OoTheNigerian

sometimes, I make a lot of sense.

So What Is An African Startup?

22 August 2012 by Oo

While attending Pivot East in Nairobi a few months ago, I learnt about the Savannah Fund, a Silicon Valley backed fund. As described on their website,

Savannah Fund is a seed capital fund specializing in US$25,000-US$500,000 investments in early stage high growth technology (web and mobile) startups in sub-Saharan Africa. Initially focused on East Africa, the fund aims to bridge the early stage/angel and venture capital investment gap that currently exists in Africa

I was excited the funding challenges facing African startups were slowly coming to an end even though I was a bit jealous that their initial focus was East Africa. So I was rather surprised when I read on TechLoy that Savannah’s first investment was in an Australian company called biNu. But here’s the twist, their product is targeted towards Africa and other ‘developing countries’. There’s more, a founder of bINu is from Zimbabwe.

So here is the question. What criteria do we use to define an ‘African Startup’? Location? Target Market? Founder’s origin? ⅔ of the above?

Is Eskimi an African startup considering that a vast majority of their users are on this continent?

Here’s why it might matter

First of all, I have to acknowledge the venture investing is a capitalist venture (obviously!). The main aim is to maximize returns.

I do not believe in “hand-out” styled charity, however, I do believe in impact investing. I believe for Africa to be self sufficient, we need to start producing more. In this software-eating age, the products are digital and the factories, startups.

The reality of the situation is that the ‘western world’ is far ahead of us in terms of human and capital resources required to tackle “African opportunities”. Based on pure competence, I think African based technology startups are at a disadvantage to their western counterparts.  Which is why Wired Magazine titled their famous article “Want to become an internet billionaire, move to Africa”. The operating words are “move to”. Meaning the people to tackle such opportunities are not on the continent.

The Questions

  1. What is the best approach in reducing this  competitive gap African startups face from a financing perspective?
  2. Should we push to have more ‘African funds’ focused on the continent?
  3. What criteria should be used to define African startups?

Personally, I’d prefer extra support and incentives for Africa based internet companies regardless of founder’s origin or target market. Also, my criteria of being based on the continent would mean that majority of ‘production’ (design and programming) is done here on the continent.

I’d like to know what other people think.

To be very clear, I am in no way criticizing Savannah’s funding philosophy. I think they are doing something amazing. I also consider Erik, one of Savannah’s partners, as the singular most important startup supporter we have on this continent. I just thought I should put my thoughts out there to get a better perspective.

BTW, the application for Savannah’s Nairobi based accelerator program is closing soon.

 

Update:

Mbwana, Managing partner of Savannah Fund has responded below.

11 comments | Categories: Commentary, Startups | Tags: , ,

  • ‘Gbenga Sesan

    You’re right, investments are business decisions. Also true is that fact that some Africans who want to play in tech are at a disadvantage in terms of skills and opportunities. I think African start-ups are those that benefit the continent in terms of manpower engagement, economic returns, social context, etc, so to support African start-ups, we’ll need more Africans putting their money where their mouth is. Funds will go in the direction of “African start-ups” as defined by those who play the piper, so if more African-based start-ups or those that engage the skills of Africans must get the funds, then African-based investors or skilled Africans with spare change will need to make it happen – or at least make others see why they should.

  • Ben

    Nice post.

    At VC4Africa entrepreneurs are asked to locate their venture on a map of Africa i.e. the business needs to be based somewhere on the continent. Most of the entrepreneurs listed on VC4Africa focus on servicing African markets, although certainly many are targeting opportunities beyond the continent as well and we will likely see more and more African borne ventures go global.

    For me, more businesses being set up on the continent means more money invested into the local economy, more revenue for taxes (govts. need to invest) and more work opportunities for the youth. Also knowledge creation/transfer to people who work with these companies in some way (a company like Eskimi hopefully brings lots of resources that are eventually translated into different parts of the ecosystem).

    Certainly an entrepreneur in Baltimore also requires support, but we assume other people, communities and platforms focus on the needs of entrepreneurs operating in these markets. I agree there needs to be a dedicated space for nurturing African based entrepreneurs who often times face unique/common set of challenges.
    As such, the VC4Africa community works together to support people who want to build promising companies in Africa, regardless of their background.

  • http://www.mbwana.com/bio.html Mbwana Alliy

    Thanks for bringing this up Oo.
    I will endeavor to explain what I just sent to a Kenya reporter last night.

    At Savannah Fund, we do not restrict ourselves to funding African residents (in fact Gour is Zimbabwean born and spends a lot of time in Africa)- we fund companies that have significant Africa interest. Whether its a Kenyan living in Russia or a Russian living in Kenya- if the business is good for Africa we fund it. And biNu is signicantly good for Africa and is very innovative allowing feature phone users which a majority of Africans use to connect to smart apps- their biggest growth IS in Africa.
    Innovations impacting Africa come from all over the world including Diaspora Africans- I shouldn’t have to state here how many African diaspora exist throughout the world. We have experienced a brain drain over the last 30+ years- part of Savannah Fund’s mission is to REVERSE it, bringing talent educated in top global universities back to Africa and participate in the growth. I got a smile on my face last week when a Kenyan student studying in Australia e-mailed me saying that because of the growth of the iHub and Kenya tech scene, he wanted to head back to East Africa to build a startup… Likewise, many companies get turned away in Silicon Valley by traditional investors there because they don’t “get Africa” or there is no investor on the ground in Africa who can add value locally- we hope to fill that void too.In either case- lets face it, Africa is experiencing a gold rush that will be addressed not just by resident Africans… Do I need to provide examples from our past?
    Examples to Illustrate the point:M-PESA Intellectual Property is held by Vodafone which is a UK company last I checked, but has all the customers in Africa… If M-PESA was a startup now in the UK should we not fund an M-PESA because it is based in UK even though it impacts Africa (over 20M users in Africa- and its one of the only success stories for Africa?). Wouldn’t it be great if a VC who gets Africa and was on the ground held M-PESA in its investment portfolio and was able to advance and shape its innovation based on Africa 1st hand Africa needs?
    Go to Silicon Valley and more than half the founders of top companies are foreigners, not Americans. Does Silicon valley shun foreign founders? In-fact, it actively encourages top ones to stay there and build companies in America that are global powerhouses.In today’s world, where innovation comes from is increasingly global. Restricting ourselves to fund only resident Africans or companies resident in Arica would be very narrow and we’d miss amazing companies. Yes, we are a for profit business, not a charity. One of our goals is to raise the bar of Africa startups to compete globally, not hand out money because they “deserve” financing or join the impact investing “feel” good bandwagon which is actually just aid 2.0 in my view.

    The world is a competitive place. I myself am Tanzanian and I had to compete with everyone around the world in my career to date from Kenya to UK to Silicon Valley. That being said- I moved from Silicon valley to Kenya and we registered Savannah Fund in Africa and we expect a lot of companies to come out of the region given the innovation here- we require all companies who sign up to our accelerator (launching next month) to move to Nairobi- so we expect those to mostly be East Africa- but we welcome folks everywhere too.
    As I explain in my blog post- biNu cam across me when I was still in the middle of fundraising back in Silicon Valley in February. http://www.savannah.vc/blog/2012/08/18/our-first-investment-binu-a-platform-to-reach-more-africans-on-basic-mobile-devices/I have now been in East Africa for the last 3 months and reviewed many deals from East Africa and no surprise looking at our accelerator applications- top countries are Nigeria and Kenya. There is a very high chance that most of the accelerator class will be Africans- in fact mostly Kenya, then I am sure I will writing another post about why I didn’t allocate the 5 spots per class to more Nigerians (or indeed Tanzania my home country). Its about performance, not about political origin, religion, race or class. The accelerator is exactly designed to stimulate high potential entrepreneurs in the region. And we expect to follow on fund the best ones that meet that bar.
    So when we see a good and relevant company for Africa we are not going to limit our investment mandate by their nationality or origin. Everyone is looking for the “Mark Zuckerberg” of Africa- will it be found by providing funding to African residents alone or actualy filtering further for talent potential and skills?

  • BigChiefX

    There is a huge difference between INVESTING in Africa and MAKING MONEY FROM Africa but there can also be an intersection of both alternate universes.

    My belief is that by their very nature venture funds from outside Africa only seek for opportunities to make money from Africa first before thinking of investing in it. They could be VCs or PE companies the motive is the same. Impact investing is the intersection of both alternate universes and it is now an endangered species after the Wired Magazine post.
    The question really is this: What is Savannah Fund? A seed fund or another institutional investor? I can understand your consternation at the fact that when they started they said:
    “Savannah Fund is a seed capital fund specializing in US$25,000-US$500,000 investments in early stage high growth technology (web and mobile) startups in sub-Saharan Africa. Initially focused on East Africa, the fund aims to bridge the early stage/angel and venture capital investment gap that currently exists in Africa
    With this first investment, it seems Savannah fund as an institutional investor together with other institutional investors put money in a company with potential to MAKE MONEY FROM AFRICA. There is no altruism on the part of institutional investors and entrepreneurs with startups at this stage of funding. It should be a source of concern that this was the very first investment they made. Savannah fund as an impact investor will show their efforts at the end of the accelerator program they plan to start. So the jury is still out. We will see if they will be the bridge or if they will be the destination.
    On the larger issue of funding startups in Africa, Venture funds are hardwired to look for opportunities with exit potential and with the perceived and real risks in Africa they will ideally look for ventures that can have a shorter runway. They will not grow the ecosystem for us so we must wake up. Seed funds on the other hand are better provided by those who have a vested interest in growing the ecosystem and dont mind very long runways.
    We need more seed funds and more accelerators to grow the African startup ecosystem from bottom-up and not top-down. Top-down models are only focussed on exits and not sustainable long term.

    • http://www.mbwana.com/bio.html Mbwana Alliy

      Yes, we are a for profit VC fund. And our primary objective is to make money- you can do both and grow the ecosystem. Funds that don’t focus on making money might not be around that long… Note, its not just “funding” that grows the ecosystem. Education, Govt policy and infrastructure also help- thats why we chose Kenya and that is our assessment, others can choose Nigeria, Ghana, South Africa or whatever country that they chose based on their model and objectives.

      I welcome more for profit seed funds and accelerators that play the long term game in Africa- competition is what enables progress, not just handouts.

      Sorry for being a capitalist and trying to make money for my investors (many are actually African btw)

      • BigChiefX

        That kind of honesty is good for everyone and I don’t see any competition for the harvest happening yet when the seeds are yet to be planted.

        • http://www.mbwana.com/bio.html Mbwana Alliy

          Excellent point. And that is the challenge for all of Africa. We actually expect quite a high failure rate in our accelerator. But we hope from failure comes success next time. Some of the strongest East Africa startups I have reviewed have come from other accelerators such as 88mph, also some of the weakest startups in my assessment won many Africa awards from competitions and got “grants”…

          Just like in college the best student with the best grades might not get the best job. Not every startup that goes through an accelerator is necessary ready for prime time.

          I will be judged as a VC from the returns and performance I generate not necessarily how many startups I have helped. But you only have to read my blog posts on afrinnovator to realize that I try give back as much as I can- http://afrinnovator.com/blog/2012/01/31/7-steps-to-raising-seed-investment-for-africa-focused-tech-startups/

          Look at the great work that Omidyar Network and Tony Elumelu are doing in the seed planting? I salute them..

  • ‘Bosun

    Nice one Oo.

    The answers to your questions are already embedded in your article but i’ll add my views to buttress them.

    Technology innovation is largely driven by the ability to make significant progress from SOA and apply knowledge in smart new ways – examples not too far from home includes (MPESA and Ushahidi). To achieve these, you need sound know-how and resources to proof your solution and target market.

    It is not by chance that investors look out for ventures with strong teams and good market knowledge. These are part of the important boxes to tick in order to ensure return on investment. With the obvious dearth of knowledge in our continent, we’ll continue to see more deals like the one mentioned in your article…the mandate of such fund is first to ensure returns before anything else.

    To grow the competitiveness of local start-ups, we’ll need to break away from the myth that funding is our biggest challenge and focus on robust initiatives that will position local players to take advantage of this emerging opportunity in years to come – NO SHORT CUT am afraid.

    On funding, we need to let go of the “I am talking to a VC” cool phrase; which is clearly driven by our Silicon Valley copy and paste syndrome. Special instruments are required to support nascent ecosystems like ours. VCs will do very little.

    Who cares if your funding is from a VC, YouWin or a god father? We just need sustainable businesses contributing to the bottom-line and leading the way at this stage!

    How well have we taken advantage of “Impact Investment” despite its success on the continent? Ushahidi, Paga and interestingly Mpesa are beneficiaries. I wonder where some of these ventures will be today if they were only interested in being cool by ‘talking to VCs’.

    How well are we leveraging seed funds like that of CcHUB/Tony Elumelu Foundation to kick-start our ecosystem? They may be small but gives good head start to young entrepreneurs to have a go! More of this should be established.

    The countries we model our hopes after don’t have ‘Innovation Funds’ for the fun of it. Several great discoveries start off with support from schemes like this.

    Don’t get me wrong, VCs have clear obvious roles to play…but focusing only on them is likely to lead Technology to where Agriculture is in Africa today.

    We need to activate all the critical elements of our ecosystem to achieve sustainable results…Including Charity, Government, HEIs, Research Institutes, Innovation Intermediaries, Private Companies and Investors (VCs as we like to call them).

    ‘Bosun

    • http://www.mbwana.com/bio.html Mbwana Alliy

      Well said. I am glad that you recognize that VCs are not the silver bullet. Thats why they call it a Tech “Ecosystem”- there are many actors at play.

    • BigChiefX

      Bosun, in your response you echoed the title of my next blog post – “The Shortcut Problem”.

      I think all parties are guilty of it from the “investors” to “entrepreneurs” even government and donors. A lot of people want magic to happen without putting effort in learning the magician’s tricks of the trade.

      Yes we have had a number of impact investments that have really not yielded much but bragging rights but it does not mean that they should stop. The real problem with those investments is that they are either “token investments” or wrongly timed. A lot of assumptions are made about African tech ecosystems based on “noise” from awards and contests. Very few understand the real dynamics and where to put the effort to yield long term results.

      Every ecosystem evolves on its own terms and “aid” or “pity” wont do it for Africa. The local investors need to be involved in the process as they are likely those with a higher stake in solving local problems and will get benefits that go beyond money. Startups in Silicon Valley build on each other and that is what the African ecosystem must do. I dont see much collaboration in Africa only schoolyard type “pissing contests” and all (entrepreneurs and investors) are guilty of that.

      There is no shortcut to growing the African tech ecosystem, we need to understand the first principles that for an ecosystem to thrive there must be equilibrium. There will be predators, parasites and there will be symbiosis but right now we have more parasitic and predatory relationships without the symbiotic ones.

  • http://www.facebook.com/chuks.ugwuegbu Chuzee Bonano

    Dear Writer,

    If you go through your article carefully you shall find that you might have nearly found all the answers to your questions.

    Although the key component issues posing a “clean cut” challenge to developing countries such as Corruption, Vacillated reformation in government policies due to political uncertainties and / or bad leadership as well as Lack of proficiency due to poor education/training foundation or abuse of “local content(s) potentials in terms of human and capital resourcing”…should have equally be found to be inclusive, in order to establish if there exist any significant relationship to your own findings or conclusions.

    However, referring to your own observation on “western world”…..,in the case of “business to government” investment opportunities, for example, it must be typical for any foreign investor to demand from government or prospective stakeholders in Africa, a form of sovereign bond, albeit provision of big government Bank Guarantee from Swiss bank, unlike in the “western and stable world” ensuring that the subject of sustainability is never at any time, misplaced. Hence, the agreed benefits could never be jeopardized.

    This could perhaps throw more light to why majority African countries would continue to witness an economic trail as most of this so-called JV’s are subject to ridiculous interest rates favorable to the foreign investor, for the entirely life cycle of the venture plus a guaranteed ROI. Whereas, just like Savannah which have indicated interest in “bridging the early stage/angel and venture capital investment gap that currently exists in Africa” as they so put it, you can only remain at the mercies of the investors, eventually, except someone like OBJ outsmarts any perception of roguery and does want he knows best.

    Based on my arguments above, what you may find is that the relevant investors aspirations or decision if you like, to extend their operations to sub-sahara Africa may not particularly achieve all the desired objectives or results but could on their own part eventually found to be considerably inept, and as such needing the very support which they had planned to provide in the very first place.

    I trust that you shall be finding my own contribution(s) to be quite helpful to your study.

    Best wishes,

    Chuzee.