Despite the effects of Covid-19 Africa remains the ripe land of opportunities and as the conversation about Investing in Africa is shifting from one of deficits and gaps to one about Opportunities, Prospects, Trends, Innovation and creativity, in the Companies and industries who have paid close attention to how business in Africa operates.
Africa continues to be the newest destination for emerging market investors and according to Eric Osiakwan, the managing partner at Chanzo Capital, half of the world’s fastest-growing economies have been in Africa, with Ghana and Ethiopia among the countries which showed a real GDP growth of 8 percent in 2018.
In an interview with this reporter at the Social House hotel in Lavington area of Nairobi, Eric Osiakwan a renowned tech investor and entrepreneur says that Investors seek out emerging markets for the prospect of high returns, as they often experience faster economic growth as measured by GDP. However, along with higher returns usually comes much greater risk.
“Investors’ risk in emerging market economies can include political instability, domestic infrastructure problems, currency volatility and illiquid equity, as many large companies may still be state-owned or private.” Eric said
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Obviously there are a number of reasons why Africa presents an incredible investment opportunity, according to Eric; “Africa is perhaps the most exciting investment destination globally when it comes to the technology industry due to the track record he and his team has had in Africa’s tech investments. He and his team has a 10X on their current venture capital portfolio from 2015 to 2020 under the auspices of the KINGS Startup Fund managed by their firm, Chanzo Capital.
How do you invest in Africa? Where do you invest in Africa? Here, we describe the extent of the African business opportunities in key sectors and suggest steps investors can take to translate that opportunity into profitable, sustainable enterprises, hoping to answer your queries.
According to Eric Osiakwan, Africa is “undiscovered” from a global investment perspective resulting in what many think are low valuations both in African debt and equity investments which offer attractive entry points, especially when compared to valuations in many more developed markets. Africa’s potential as a growth market for business remains both underestimated and misunderstood as does the potential for business to play a transformative role in solving the continent’s biggest challenges.
Greater innovation and investment from business is essential to meet Africa’s unfulfilled demand for goods and services, close the gaps in its infrastructure, create jobs, and decrease poverty.
The UN’s demographic projections indicated that almost 60% of Africa’s population in 2019 was under the age of 25, making Africa the world’s youngest continent. While the rest of the world is aging, Africa is “younging”. This implies that even though the global workforce is reducing, Africa’s workforce is growing and surpass that of China and India in this century.
The young demographics signifies economic strength. Also, young Africans like to consume the latest products, services, and technology which will generate the market for entrepreneurs to make a profit for themselves and their investors.
More than 80 percent of Africa’s population growth over the next few decades will occur in cities, making it the fastest-urbanizing region in the world. At the same time, incomes are rising across much of the continent, generating new business opportunities in the consumer market. These trends are spurring growing markets in a range of sectors where Africans have unmet needs, including food, beverages, pharmaceuticals, financial services, healthcare, and education.
Diverse and stronger economies
Previously the economies of African countries relied heavily on agriculture and natural resources. However African economies are now diversifying beyond commodities. The skills development of Africans to venture into sectors that previously had no or few Africans is also helping diversify the economy.
African countries are also focusing on non-commodity areas where they can be competitive. Every country in Africa now has what they call “Investment Promotion Agencies”, which act as one-stop shops for investors, assisting with registration, taxes, and other steps to establish companies locally.
According to the GSMA, 475 million people in Sub-Saharan Africa will be mobile internet users by 2025.
Africa is a leader in mobile adoption. Mobile money networks which started in East Africa opened the global economy to the unbanked city and rural dwellers.
The use of technology in Africa now is on the rise. Examples include Olam using mobile to reach new African suppliers and farmers and mPharma harnessing technology to remove the inefficiencies and price fluctuations that prevent prescription drugs from reaching sick people. In Kenya the use of M-pesa has also made business transactions easier than before.
Customers are changing
Africa’s middle class is growing thereby leading to the creation of new expectations and a change in consumption. According to the World Economic Forum (WEF), the African who is in the middle class is young, brand-aware, and sophisticated in terms of their consumption.
This means that international retailers and consumer brands can capitalize on the demands and preferences of these Africans and invest in the continent.
“Investing in Africa is sometimes like taking three steps forward and then one step back,” says Eric Osiakwan, “But as long as there are governments focused on sustainably growing their respective countries, it will be a good place to be.”
Africa is diversifying
African economies are finally beginning to diversify beyond commodities, though this is still in the early stages. Africa is seeing a returning diaspora that recognizes the potential and opportunities in their own countries. This population supports local economic growth with their skills and talent, by acting as “first movers”, investing back in their communities.
At the same time, African countries are beginning to place bets on non-commodity areas where they can be competitive. And they are packaging themselves to appeal to a broader set of investors. Recognizing they can no longer count on growing investment from China. Every country now has what are called “Investment Promotion Agencies”, which act as one-stop shops for investors, assisting with registration, taxes, and other steps to establish companies locally.
Vast Natural Resources
The African continent is incredibly rich in natural resources. It has huge, untapped reserves of natural gas and oil (10% of the world’s reserves) and largely unexploited hydroelectric power. It is home to vast gold, platinum, uranium, iron ore, copper and diamond reserves. Currently, only 10% of Africa’s arable land is being cultivated, yet it holds around 60% of the world’s cultivatable land. As such, Africa has become a magnet for foreign direct investment FDI.
Finally, emerging domestic developments lend credence to actively engaging Africa’s economic transformation agenda. Some of these developments include improvements in macroeconomic prudence and overall governance. For instance, evidence from the 2017 Ibrahim Index of African Governance shows that Africa’s overall governance index improved at an annual rate of 1.4% since 2007, an improvement of more than 5% in at least 12 countries, including Côte d’Ivoire, Tunisia, Rwanda and Ethiopia. This improvement helps to mitigate perceived risks for many investors on the continent.
On the other hand Eric castigates the way most Africa government have carried themselves in any event of borrowing, which has resulted in mismanagement and misappropriation. This includes eliminating corruption and capital flight; improving safety and security; strengthening macroeconomic environment, investing in quality education and skill development in science, technology and innovation.
“Investing in Africa is good business and a sustainable corporate strategy for foreign investors. Advanced and emerging countries’ governments and the private sector should leverage these profitable, emerging investment opportunities.” He says.
As investment spreads to more sectors of the African economy, investors are also thinking in new ways about its geography. Investment rationales are less frequently based on country-level economics, and more often focused on urban areas, corridors and regions. Leading cities, such as Lagos (Nigeria), Johannesburg (South Africa) and Nairobi (Kenya) stand out for their financial-technology hubs, middle-class consumers and connectivity.
Africa can lead in sustainable development
In energy, technology, supply chain design and other areas, Africa has the ability to look at what works elsewhere then fashion its own answers. It can openly embrace new technology and ideas, with no historical imprint from which to break free. It can develop flexible fuel grids that generate power with a mix of abundant wind, solar, hydro and bio energy, alongside conventional fuels such as oil and gas, which are also abundant. Nowhere on Earth is there as much unused or poorly used arable land, so look for big agricultural breakthroughs and productivity gains in food production in Africa.
Business leaders are hungry for vibrant new markets and consumers know the reality: globalization means there are too few remaining frontiers. As the developed world matures, and becomes increasingly difficult to trade in as a result of factors from legislation to terrorism, opportunities for corporate growth are limited. There are too few places where entrepreneurs and businesses with ideas and an appetite for risk can bring value and find long-term growth if they are persistent, creative and determined. But there’s something else they know: Africa is the place.
Provision Of Enabling Environment
Most Government have a structural plan in providing investment climate that is conducive to attracting high-quality, responsible investment in all sectors. Enabling environment not only reduces the cost of doing business but opens new areas hitherto neglected by investors hence creating more employment opportunities.
The investment climate needs to enable investors to thrive, and contribute to the local community and the broader economy in a socially and environmentally responsible way. An effective enabling environment contributes to the chances of investor success, which is in the interests of all stakeholders.
Areas Of Investment
Digital trade is possible through mobile phones. We know, for example, from the experiences of various countries across the African continent, that you can access distant markets using your mobile phone. So, the digital platforms are already there. We also know that Africa has one of the fastest growing penetrations of mobile phone subscribers. It is a question of leveraging all those technological innovations and advantages into a common platform for free trade in Africa
Mobile phones are one of the most powerful of these new drivers, Africans use them for commerce as well as communication, creating a new value chain in the process. The first and most famous example of telecommunications creating a value chain is MPESA – the Kenyan mobile money platform. It was created to send money between people and has blossomed into a marketplace. Kenyans can use it to buy insurance, pay a barber, borrow money, or finance a pay-as-you-go solar-power system.
To illustrate: In 2014, Ethiopia set up a telephone hotline allowing small farmers immediate access to advice from agronomists, with over 3 million calls done in the first six months of the pilot programme. Mobile is the area where Africa has pushed beyond the boundaries in the developed world, and African tech innovators are pushing to innovate more. So what’s next?
“We need to find a way to digitize our customs capabilities such that they are seamless across the continent. It is going to take quite a lot of work, but I believe it’s possible.”. Africa has more than 120 million active mobile money accounts, over 50 percent of the global total; this has leapfrogged many people over traditional banking products. This trend will allow companies to improve productivity, speed up transactions, and access wider markets,
Agricultural investment is a necessary requirement to develop and organize the agricultural sector in Africa. The African agricultural potential offers opportunities to be seized in terms of intensification of production and structuring of the agricultural value chains.
Having been long neglected, agriculture has regained interest in the global discussions and has since come to the forefront of the international scene, due to the multiple crises of the agricultural market. Climate change impact on production, combined with the food crisis, which has marked the last decade, has urged heads of states, international organizations and the civil society to look into the problems of agricultural productivity and food security in the world.
It is well known that agriculture plays a significant role in the economic growth and sustainable development of nations. Productivity gains in the agricultural sector generate a surplus, which can actively contribute to the development of national economies. A well-organized and effective agricultural sector can provide large and diversified agricultural production, ensure enough capital accumulation to shift to other sectors, and guarantee an adequate standard of living through price stabilization of basic agricultural commodities. Thanks to this accumulation of wealth, investing the surplus produced by agriculture in the other sectors will at length lead to the creation of new employment opportunities, higher incomes and obviously an increase in demand. Investing in agriculture turns out to be a necessary condition for the development of countries.
African states should no longer count on imports to feed their population and are obliged to develop their agricultural sector to guarantee food security for their population and fight poverty.
As most of their population is rural, and agriculture is the most important activity African countries must necessarily invest in agriculture to reduce their food dependence on the international market, ensure food security and guarantee the creation of increasing wealth by making agriculture the driving force of growth of their economies.
Africa enjoys a fertile environment for tech entrepreneurs due to the continent’s youthful and growing population, rising internet penetration, and the application of emerging technologies that have the potential to improve access to healthcare, financial services, education, and energy according to Eric Osiakwan. One of the long-running tensions in the African startup investment ecosystem has been whether the Silicon Valley funding model, which seems to have been transferred wholesale to Africa’s very diverse and different tech ecosystem, is right for the continent at this stage of it’s development.
But With the disproportionate influence of Silicon Valley investment on Africa’s top tech ecosystems in Lagos, Nairobi and Cape Town, this debate isn’t going away anytime soon. And even where there are local tech investors many have adopted the expectations of their better funded American counterparts.
Many African startup founders focus on trying to solve large, foundational problems that could improve the lives of countless people; building infrastructure such as supply chains and fintech platforms, pursue mass markets across Africa, and leverage local knowledge.
“Local investors are not investing in Technology companies because the industry is unfamiliar to them” He says.
The challenges with low financial inclusion and outdated banking technology and payments systems in some African countries with large consumer bases has meant huge investment has been put into startups addressing these problems. Nigeria’s Paystack was bought by Silicon Valley’s Stripe; Visa invested in Lagos-based Flutterwave and Goldman Sachs has led two investment rounds in South Africa-based fintech firm Jumo and Lagos-based logistics startup Kobo360. Fintech in particular has dominated African startup investment for several years now.
If there is one core message from Eric the Co-founder of Angel Fair Africa, is that Africa’s startup ecosystems need to adopt norms, structures, and processes that reflect the realities of operating in Africa. Nowhere is this more essential than in the funding structure of venture capital and other investors.
“General partners of funds need more flexible structures to better cope with markets that are evolving as rapidly as most African ecosystems.”
In African countries like Egypt and Nigeria two of the continent’s largest and most mature economies where financial exclusion rates remain orders of magnitude greater than in the US, hundreds of funded startups have already begun unlocking the long-term value in almost every sector, especially financial services.
In Egypt, FinTech, particularly payment solutions, has helped by laying down crucial digital infrastructure over which further technological solutions can be extended. Here, the Egyptian government has provided direct support, determined to unlock growth hindered by an inefficient cash-based informal economy amounting to roughly a third of GDP, while two thirds of the population still remains un-bankable.
In a world where technology allows any company to integrate financial services into its value proposition, Egypt particularly is set to close the financial inclusion gap as we see more software and IT companies blending financial solutions into sectors such as healthcare and agriculture.
In conclusion, South Africa is the most developed of sub-Saharan economies, with its deepest capital markets and understanding of the continent because, in addition to being a favored target for Foreign Direct Investment FDI, it is the fifth-largest source as well. South African retailers are among the most visible brands across the continent, such as MTN, the telecommunications provider, or Shoprite, the supermarket chain.
. Nigeria is also a known investment destination for oil and gas and hosts an emerging technology ecosystem and start-up culture. Ethiopia is home to Ethiopian Airlines, the continent’s largest airline, which makes Addis Ababa an emerging transportation hub.
Ghana and Kenya stand out for their relative political stability and economic diversification. Both export natural resources but aren’t dependent on any single one. Their challenge is to develop more domestic supply chains to generate economic value before exporting. Côte d’Ivoire, on Ghana’s western border, is another example of diversification. Together, the two countries produce about two-thirds of global cocoa output.
Well, what’s important is that investors now realize there is money to be made for those bold enough to help close the gaps. As that takes place, the promise of greater prosperity for Africans and African businesses will be realized. In our opinion, Africa is following Asia’s development path and the coming decades will see a strong rise in incomes, continued reduction in poverty, and substantial economic gains for the investors who get in early.
It’s important to acknowledge that Africa tests an investor’s patience. Time horizons and return models that fit other markets don’t always work in here. Even the most experienced, sophisticated companies can be forced to recalibrate.
Prospective Investors who have less or no knowledge about investing in Africa can engage with Eric Osiakwan through his firm, Chanzo Capital that invests in startups and scale up in Kenya, Ivory Coast, Nigeria, Ghana and South Africa (KINGS) – these countries are the KINGS of Africa’s digital economy.
The firm’s annual flagship event Angel fair Africa brings selected entrepreneurs from the continent to pitch to invest who write them checks.
This year’s event will be held in Mauritius on the 25th of November 2021.
“Through our event over the last 8 years we have been able to realize $23m of investments ”Eric said.
Who Is Eric Osiakwan
Eric Osiakwan is Managing Partner of Chanzo Capital – an Entrepreneur and Investor with 20 years of ICT industry leadership across Africa and the world. He has worked in 32 African countries setting up ISPs, ISPAs, IXPs and high-tech startups. He Co-Founded Angel Africa List, Angel Fair Africa.
He was part of the team that built the TEAMS submarine cable in East Africa and an ICT Consultant for the WorldBank, Soros Foundations, UNDP, USAID, USDoJ, USDoS as well as African governments and private firms.
About Chanzo Capital
Chanzo Capital is a venture and growth capital firm, investing Capital, Capacity and Community in high-tech Startups and Scaleups in Kenya, Ivory Coast, Nigeria, Ghana and South Africa (KINGS) – these countries make up the “KINGS” of Africa’s digital economy.