The Case for Investing in Africa
Why I started a fund to invest in Africa.
|Royce||Sep 18, 2020|
This year I created a fund for investing in business deals in West Africa. I believe the African continent is the best place to consider venture investment if you have a decent appetite for risk and a bold view of the future.
This is perhaps a bold claim given the common knowledge of the continent. Asia has a better technology and development story. Europe may have had its issues but is clearly a safe bet. The United States is the current world leader and the center of innovation as it stands at the start of the decade.
So why then, is Africa the best choice to focus investment efforts?
In this first investor letter, I lay out the case for investing in Africa and the investment strategy for the new fund. If you are interested in learning more, read on or reach out directly.
Africa is poised to have outsized benefit from a number of macro trends that will drive additional growth and opportunity on the continent.
Africa is the world's second most populous continent. Over 60% of the population is under 30.
The generation are tech-natives in a similar way to America's Generation Z. They've grown up with near ubiquitous access to smartphones and the internet. These technologies are central in a way that they aren't for older generations.
Africa's young technologists are almost always working from a mobile-first context. Some 90% connect primarily with a smartphone. The world's youngest, fastest growing population of tech-native, mobile-first population of employees and entrepreneurs is primed to take over the mid-level service and development industry if given the opportunity.
Africa is the second largest continent by landmass. Located directly within the global routes of trade and commerce, geographically it could be considered the center of the world. It is the unique continent to share direct shipping routes with every other continent.
Africa is already the material birthplace for much of the high-technology that we use today. Though the value-added manufacturing processes take place far away from the continent, the raw materials come from here. Where value-add manufacturing and production is missing, are prime opportunities to invest and develop local capabilities.
There is also a large breadth of opportunity. Common knowledge often looks at the continent as a singular block. This is a lack of nuance. The world's second largest and second most populated continent has some 50-odd countries and billions of people scattered across cultures. While the continent's early mega-cities are still expanding exponentially, small and medium locales are seeing plentiful growth.
Africa is also, for lack of a better word, somewhat inscrutable. It defies easy analysis and one-size-fits-all pattern matching that may work when looking at investment opportunities in other parts of the world. The knowledge asymmetry gained from someone actually on the continent is immense. For investors looking for opportunities on the continent, local talent and knowledge will be indispensable, and the networks of capital which provide deal-flow are not nearly as established as elsewhere in the world. This creates a unique first-mover advantage, a reward for the early-adoption risk and another tailwind for any investment strategy focused on the continent.
The confluence of these factors means a unique situation of untapped human and natural resource capital is sitting, largely fallow, quite ready for targeted cultivation.
Foreign direct investment in Africa remains staggeringly low. It hovers somewhere in the low single percentage points for world share. The picture is even worse when you consider that outside of a few token countries, FDI inflows are peaked. Though the capital flows have seen net increases over the last few decades, Africa has missed out on the boom in developing country investments.
The explanations that pundits trot out for the lack of investment inflows are typical. African countries score low on measures that track ease of doing business. Business protections are lacking in some areas, and even when in place may be secondary to just knowing the local strong man or having a well placed government connection.
The stereotype of African corruption (now dripping in irony considering the political climate of the West) grew from real experience. The stories of investors showing up with briefcases of cash to push through infrastructure deals, while steeped in hyperbole, speak to a certain reality of the facts on the ground.
The African finance sector is underdeveloped compared to other markets. Infrastructure on the continent is available, except when it's not. Access to electricity, water, and other utilities can be spotty, even in the largest cities.
But I think the true culprit is more straightforward. The simple fact of the matter is that there are far fewer people working on deal-flow and opportunity investments in Africa. There are very few operators with local knowledge and expertise, coupled with connections to big money. Top candidates are sent to analyze the deals coming out of the US, Europe or Asia. African opportunities are a second-thought and so they get second-hand funding.
Capital then, has largely taken the route of least resistance. Faced with even a mild uphill journey to understand and develop before profiting, investment outflows have opted to settle in more comfortable locations.
Africa exists in the institutional blind spot that comes from a lack of focused and meaningful study in to the opportunities. A blindness that is exacerbated by the common knowledge attitude that the problems which prevented investment in the Africa of the past are the same problems that will prevent investment in the Africa of the future.
So we are faced with something of a chicken-or-the-egg problem. The conditions for attracting investment, while there, are not as fully developed as other options. Yet to develop a more attractive investment locale will require some of the same direct investment that until now has been missing.
What this represents is a rare arbitrage opportunity.
The group willing to put in the on-the-ground work necessary to cultivate a business network, source deal flow, and execute strategic investments in key sectors is going to have the opportunity to produce outsized returns on their capital investments. Returns are often found by arbitraging blind spots in common knowledge. The current common knowledge of the African continent is riddled with these blind spots, just waiting for a savvy fund operator to get to work.
This is the gap that I hope to fill.
What does this kind of fund look like? How do they source deals? How do we execute on potential opportunities?
While structurally, we can take cues from how similar efforts have developed in the West, the most successful will likely spawn directly from within the African context. Institutionally it is clear that the current players are missing the opportunity as it presents themselves. Hence the common knowledge blind spot. Getting around this blind spot is going to mean coming thinking global but acting local. Being on the ground, in the mix, is what is going to provide the advantage. Leveraging the African context to solve global problems will be the key to our successful execution.
The fund will take advantage of the macro trends discussed earlier. Leveraging this youthful population of technologists will be key. It will make sense to create methods for developing and cultivating this talent. While the process knowledge and means of production for high-end technology manufacturing is for now kept outside of the continent, this situation can change rapidly. For mid- and lower-level production, the tools and humans are there, waiting to be turned on. For the knowledge worker or for the local creator, smartphones are democratizing, and the African youth are smartphone natives in a way different from any other population on the planet.
It will be a mistake to focus on just the virtual world. It is tempting to source deals that are looking to capitalize on technology trends, and it may be more straightforward to pattern match Amazon-but-for-Africa or Uber-but-for-Africa. But the exemplary operator here will search for physical as well as virtual opportunities. Technology is slowly seeping into new areas of business, and it will be more interesting to look at how these technologies develop and interact with the physical world than just going after the next potential giant driven by network effects.
We won't be constrained by a typical path of technology development. This plays back into investing from the African context. Many countries have leap-frogged steps in technological development that we take for granted in the West. A good example is the explosion of fibre and 4G internet networks on the continent, even where there were no preexisting slow-speed DSL or cable networks. Another is the online government processes to create businesses and file taxes provided by Togo. Looking for these kinds of opportunities predicated on this leap-frogging will be fruitful. Absent the institutional inertia that comes with a long inventory of aging infrastructure, African investments can jump directly to the current best-in-class standards.
There will also be a lot of room for innovation at the edges. Solving global problems using an African context is likely to yield some particularly interesting problems. Thinking here about some of Dan Wang's suggestions to look at the less glamorous opportunities. There are sure to be clear innovations in plastics, distributed energy and other such items that solve non-sexy problems. There are a lot of these kinds of problems on the continent, making it a unique location to uncover these innovations.
That we haven't seen examples is another testament to how blind the commons are to Africa in general. We haven't found these innovations yet because we haven't looked. So the best operator on the continent will be the one that actually looks.
We will need to have a long investment horizon. In the short term it may look even more crazy to invest in the continent. The global macro environment is tepid to say the least, and safe bets are going to attract safe money. But for a group of investors willing to look at the next decade or two decades from now, plenty of opportunities will present themselves, likely with extremely attractive pricing.
We will have to take advantage of our connections back to the money and power centers in the West. Until now Africa has largely been an afterthought when it comes to investment opportunities. Shifting that will require some level of clout.
More importantly, we will need local talent excellence. Local connections and deal flow will make the success of the program. It is also the missing piece that is perpetuating the overall blindness to opportunity on the continent. Cultivating and retaining that talent will be a key advantage to the operator looking to maximize returns.
We are at a unique moment in history to take advantage of this opportunity. Early capital, first-mover advantage leading the next wave of financing for the continent is a possible answer. We are positioned with the local knowledge. There is a powerful tailwind in the prevailing climate of bleeding hearts throwing money at causes looking to address diversity in the abstract.
Opportunities for direct investment in Africa represent material diversity. I also believe they will represent respectable returns for the patient investor. The two together are a powerful story and why I have staked my own money and time to realize these visions.
Through 2021 we will be raising money for our first fund with a target to invest in 3-5 companies that address the opportunities and challenges detailed above. We are targeting a small fund size of $250,000, which will allow us to make targeted investments in early-stage companies that we believe will deliver better-than-benchmark returns.