East African venture advisory firm Kinyungu Ventures has published a white paper detailing what it says is a “misalignment” between traditional venture capital models and the African market. The white paper, entitled “Chasing Outliers: Why Context Matters for Early Stage Investing in Africa”, finds there are “multiple mismatches” between key characteristics of Silicon Valley venture capital and African markets, which influence how startups and funds function as well as what results they expect and produce. The paper includes feedback from 100 pan-African founders, investors, and LPs across 15 African countries, and recommends investment structures and approaches tailored to African operating conditions, and a broadening of approaches to institutional investment on the continent. Findings show that African markets are large, but also fragmented, and its consumers have limited purchasing power. Furthermore, consumers on the continent are difficult to acquire and retain, yet the sheer size of the African market also presents a real opportunity for profit once the environment is clearly understood. The paper’s key recommendations for funds include adopting more focused investment strategies, such as investing in b2b companies or cross-subsidising a portfolio with less risky, steady return assets; considering non-unicorn investing models geared at more resilient companies, with returns distributed more widely across the portfolio; using flexible structures such as debt or PCVs to accommodate market-level changes, where feasible; and allowing a longer time horizon for returns, understanding that growth could be slow and difficult to achieve for many companies.
SOURCE: DISRUPT AFRICA