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Approaches to supporting entrepreneurs in Africa

7 October 2014

This post is based on ideas developed for a class for the MIT Sloan Global Entrepreneurship course. Thanks to the staff and students at Sloan for some fantastic conversations.

Silicon Valley-style entrepreneurship is growing rapidly across Africa, as evidenced by the exploding numbers of incubators, co-working spaces and similar across the continent. Despite this, there are still relatively few real success stories of startups that grown large enough to substantially impact the continent’s economy, and many startups still complain that securing real investment capital is extremely hard.

Other types of entrepreneurship have been much more successful: corporates have been hugely entrepreneurial, especially in telecommunications, retail and increasingly banking. M-Pesa, the go-to example of African tech innovation, was largely developed inside Safaricom. On the other end of the scale, much of the continent’s population are entrepreneurs, creating jobs in informal retail or subsistence agriculture — but these are not businesses built with scaling in mind, and so are “necessity” entrepreneurship rather than opportunity-driven business creation.

So why aren’t Silicon Valley-style startups (i.e., small teams build businesses from scratch, securing investment over one or more rounds, and often using Internet or mobile technology to deliver services) taking off and securing funding as in, say,  Silicon Valley? In our experience, the US model of venture capital struggles in Africa. Some of the reasons are:

  • While growing rapidly, African markets are still small and fragmented, so near-term upside for investors is limited
  • African startup teams don’t operate in an established ecosystem, and frequently lack any members with a corporate background. This lack of experience means that pitches and business plans often need a lot of additional work from investors until they’re “investable” — even if the team has fantastic fundamental talent. This further hurts the investment/return ratio for investors
  • Too many startups build ideas based solely on cool technology, rather than providing a proven product or service to an established customer base. Big ideas or cool websites seldom build businesses, and teams too often neglect the nuts and bolts of testing products, acquiring early customers, building a marketing strategy, etc.

We are, however, starting to see a wave of innovation in the space of supporting innovators — specifically, different approaches to the challenge: How best can one get skills and capital into the hands of African startups? Everyone likes to back strong teams with good ideas targeting large and growing markets. But there are huge differences in approach. Here are some important differences for several notable models:

Traditional Venture Capital Rocket Internet et. al. Incubators/Hubs "Business Builders"
Team Existing Assemble Existing Supplement existing
Idea Innovate Pre-chosen Innovate Proven
Focus of offer Capital+… Execution Network+environment+maybe cash Execution
Investment size A few $m $10-100m’s (with partners) $10k’s $100k – a few $m
Stake Small Most Small Big

Disclaimer: These are of course very rough guidelines, and there exist other models or lots of variation even within the same organisation.

Silvertree is closest to what we’ve called the “Business Builder” model, of which there are several other examples. We feel this model allows us the greatest opportunity to bring operational experience to ensuring the success of startups.

Over the coming few years, we expect to see a lot of innovation in models for supporting entrepreneurs with cash and skills — and some real break-out successes from African startups!