Has Venture Capitalism (VC) in Africa Been a Force for Good

Sure, exuberant VCs have written cheques to people who should not have been allowed to hold their neighbour’s wallet for even one second, and surely, people may have been incentivised to try to make a quick buck and pay themselves a fat salary. And of course, African tech (not African VC) as it is today, may not be economically transformative in the short term (I say this with great caution).

But the point is that venture capital may not have successfully lifted Africa’s paltry GDP tenfold, but is a potent ingredient in the business investment mix. In some cases, one can even argue that it has been a more efficient way to deploy business investment that lifts the productive capacity of an economy.

I like how Exploratorium explains the Big Bang Theory.

“The universe began, scientists believe, with every speck of its energy jammed into a very tiny point. This extremely dense point exploded with unimaginable force, creating matter and propelling it outward to make the billions of galaxies of our vast universe. Astrophysicists dubbed this titanic explosion the Big Bang.”

I like it so much because it is a close-to-perfect analogue for today’s piece. 

When Africans started huddling underneath kiosks and umbrellas to talk to distant relatives on mobile phones, instead of queuing to make a call from a decrepit street phone booth, nearly nobody expected the burst of economic energy that would be released. Supply of network coverage, devices, policy legroom and value-added services quickly ran out and investments into telecoms soared. Today telecom stocks account lead or are in the top 10 companies by market capitalisation in almost every major African economy. We have also settled into treating mobile cell service as a given commodity in urban and semi-urban areas in the same way the (still rapidly expanding) universe appears to be predictable.

A lot of things that have happened since the late ‘90s that are classified under tech in Africa are still downstream of that initial bang. And just like how solar systems are mostly made up of rocks and gasses that orbit constantly exploding gas giants (or suns), our orbital path in Africa’s tech business world is around a sun that is barely 12 years old, and which only became hot 3 years ago. 

This something is venture capital, and it has in the last 7 years, come to dominate the technology business-building cycle in Africa—at least on paper and in the media.

Thus: “The venture-backed model for building businesses on the continent really got its start roughly a decade ago,” Emeka Ajene wrote, “It’s arguably too early to judge in certain respects, but has VC in Africa been a force for good or not so far — net net?”

It’s a good question. Especially as public sentiment in the last 18 months remains submerged beneath the crushing arctic ice of stalled funding markets. Meanwhile, inflation continues to bite ever deeper into startup and consumer wallets. Unsurprisingly, the last 18 months have also fueled self-immolation inside and outside venture capital circles, in private and increasingly in public, especially at your favourite conferences.

One European VC fund manager went a bit further and wrote up a damning indictment of her industry, listing The Five Deadly Sins of VC, and branding herself and other venture investors as, “liars, hypocrites and egoists.” In case you’re wondering (and a VC), the crimes include Hypocrisy, Vanity, Lack of transparency, Superficiality, and Robot-likeness. Following that, I wrote in October of that year(2023): 

“In the last few months or so, I’ve seen a lot of takes about venture capital. Everyone from purebred venture capitalists to social impact VCs, hedge fund and traditional fund managers, to public market analysts have an opinion, [are] hand-wringing or [revelling in the] unabashed schadenfreude they derive from the collapse of the short-lived roaring 2020s in VC land.

“Some parts of this [is] worrying, but [it also kind of] funny to watch or read, especially the full-throated gloating comments on Financial Times articles by traditional asset managers. What is clear, though, to me is that the world of venture capital is undergoing an identity crisis like never before—even the infamous dot-com bubble did not create this type of self doubt.”

Who hasn’t seen the long essays that explain why switching from hunting unicorns to hunting for camels, gazelles, zebras, etc. is a better idea for Africa? Sure, everyone could use a little bit of humility when estimating the future value of their companies, but whether a company is a cheetah, or a whale, is a matter of perspective. And understanding the fact that the business of venture capital and the businesses that receive venture capital are two different things. Even if this distinction has lost its refined contrast to an overwhelming sense of woe in the wake of the 2022-23 meltdown in tech startup land.

Pledge your support

Of course, the public and self-flagellation has only gotten worse normalised since then. Therefore, wondering out loud if VC in Africa has been a force for good, is only natural and an exercise that more of us should indulge in. As my former boss, Muyiwa, said recently, clichés create flat explanations. Flat explanations allow people to escape the hard work of thinking too deeply and exploring the crevices in the story.

So is VC a net good for Africa? My vote is a full-throated aye. A short and inexhaustive list of “whys” is what this essay is about. 

Big bangs create other bangsOne way to look at it is that the primary source of “good deeds” from venture capital in Africa is the simple fact that this esoteric capital market formula has received and directed enough commercial capital that today rivals the super-opaque traditional private equity market that predated it. Granted the market remains highly inefficient and broken in several places. Still, it is a market nonetheless, and it’s difficult to overstate how important capital markets—different types of capital markets—are for economic development.

Why is a capital market important? Why is any market important? Markets are important because they function as systematic catalysts of value creation and subsequently play the role of a clearinghouse for value exchange. Modern capital markets are an insanely effective way to catalyse value creation and distribute rewards and risk; venture capital is only one variant.

On this planet, national economies and entrepreneurial activity very often (perhaps more often than not) follow financial development. That is to say, the so-called “real economy” often follows the money. This can be both good and bad and a lot of people think it should be the other way around. If you listen carefully to the popular remonstrations against venture capital in Africa, it sounds awfully like what Joan Robinson would agree with. In 1952, the respected British economist wrote, “By and large … where enterprise leads finance follows.” 

Robinson was not entirely correct. While it is true that capital can choose to chase a proven enterprise opportunity, the development of financing systems and an efficient capital market are both a signal and a predictor of profitable economic activity.

Sure, exuberant VCs have written cheques to people who should not have been allowed to hold their neighbour’s wallet for even one second, and surely, people may have been incentivised to try to make a quick buck and pay themselves a fat salary. And of course, African tech (not African VC) as it is today, may not be economically transformative in the short term (I say this with great caution).

But the point is that venture capital may not have successfully lifted Africa’s paltry GDP tenfold, but is a potent ingredient in the business investment mix. In some cases, one can even argue that it has been a more efficient way to deploy business investment that lifts the productive capacity of an economy.

A LeverI don’t know if anyone can argue that aid money is a better way to deploy impact capital in Africa. Or that bank loans have historically proven to be a panacea, not least because of punishing interest fees. Equity capital in Africa is still so new that it still does not make a lot of sense to a lot of people. The local stock markets have not made a lot of sense, how much less private markets.

Ventures Platform released an impact report this September that shed a tiny bit of light on how it’s performed from its syndicate roots and the social impact of portfolio companies. Impact reports are almost as tricky to interpret as financial reports because you typically get only the information the author considers impact. But in 80 pages or so, the Ventures Platform team does a good job of teasing out the secondary results of some of the cheques the business has written over its short lifetime (alongside other investors).

From the report:

Portfolio companies have created over 4,264 direct jobs and an estimated 20,650 indirect jobs, unlocking economic opportunities and enhancing productivity across sectors. Fintech investments like PiggyVest have facilitated access to financial services for over 4 million underserved individuals as of 2023 and contributed to a 13.5% increase in financial inclusion in Nigeria. Agritech solutions like ThriveAgric have disbursed over $140 million in input financing to about 400,000 smallholder farmers, as of 2023 driving food security and sustainable agriculture.

Ventures Platform is just one firm, I know. However, with an AUM of $72 million on little over $20 million of investment made (if you count early syndicate investments), it appears to be a singular example of VC being a net good. 

I concede that have no insight into the state of VP’s portfolio, but if we conservatively assume that the brief snapshot we have today places VP at the 50th percentile of all African VC funds today, then it easily outperforms the performance of a lot of decades-long donor-funded programs, government-run initiatives, and even some commercial and multi-lateral lending.

Throw in the fact that the fund is only 2 years old (since the oversubscribed full close) and that its partners previously managed to return capital to syndicate investors four times, and you may just have satisfied limited partners—which frankly, is all that counts. Here’s the full report, if you haven’t read it.

The report does not tell us if VP will be successful tomorrow, but it allows us to see at least part of how the limited partners define success. And using that admittedly impact-heavy lens, VP appears to be succeeding today. We can now rewrite Emeka’s question to: Will the success of Ventures Platform given the trajectory today, be a net good for Africa?

The Plough

But maybe you don’t care a lot about whether venture capital creates a positive social impact. You’re just more concerned about how it has affected how businesses are being built. You don’t like move-fast-break-things and mock unicorn-chasing-20-to-30-something-year-olds. You question the exit opportunity and can recite a litany of reasons why the Silicon Valley model does not work. (Read this by the way).

You’re right! And we (mostly agree). The fact that you’re reading this and that we’re all engaging with an entirely new set of lexicons in the world of global finance is a good thing in my book. It means we are breaking new ground and digging new wells. Some of it will be empty, some will be springs.

This goes without saying that, venture capital, being a subset of private equity, is probably a much more nimbler in terms of deploying finance, learning quickly and adjusting on the go. Banks (with all their regulatory straight jackets) can hardly say this. Nor can aid money. The advantage of private capital in this regard is clear. And we’re already seeing some of that nimbleness play out in the form of increasing convertible debt, PE-style portfolio support sans the debt engineering, and above all, the creation of a pipeline of private money manager talent across the continent.

Again, as I said at the beginning of this piece. The business of venture capital (that is, the stuff that keeps general partners are VC firms awake at night) is different from the things that keep startup founders up at night, even though they might sometimes converge. 

The fact that VP which grew out of a small loosely organised group of friends who occasionally wrote personal cheques, has become a proper $45.7 million fund that counts the International Finance Corporation, several other development finance institutions, and other institutional limited partners, including Africa’s larger lender, as backers, is itself a big example of this leverage effect.

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