large NGOs and multinationals. Why? They got to a place in their life where they had to make the choice of going out on their own, armed with a good idea and no hope of funding, or putting food on the table. This is similar to entrepreneurs worldwide, however in Africa the gap between success and failure is a lot less forgiving and the choices are a lot fewer.

Most of the funding available for companies in Africa comes through loans, debt financing. It’s mostly used in SMEs at the medium-sized level. There’s a gap, and that is seed funding. There are very few opportunities to get equity-based funding, especially at the levels where most entrepreneurs starting off need it. This is the $10-300k range.

Who funds them? There are a few organizations internationally who run business plan competitions with money prizes, others that fund a few startups each year (TechnoServe, Kuv and Acumen come to mind). There are also some local people and organizations that do some of the funding (as was the case for Agosta Liko pictured above), but it’s very hard to come by even within Africa’s most advanced tech/finance cities (Nairobi, Johannesburg and Accra).

Who else is out there?
How can we bridge this gap?

30 thoughts on “Finding and Funding African Innovators

  1. I really appreciate this inquiry. I wish I had this long line-up of brilliant orgs that are moving in the direction you suggest. Maybe others are more in the know.

    While I was in Rwanda, I attended a conference (as an expat is apt to do;) and it was co-sponsored by the London School of Economics and the Government of Rwanda. This leads me to wonder about universities as a source of start-up funding in light of this? A co-designed business? That way the innovation comes from people on the continent but universities invest in a learning model? This could be foolish but that conference got me to thinking about this idea. If we want people to learn new ways of doing business then isn’t a school an optimal location for this exchange?

    LINKS: Some Canadian organizations are profiled here and perhaps there are some who are forward thinking? http://www.charityvillage.com/cv/ires/fund.asp
    This is another org that positions itself as philanthropic but may have something? http://www.tidesfoundation.org/
    http://www.renewal2.ca/ (Again, Canadian and have a particular focus on where they direct funds)

    I wonder if the Acumen’s of this world are rare? And because of this, are we going to be a shift in how funding is viewed? For so long, people have viewed “the dark continent” as a charitable scenario. Now, with all this dialogue that shifts people away from this mentality, there an open door but the funding part needs time to catch up. Two years in Nairobi might be a good assessment on timing?

    These are my random thoughts. Look forward to how this dialogue unfolds.

    PS. Loved the video at SoCap!

  2. This is a really complex problem – one that we talked about a lot at the last Geek Retreat. There are a bunch of potential solutions, but I think that one of the most realistic is in the kind of cooperatives (as opposed to government-orchestrated ‘incubators’) like the Bandwidth Barn where there is a high level of independence and collaboration. Have just written an article for Brainstorm mag about it. But obviously a much bigger question.

  3. Owen says:

    what about institutions like equity bank who have found a way to do commercial banking in the space right at or above where you would normally see MFIs? over the last six months i’ve seen an increasing number of VC and PE funds poking around, but they’ll never be able to bring volume like a commercial bank who figures out a model for doing an honest to goodness loan business in this space.

  4. Universities are a great place to start from. Student organizations like AIESEC have a strong network among universities in Africa and do a lot of work in preparing and fostering entrepreneurship. Personally I took part in an entrepreneurship course run by the AIESEC chapter at Makarere Business School in Kampala, and I was amazed at how many young entrepreneurs had been involved by the students there to share expertise and experiences with aspiring entrepreneurs.

  5. We continue our discussion here. I realized that if you have a good idea in Kenya, you don’t want equity funding, because you want to retain control, profit, direction etc. – so you’d rather seek a bank loan that you can pay off. You don’t want an equity partner because the consequence if there are disagreements are not very clear for corporate divorces in Kenya. At the very least, some lawyer should patent a simple VC-entrepreneur contract for Kenya, tailored to fit our legal system taht gives comfort to entreprenurs (and perhaps a few other countries)

  6. this is a very nice post and i agree with everything you have said. i think that the already successful entrepreneurs should help fund the ideas that they see most progressive. they are at a better position to know which ideas have potential to be successful and which ones do not. the business community should sustain itself because the government will definitely not
    thats my piece
    -http://kenyantykoon.wordpress.com/

  7. African ingenuity is sometimes down played by developed markets, coming from South Africa, where we have taken a step in showcasing and finding commercial partners for some of the Intellectual Property (IP) that eminates from the various research focused tertiary institutions it is a daily battle to link up entrepreneurs with willing finding entities.

    More on Tektique: tektique is a collaboration of South Africa’s leading university and the Medical Research council and their technology transfer offices.

  8. Are there no case studies for this $10k-300k gap in South Africa?

    Is setting up a Kiva type clearinghouse not reproducible for this level of funding? Clearly the relationships would be more significant, but that should be easy, considering the fact you’ve got a tiny fraction of the businesses being showcased.

  9. A lot of organizations are working to rapidly fill this gap. Of course there’s the Education-incentive orgs like MEST (meltwarer.org) or the equity-incentive one’s like my own Appfrica.org our own investor Kuv Capital (kuvcapital.com). There’s also communities like VC4Africa.com and MyC4.com. Still the problem is that almost all of us are only looking at Seed Capital to get going ( >$20,000) rather than the type of capital that can run an organization for a year or two ($20,000 to $300,000).

    BidNetwork (bidnetwork.org) seems to be attempting to fill this space as well as other groups like Chembe Ventures.

    What Africa really needs is a VC group more like Sequoia Capital out of Silicon Valley in the US.

  10. Bankelele, I’d also like to add that the whole aspect of dealing with Equity investment (dealing with investors, disagreeing with them and sometimes falling out with them) are needed. They indicate mature industry and add to an understanding of business that you won’t get from working alone. I’m not saying all successful businesses HAVE to go this route but there is a lot to be gained. Especially in terms of building international relationships and networking.

    On the other side of things, it no doubt helps demystify investment in Africa for other potential investors who may be siting on the sidelines to have a friend or colleague to has success here.

  11. So much to say on this subject, but I really want to discuss why equity financing is missing and debt financing isn’t always the best way to go.

    @Bankelele – Debt financing is actually a fairly difficult way to start building a company unless you already have a way to make the cash flow immediately. That’s just not a possibility with a lot of high-tech companies, and even manufacturing ones, that have a lag between the build-out and sales channel. It’s why equity works so well in high-tech and the reason places like Silicon Valley exist. However, you’re right too, in that debt financing can get you places without giving up control. The trick is finding the right vehicle for growing the company.

    What happens when you have no credit and the banks are giving out loans at 20-30%? That’s usury and it makes it nearly impossible for would-be entrepreneurs to get clear.

    In a best case world we have loans available at moderate interest rates. You’re a banker, is that available in Kenya to an entrepreneur with little to no business or credit history?

    Where is the funding that allows someone to take 10-20% of my company and I walk away with funding for 6mo to 2yrs?

  12. There’s also a huge risk to ‘blind funding’ to someone who may be a brilliant developer but inexperienced in the area of finance. For instance I had a conversation with a woman from the investment authority here in Uganda recently. They have initiative that gives out $50,000 to would be entrepreneurs that win a business plan contest. According to here, almost all of those businesses have failed in the first year because there was no oversight.

    @HASH I totally agree with you. Not to mention that access to debt capital (loans) is virtually non-existent in most African countries. The Banks see it as a huge liability so interest rates remain high, making it impossible for young entrepreneurs to secure a loan in the first place.

  13. On the other half of this topic – the search for quality entrepreneurs, we at Inveneo feel the pain daily. We’ve been working for 5 years to find quality ICT companies in Africa, and feel that only now we’re really hitting our stride with ~50 in 16 countries. Even then, they are all not of the same quality and we spend much time building capacity to compensate.

    More than money, I’d love to see an effort in skills creation around startups.

  14. there is always money. the world is full of it and some people simply have a hard time knowing where to put it. i think it is up to us to come up with a plan and network ‘sexy’ enough to get it.

    what happens if we turn the table and we actually have the money. say we have 500,000 to 1,000,000 in a pot and now all we have to do is figure out how best to use it…….what are our ideas? i think its time to start working towards actual models. when we have identified the viable platform we can move to realize the idea.

    so would it go to seed new ventures? would this be in the form of donation, grant, loan, equity? what range is the most interesting to target? how much energy needs to be spent on mentorship, training and support? how else would this be structured so that it is both good for the entrepreneur and the investor?

    i want to build an actual model and anyone is free to join me in this process. ben@vc4africa.com

  15. Hash: We recently started an attempt to provide seed capital to startups and small enterprises, in the range of $10 to $25K.
    The aim is to provide equity financing. The figures are small and the chances of success are probably in the region of 1 out of every 5 companies we invest in, but thats the risk we are willing to take.
    As @Banks puts it, entreprenuers in Kenya want to hangon to 100% ownership but this is changing and anyone who is serious about their venture knows that 70% of a bigger more stable cake is better than 100% of a smaller one.
    But also we do not intend to just throw money into any firm that puts out the a proposal. Since as mentioned by Jon, biz plan competition winners are not the most successful entrepreneurs as putting plans on paper is very different to actually running a good business.
    We are not big, we don’t have a bottomless pit of dollars but we will still plunge and find a few worthy investments and take calculatted risk on them.
    You can contact us at:riba@ribacapital.com

  16. As a European citizen and resident who has provided seed capital ($15 k – $30 k) to two East African start-ups already, I’d like to share some of my experiences.

    Let me preface my comments by saying that I don’t think the outlook for seed capital / angel investments in Africa is bleak. Most low level angel investing is informal, and informal investing is, by its very nature, informal. It’s the “friends, family and fools” round, so we don’t get to hear about it very often.

    Higher up the sophistication ladder you have angel investor groups, investment syndicates, matchmaking operations and of course VCs. While there does seem to be a dearth of these groups operating in, or concentrating on Africa at the moment, this is changing fast.

    An experienced and accredited “Western” angel investor, who may be interested in investing in pre-revenue African tech start-ups will often go through Angelsoft at some point on his/her journey. There the investor will try to link up with investor groups or just review deal flows in a particular country or sector. This is where the problems start. There are 460 angel groups/VC companies registered with Angelsoft (representing almost 20,000 investors) but fewer than half a dozen have any focus on Africa. Of these one of the most reputable is Bid Network, as mentioned above by @egm and @jon. I know some of the management staff at Bid Network and they are all upstanding individuals who work hard, but they’ll be the first to admit that they don’t really have many projects in the general IT sector, let alone cutting edge mobile Internet or web services start-ups. Most of their deals are in agro-processing, alternative energy, and tourism, etc.

    Another big problem with angel investing is the high failure rate. Depending on whose stats you read between 40 % – 85 % of start-ups never get past the 2nd year, so angel investing is risky business in any market, even without the specific peculiarities involved in backing ventures in Africa.

    However, @HASH is absolutely right about having to get your boots on the ground. I have made two trips to Africa in the last 3 months. I visited four countries specifically to meet people involved in local tech scenes, to follow up on leads, ask a thousand questions, develop a better understanding of local markets and to really get a feel for what kinds of projects might succeed.

    As a result of this research and these trips I formed a company, Chembe Ventures Ltd (thanks for the plug, @Jon) to make and hold these investments. The first venture I seeded was Status.ug Ltd, a Kampalan group developing a mobile social media network for Uganda. The product has its origins in a mobile Facebook updating app originally incubated by Appfrica Labs and Jon Gosier, and conceived by Felix Kitaka, a talented programmer whom some of you may know. The second investment is in an innovative results monitoring software. I’d rather not give too much away about that one just yet.:)

    I’m expecting a co-investor and old friend who shares my passion and optimism for Afritech to join me as a partner next month. Eventually, we will launch a web site to showcase the Chembe Ventures investments and become more active and open in sourcing opportunities. Our goal is to be present in 3-4 countries by the middle of next year. However, in these early stages, remaining low-key and credible, as well as working closely with those projects already seeded, are much more important to us than trying to be seen as something bigger than what we really are.

    Obviously, we don’t expect to get rich quickly. Small but fair stakes with options in innovative ventures run by ambitious, talented and trustworthy entrepreneurs is the name of the game. It’s only a matter of time before bigger VC firms start looking seriously around the region. Hopefully, we can be their tour guides.

    But of course there are problems…This comment is long enough already without getting into region/country-specific issues of poor investor protection legislation, corruption, tax burdens and bureaucracy. There are also more generic barriers one has to deal with. These are the same all over the world, from the Silicon Valley to the Rift Valley: flawed business plans, due diligence hiccups, unrealistic expectations, annoying “introducers”, agents and other BS merchants.

    However, I think there are two or three missing links in the emerging “angel investor meets viable tech project matchmaking ecosystem” which are specific to much of Africa right now:

    1. More organized, recognisable and credible groups of angel investor networks (primarily local!) are needed as well as organised foreign independent, nimble, seed capital providers.

    2. The sector is crying out for a regional, professional matchmaking service focusing exclusively on cutting edge East African tech entrepreneurs. This is a must! It doesn’t have to list a hundred half-baked ventures. A half dozen well vetted projects and two or three successful matchups a year is a feasible and achievable target.

    3. A success story! A hugely successful East African (not South African) start-up. turned star. It doesn’t matter whether it’s acquired by Google, or has its own successful IPO. This sector needs a Wow! story within the next two years. There’s nothing like a well publicised “fairytale” of a few bright kids from Nairobi or Lusaka making millions to spur the imagination of both potential investors and developers alike.

    In closing there are two more issues I think are worth addressing here. Perhaps I’ll get some flack for bringing these up, but here goes.

    Firstly, let’s ask a question. Is the idea that there is a huge overflow of tech entrepreneurship in the African IT scene just bursting to be funded, nurtured and incubated a bit of an illusion? Sure there are bundles of raw talent, skill and innovation and of course ingenuity, but, and this is true for some countries more than others, are African techies too risk averse? Too unwilling to take a chance? I disagree with @HASH when he says that in Africa “the gap between success and failure is a lot less forgiving”.

    Secondly, as @HASH pointed out, many of the sharpest coders end up working for multinationals or NGOs. What’s just as worrying is that many of the more ambitious and capable tech entrepreneurs also find it easier to tailor their killer apps for the “non-profit” sector. I’m sure we all look forward to a time when writing a solid business plan becomes more profitable than writing a sexy grant proposal.

  17. It good to see a country like Kenya moving forward to the 21st century. Technology allow us to do anything especially doing buisness online. I hope more african countries should follow Kenya. After all technology will move forward with or without you.

  18. Most venture capital targets larger projects with a track record in place. Before we can bring in parties like Sequoia Capital as mentioned by @Jon we need to build the base of companies, projects and ideas. I feel this is the area in the most need. Do others agree?

    Let’s look at Seed Funding ($10-300k range) as described by @HASH. This is a challenging area as described by @Sean Murphy who explains, ‘Another big problem with angel investing is the high failure rate. Depending on whose stats you read between 40 % – 85 % of start-ups never get past the 2nd year, so angel investing is risky business in any market, even without the specific peculiarities involved in backing ventures in Africa.’ So how can we address this key gap?

    Will angel’s, family and friends address the issue or do we need to mobalize capital in this area? Where would it come from and how can we structure it in a way that everyone wins?

    I agree that as @HASH pointed out, many of the sharpest coders end up working for multinationals or NGOs. Also @Sean Murphy who says, ‘What’s just as worrying is that many of the more ambitious and capable tech entrepreneurs also find it easier to tailor their killer apps for the “non-profit” sector. I’m sure we all look forward to a time when writing a solid business plan becomes more profitable than writing a sexy grant proposal.’ Can we fill the need for seed funding commercially or do we need to look for alternative models? And if so, how can we do it that we don’t perpetuate the grant writing culture we are trying to move beyond?

  19. I think the problem still has to do with the low availability of seed investors not to mention the lame infrastructure which is keeping the investors from investing in some parts of Africa in the first place.

    i loved your article however.

  20. Not all ideas and innovations are businesses – they can be sold to add value to existing businesses and processes – hence we need to encourage local corporations to invest in local R&D. So that
    a) innovators have an outlet,
    b) develop the technology absorption capacity – and that is important because most corporation in Kenya rely so much on turnkey solutions such that even if you came up with an innovative piece of software it would be a problem integrating it into there existing process.
    c) More option for innovators because not all innovators are entrepreneurs

    10yrs ago most companies did not have a CSR component to there business and then it became fashionable – we can make it fashionable for companies to invest n R&D

  21. Was catching up on your blog and also hit Sean’s link on (of Chembe Venture aka Afrcafeed) – http://bit.ly/Y1Mas.
    Two points from both your post and Sean’s

    “HASH pointed out many of the sharpest coders end up working for multinationals or NGOs. What’s just as worrying is that many of the more ambitious tech entrepreneurs also find it easier to tailor their killer apps for the non-profit sector. I’m sure we all look forward to a time when writing a solid business plan becomes more profitable than writing a sexy grant proposal”

    “A success story! A hugely successful East African (not South African) start-up. It doesn’t matter whether it’s acquired by Google, or has its own successful IPO. This sector needs a Wow! story within the next two years. There’s nothing like a well publicised “fairytale” of a few bright kids from Nairobi or Lusaka making millions to spur the imagination of both potential investors and developers alike”

    I have come to the knowledge that after a certain period of time, it is no longer about talent and brains but about opportunity. The only way that the success stories will come from Kenya, Uganda and Tanzania is when the talent meets opportunity. Otherwise “less talent” will meet the very same opportunity and while “less talent” will not have the killer app or execution they will have the opportunity to roll out and with rolling out comes the revenue… if any, then the refining of the product or service and eventually the service is entrenched and revenues grow. Techies need to stop meeting with techies in this respect.Techies need to learn additional skills or partner with individuals who can package the products and services to appeal to “the opportunity”. The other thing is that they must not hang too tightly to the their concept product in a manner that will stifle “the opportunity”. Grow your network…knock on those “ooh it will be impossible to get a meeting with person X” doors. Ask for 30 min…..if you can’t sell the value of your product or service in under 30min…then either theirs a problem with your presentation but more often that not it will be with the product. Work your elevator pitch. Be flexible and run with the punches, but at the end of the day, cover your bases and be smart.

    That said, we are looking forward to be the “WOW” for Kenya.You will be in the loop HASH :-)

  22. I’m not sure lack of funds is really always the restriction – look at e.g. the amount of money that groups like Transcentury are able to raise (without wanting to go into their political connections etc), and at the amount of money that small retail investors were able to raise to buy shares in the Safaricom IPO (without wanting to go into the whole issue of borrowing to buy shares etc). There is a lot of money around, and I regularly meet employed or self-employed Kenyans who invest in smaller ventures. These are people who are ‘on the ground’ – they live here, they understand this place. They don’t need a reminder about the need to understand Africa. Have you spoken to them why they rarely invest in start-up tech ventures?

  23. The industry needs a wow story : agreed.
    The sharpest developers end up working for the non-profit sector : agreed.
    I think the problem we have here is because we think that cash is the only capital you need. I totally disagree. What we need is one killer app that someone/s will make that will be so successful that it will make him/her leave their daytime jobs because it is paying better.
    Someone can start a project online, lease some hosting space, upgrade later to a dedicated server as biz grows. That will be the fairy tale that we need.

  24. Bancy says:

    This is quite an interesting and pertinent topic. I have been searching for funding for my ventures for about two years. The story is always the same: “We do not invest in non-revenue generating businesses, a.k.a. startups.” I have developed several business concepts, and would like someone to work with in terms of mentoring and partnership. My concepts range from education to financial inclusion to e-commerce, all with a focus on Africa. I have been fortunate to find a partner for the e-commerce concept, and I am now looking for partners for the education and financial inclusion concepts. Anyone interested can reach me via the email: ms[.]bancy[@]gmail[.]com. Thank you.

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