How Boost Africa uses patient venture capital to close financing gaps and prepare African startups for sustainable growth.
Over the weekend, I tuned into an Abojani Investments webinar feature, and left with a wealth of knowledge about how venture capital works, how it supports African entrepreneurs by bridging finance gaps, and how it drives growth for startups by profiling the Boost Africa programme. Boost Africa is an initiative of the European Investment Bank and African Development Bank, with support from the European Commission.
The webinar began with an insightful question from moderator Claire Munde who asked why so many promising SMEs were still struggling with accessing capital. The subsequent discussion with Astou Dia, Boost Africa Technical Assistance Facility Lead and Adolfo Cires, European Commission Boost Africa Lead, offered a perspective on venture capital that does not normally get airtime. A large portion of what they talked about falls below the radar with regard to Venture Capital Funds policies and various frameworks that determine allocations.
Their dialogue offered a map that would be useful for anyone wanting to comprehend how private capital enters African markets. It also showed what firms have to do to cross the bar set by investors who align development with business sense.
The reason traditional finance fails young enterprises
Astou Dia clearly differentiated between what banks have to offer and what start-ups require. Astou said that banks are based on collateral, credit rating, and guaranteed cash flow. Startups involving new products and irregular sales cycles don’t fulfill these criteria. Founders have to mortgage personal assets or borrow from friends and family. Some entrepreneurs are advised to come back once they get substantial revenue traction or assured business contracts.
Venture capital finance fills the gap. It provides patient capital so that a venture can evaluate its products, develop and mature. Astou made it clear that venture capital financing does not contradict conventional credit. Both sources are given different roles at different times in the business growth cycle. A business can start with venture capital and then seek credit from banks once it settles.
Structural barriers impacting investor demand
But when Claire pushed Cires on reasons why foreign investors were hesitant, he zeroed in on structural risk. Cires said foreign money considers the certainty of repayment, predictability of legal frameworks in countries, and reliability of arbitration tribunals. “If these factors are in question,” Cires said, “the foreign money holds back. It’s not just an African thing. It’s an emerging market thing.”
Adolfo brought up an example from a previous attempt at organizing a fund in Uganda. The high capital gains taxes made it less attractive for people to invest. It took a lot of policy discussions for the government to change the rules for particular instances. It made it simpler for them to attract institutional capital. A change like this has importance because it determines the ease of market entry for investors and capital distribution efficiency for the fund within a market.
The discussion then turned to the type of architectural approach adopted by Boost Africa. Adolfo described it as follows:
“It’s based on a multi-layer structure that has been created by or on behalf of the European Commission, the European Investment Bank, and the African Development Bank. EIB’s role is catalytic. It invests a ‘junior tranche’ into qualified investment funds. That tranche commits to absorb ‘first losses’ in case they occur, thus shielding other private investors from loss. ‘Private risk takers’ then subscribe with reduced risk exposure. From these risk pools, a fund will be created that invests ‘in businesses geographically spreading across that region.’”
This business model shapes capital flow. Rather than making direct investments to startups, the EIB makes financial injections to private equity or venture capital funds including Seedstars Africa Ventures, AfricInvest, and Partech Africa. These players know the local market. They identify businesses with high growth capabilities. It is a process that takes time. It works well in markets with dynamic changes.
The businesses hardly get to see EIB. They operate with fund managers who understand the region and offer advice on growth, hiring, and compliance.
Justification for sector focus
Both Adolfo and Astou reiterated that venture capital does not have the capability to invest in every business. It usually prefers businesses with high growth attributes and a significant market demand to drive scalability. It is because venture capital-backed businesses usually belong to sectors with measurable effects brought about by marginal changes.
These industries include connectivity, finance, retail infrastructure, agriculture, and energy, especially those that are tech enabled. These form the core of business activities. At the same time, they have inherent challenges that conventional lenders have avoided. EIB-backed funds invest in businesses that address these infrastructure or operational challenges to solve real problems for the African people.
The foundation for operations before an investment
Astou added that what these businesses usually show the investors, with so much enthusiasm, is very limited as regards structure. She cited three things that are usually missing. First, entrepreneurs don’t know their numbers. You might know your audience but apparently don’t know your unit economics or your growth metrics. Secondly, there might be a shortage of talent necessary for scaling very fast. Those who manage a thousand subscribers won’t be able to manage a million. Thirdly, there might be a need for strengthening the technology infrastructure before an organisation can scale.
Boost Africa created its technical assistance facility with exactly these challenges in mind. It assists or enhances the financial reporting and internal processes for portfolio businesses to safeguard the business as it scales. Technical Assistance may seem of secondary importance to capital flow but it will determine if capital will achieve an outcome.
Investor readiness and the gap that widened
The webinar brought out a common theme among investors. A number of businesses have incomplete documents and financial organization that does not hold up under examination. Claire wanted to know if entrepreneurs were looking for venture capital as an alternative. Astou replied that there is some interest, particularly among hi-tech businesses. However, the degree of readiness varies greatly.
To reinforce this, Adolfo pointed out that there is an increasing interest among pension funds on the African continent, which could drive much needed local private capital mobilization. These funds have large assets, but these have mainly been deployed in government bonds and listed companies. It could be an additional source of money for SMEs if they invest even 1% of their assets under management in private equity. At least for now, changes in regulations and investment knowledge are necessary.
A pattern that emerges more deeply
Through out the webinar, and the larger picture, there emerges a trend. Institutional capital on the African continent exhibits a layered structure. These layers are contingent on regulatory certainty, technical expertise, and fund managers with knowledge on the ground. The businesses choosing to participate within these value-chains exist within necessary sectors and solve for the daily dilemma.
The EIB’s Boost Africa-supported startups on the African continent do not rely on speculative capital. Their success is based on measured progress and addresses various needs. Their developments can be measured based on the extent to which the venture capital system is supportive before any news stories.
What the next phase may hold
All members agreed that progress will be dependent on patient capital, more local private capital and more necessary changes to develop a self-sustaining venture capital eco-system. There clearly remains a need for more dollars towards infrastructure related to climate change. There also remains a need for more dollars on day-one support so that entrepreneurs can be compliant with institutional capital. One thing that emerged clearly from the discussion. African markets require an understanding that reflects the regional realities. Boost Africa and its fund partners operate under an understanding that identifies complexities on the continental market.
You can find the Abojani Webinar here.
