Business challenges hinder VC funding in Africa

The perceived challenges of businesses operating in Africa as well as the higher costs of due diligence and inexperience of the investors and entrepreneurs in the region have all worked to dampen the growth of venture capital funding for tech startups and mid-level businesses on the continent, according to industry insiders.

Many venture capitalists and angel investors in tech are based outside the continent, mainly in Silicon Valley, where there is a scarcity of information about whether the challenges of doing business in Africa have changed in the last few years. Because of this, investors tend to trust startups and businesses led by entrepreneurs with Western ties, rather than local entrepreneurs.

"Many Kenyans who are graduates from Stanford or Harvard have an easier time raising funds compared to others who didn't school in prestigious Western universities," said Erik Hersman, founder of the iHub Nairobi, a co-working space for techies.

Local startups have held discussions and wondered whether their lack of success in raising big money had racial overtones, the idea being that companies run by whites seem to be luckier in securing funds. The problem, however, seems to be more about the perception of inexperience and a lack of contacts than race.

"I don't think it's about being white or black, it's about your network; highly networked Kenyans have an easier time too," added Hersman.

The perception about lack of technical capacity has also stymied growth in companies led by local techies, according to business people in the region. For instance, Angani Ltd. is a company providing cloud services and is led by a team comprising a technical director who set up the billing platform for a large telecom company, a commercial director who helped expand VMware's business and other directors who have worked for global cloud providers. Yet, when they sought funding from one of the VCs, their capability was questioned and they were advised to leave the cloud business to Google and Amazon.

"The funny part is that when a rival company that had Western ties entered the market, they approached the same VC and they were more receptive; the entrepreneur had no team, no experience in the market, had no network access or agreements like we had and did not seem very technically astute," said Brian Muita, technical director at Angani. Muita said that the perception of a lack of capability is not only held by international businesses and VCs; even local business leaders feel that Africa is still not in a position to compete with global companies.

"We have also experienced the other side of the same coin; we have been told by respected local business leaders in tech, to leave Infrastructure to the likes of Amazon and Google -- that it is too difficult and we should focus on mobile apps instead," added Muita.

With the growth of mobile devices in Africa, it is assumed that businesses focusing on the mobile market would be more successful compared to others that pursue tech ventures that rival global service providers. For instance, from the iHub, these are some of the startups that have secured funding for the next two years; mFarm, which makes a mobile app providing market information for farmers, to prevent them from being ripped off by middlemen, received $500,000; eLimu and Eneza, makers of mobile education technology, received $500,000 each; and, KopoKopo, which helps businesses accept and process mobile money payments, received $2.6 million.

"Innovative early stage ventures with the potential to yield high social and environmental impact and requiring less than $500,000 in financing remain the most difficult segment of the SME pipeline to reach," said Ben White, founder of VC4Africa. VC4Africa is an online portal that brings together 13,000 entrepreneurs, VCs and angel investors interested in Africa. It was kicked off at the annual congress of the African Venture Capital Association in Dakar, Senegal, in 2007. Last year, VC4Africa startups secured $80,000 in funding while companies seeking expansion secured an average of $237,000 in funding.

VC4Africa works with entrepreneurs in 40 African countries but the number of start ups and growing companies seeking funding outstrips the available capital. The lack of in-country funding mechanisms and lack of tech-specific financial facilities from the public sector most likely means that the problems will persist. 

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