South Africa (VC and Entrepreneurship): The Next Israel?

I was asked to give a little speech this evening to a large group of entrepreneurs discussing some thoughts on entrepreneurship and venture capital in Africa.  It was a great opportunity for me to reflect and synthesize my thoughts on many of the key takeways I have had during my time here.  From discussions with my colleagues and from the many business ideas I have seen, I definitely do not think there is a lack of entrepreneurs or interesting ideas in Africa. In fact, there have been some very exciting ideas and I think they could even make some top American VC’s take a second glance.  One of the biggest challenges, though, is finding the entrepreneurs that really want to take their idea global and be the next huge company.  Many entrepreneurs and companies here are quite happy with their lifestyle businesses, making good money in the domestic market and don’t really see a need to go further.

I would argue that the entrepreneurs here should really dream big.  They are all looking at the domestic market, rather than the global market or the African market as a whole.  For example, the African mobile market is huge and growing at unheard of rates.  As Joe Shoeendorf from Accel Ventures said in a recent VC Insight Report, Africa has the next billion customers waiting to be served.  Entrepreneurs here need to see that market and take advantage of it.

Israel is an interesting case as it is the country with the greatest amount of VC funds as a percentage of its GDP in the world…even though the Israeli market in itself is miniscule.  Israeli entrepreneurs are coming up with great ideas and unmet needs not for the Israeli market, but for America, Europe, Asia etc.  There is a great opportunity for a country in Africa to follow this model of being the place bringing about amazing innovations and a large amount of venture funding to take great products all over Africa.  South Africa is the natural home for that, in my opinion, as it has developed infrastructure, a strong stock market (Johannesburg Stock Exchange is the 10th largest in the world), a mature private equity industry, top notch educational institutions, and innovative technologies.  Now, all it needs is for the entrepreneurs to dream big and target the whole of Africa as their market and it will be off to the races.

Entrepreneurs in Africa.. Can they Do it?

I recently received an email asking a bunch of great questions of things I have been thinking about regarding entrepreneurs and investment in Africa.  Below is the question and my response based on the very limited experience I have had so far.

“…I also heard phrases from Western businesspeople, such as : “Their culture and mentality just won’t let them make good on what they can do”. As much as the phrase stings – I definitely understand the concern (it is kind of a Wild Wild West out there, right?). Yet I feel like the perception of risk is still too extreme. I think you can do business with smaller entrepreneurs if you control for certain factors and make good information flow in.  I am just not sure what would be a good feasibility indicator for these projects? How do you deal with this in your internship? I understand that having a local network and facilitators is key, but can you quantify something at all? Since standard assessment criteria may not work, are there any more exotic indicators that you can come up with, if you are not based locally? I imagine that valuation is still valuation, so would they mostly concentrate on corporate governance criteria and product/consumer assessment? How do you know that the team can succeed if you don’t trust the mentality of local businesses?”

I have definitely heard similar concerns about investing/getting financing in Africa (and I would imagine the same exist in Central Asia).  I am not sure if I would agree so much that it is a cultural/mental barrier as much as a lack of entrepreneurial education and resources.  Yes, there are probably a few more “highly ambitious entrepreneur-types” in the U.S., but I have met a fair share of incredible people in Africa, who, if had access to the resources of silicon valley, would be incredibly successful.  That being said, because those resources are nonexistent, a successful VC investor in Africa would need to be incredibly “hands-on”- much moreso than an American VC would be.  They would need to take almost a weekly (if not daily) interest in advising and counseling the company.  An American VC does not have the time to do this, nor is it even feasible because none of them have local offices in Africa.  We have seen this in India and China recently (many of the top firms have opened branches there as I am sure you are aware of) and I would think that will happen in Africa at some point…but possibly not for 10 years.

It is a bit ‘Wild Wild West-like’ around some parts in Africa, but actually in South Africa where I am, technology and infrastructure is quite mature and the private equity market is solid as well (late stage, though, and not early or seed stage VC yet).  There is a trend toward earlier stage investments, thus the founding of our firm and others recently, but the early stage investment market is definitely still quite young, precisely because of the concerns you raise.

We do use much of the same assessment criteria that a VC in the states would use: the team is incredibly important, the technology, their unique advantage, the market need etc, but to figure out the answers to those questions takes a much more proactive approach of talking to customers, experts, and others as there isn’t nearly the amount of research reports or statistics that we can look at it as in the Western World.  Further, we must consider political issues such as the Black Economic Empowerment movement and how they may impact the company.  You’re right, valuation is valuation, but the exact same company with the same team in Silicon Valley might be perceived as both higher value and less risk because of political considerations, larger market, etc and thus be a better investment opportunity.

To your last question, we really have to figure out what the mentality of the team of a potential investment is- just like a VC on Sand Hill, we are ultimately looking for stellar returns on our investments and if the management team does not have the mentality of hyper growth and large ROI, it may not be what we are looking for.

A Step Back

Why VC in AFRICA?

The idea to come to Africa for my summer internship came from a class I took at Stanford called Entrepreneurial Design for Extreme Affordability. Besides it being one of the most influential courses I have ever experienced (check it out- www.extreme.stanford.edu), it taught me a lot about the potential of and entrepreneurial environment in Africa. People are fixated on the opportunities that exist in China and India, but almost nobody is focusing their time and energy on entrepreneurship in Africa.

Where have all the Entrepreneurs Gone?
I believe there are entrepreneurs (ie people with passion to innovate) all over the world. Having been lucky enough to travel pretty extensively, I have seen them in Ethiopia, Kenya, Zimbabwe, London, India, China, and South Africa and I know they exist in every other corner of the world. In Africa, there is very little access to capital or entrepreneurial skills, but if given those things, I think the results will be astounding.

I decided to try and offer both capital and entrepreneurial knowledge to Africa where it is needed most (and lacking the most) in the hopes that I will be surprised by the people stepping up to create great corporations.

There was also a large selfish component of my desire to work in Venture Capital in Africa. I am a passionate entrepreneur and know that I do want to start my own business. Raising funds is one of the most critical things that must be done to succeed with a startup so I wanted to really learn the ins and outs of a VC firm. I wanted to know exactly what they are thinking when a team comes in to pitch “the greatest idea ever” and what they discuss after the team has left. I wanted to absorb all the “tricks of the trade” that I will be able to leverage when I am sitting on the other side of the table, trying to raise money for my company.

Finally, I wanted to learn all of these valuable lessons in both entrepreneurship and Venture Capital in Africa: one of the most challenging business environments on the globe.

Ultimate Goal:
If I can figure out what makes a successful entrepreneur in Africa, I can be one anywhere. (Well that’s the hope, anyway!).

The Journey Begins- One Week In

In the Beginning

Today marks the one-week mark into my journey as the Hostel Venture Capitalist. On July 22, I left my Stanford home and the land of startups in Silicon Valley on a plane through New York and Dakar Senegal, landing in Cape Town, South Africa about 40 hours later. After gathering my belongings and paying a 30% surcharge for currency exchange, I was picked up at the airport by the owner of a hostel in nearby Stellenbosch. My flight was delayed about eight hours and I had no idea what time of day it was.

Welcome Home
I arrived at the hostel, was given a quick tour (billiard room, bathrooms, dining hall and bedroom). While quite clean, the walls were conspicuously bare, and it was very quiet. I expected a lively setting bringing me back to the community living of my fraternity days, but found a bunch of empty, cold rooms. I was hoping to interact with travelers from all over the world, asking them what made them tick, discussing life’s biggest challenges, and bouncing off business ideas that could change the world…but I was told that Stellenbosch is not at all a tourist destination for people outside the country, especially during the winter months (July is smack dab in the middle of winter in South Africa).

Our realities don’t always match our expectations and this seemed to be the case here. But, I was much too tired to worry about my summer plan going sour. I quickly jumped into bed and began sleeping, knowing that when I woke up, I would be eager to start planning my summer/winter life as the Hostel Venture Capitalist.