The Anatomy of Venture Deals in Africa

Africa remains a wide-open space in terms of venture opportunity. A successful deal will require a good understanding of local market dynamics.

As tech hubs from Silicon Valley continue to attract investment, copycat companies across Africa have attempted to mirror these successes — with mixed results. Replicating a foreign business model has been the strategy of some successful African ventures.

But for every one of these recent successes, there are a considerable amount of failures. While imitation may be a starting point for Africa’s most promising start-ups, early-stage ventures must also adapt to their local environments.

Here are a few nuggets of advice that have guided me across my investments on the continent:

The success of an African startup has a greater dependency on the “on-the-ground” implementation rather than the ingenuity of a high-level idea, especially since replication does not equal success, and execution is often hindered by basic infrastructural and logistical problems.

On teams — look for strong team members that will demonstrate creative and authentic thinking, integrity, and a willingness to admit mistakes and take calculated risks in the face of difficult implementation situations.

Because Africa remains a wide-open space in terms of opportunity, talented middle managers often decide to leave and create their own businesses when facing internal headwinds and managerial challenges. Traditional incentives like stock options may not provide enough of a draw, so retention strategies must be as innovative as the newest ideas.

In the high-risk, high-reward African start-up ecosystem, good ideas (especially those with social impact) may attract a lot of investment. However, too much cash too soon can lead founders to overlook the steps required to build a self-sustainable, quality business that can pass the “stress test.”

Focusing on raising funds at the expense of focusing on actually growing the business is a recipe for failure. Beyond the early-stage capital, there is also a gap in local funding before companies reach the traction that would attract middle-market private equity. Businesses that have built their growth and survival on the availability of outside capital will not make it through the valley of death.

Do not discount the value of local investors. In Africa, local partners are a key component to any deal. They have the relationships necessary for due diligence, access and execution, they know the local talent, and they understand local market dynamics. They also know how to navigate problems inherent in the local environment.

Likewise, foreign investors play a key role in providing global context, operational best practices, and often times access to capital or relationships for follow on investments.

About the Author

Lexi Novitske is the Principal Investment Officer at Singularity Investments. Ms. Novitske joined Singularity in 2014 and is responsible for managing investments in the firm’s Africa portfolio. Prior to joining Singularity, she worked for Verod Capital Management. Ms. Novitske has also spent her career developing an expertise in financial services through her time at Sandler O’Neill Asset Management.

This article is featured on the State of Play report. To receive a free copy of the report click here.