Africa is already home to a vigorous entrepreneurship scene. Strong growth and the lack of local technology incumbents have generated the world’s highest start-up rate.
Many are essentially greenfield investments. Successful start-ups will have a first-mover advantage and the potential to dominate their market. As African consumer societies continue to grow, this holds out the promise of substantial returns. Savvy investors are paying attention, and learning how their approach needs to adapt to African realities.
Perhaps Africa’s best-known opportunity for tech investors is in mobile — so it’s not surprising that a lot of would-be investors make identifying mobile opportunities their first strategy. The weakness of conventional forms of infrastructure in Africa has put a premium on all things mobile and created an infusion of high-tech solutions into low-income markets.
Take M-Kopa, a Kenyan venture to provide small-scale solar-power systems to households without electricity. Most customers have difficulty managing the upfront cost, so M-Kopa incorporates SIM cards for payment by regular installments through M-Pesa, the Kenyan mobile-payment system. Building on such ingenuity, M-Kopa has expanded into Uganda and Tanzania.
Then there’s mPedigree, a Ghanaian venture that has expanded to three other countries, including India, offers an app to let consumers verify the origins of sensitive products such as medication.
And yet even appealing ideas like these pose a number of potential obstacles for investors. For one thing, it can be hard to estimate the commercial potential of such ventures, because there aren’t comparable business models elsewhere. And stories of heart-wrenching failures are all too numerous. Many investors are familiar with the story of Adesemi Communications, the wireless virtual phone network that succumbed to local political headwinds in the late 1990s.
So a second strategy for early investors is to modify the typical venture-capital principles by spreading their bets more than usual. That’s easier than it looks, because most of these asset-light start-ups require only modest initial outlays.
The recent Demo Africa, the continent’s largest innovation conference, planted the seed of a pan-African business angel network, which complements an increasing number of incubator facilities and venture-funding vehicles. Demo also saw intense interest from big Western companies, with the likes of Microsoft trying to get a foothold in terrain unknown to many outsiders.
Other tech firms have also decided to invest widely rather than deeply. For example, instead of looking for one or two good partners, Google is working with the incubator 88mph, while publisher Pearson engages with multiple “edupreneurs.” The telecom giant Orange is running an extensive venture program in Ivory Coast.
A third strategy Western investors also increasingly use is to focus more on the entrepreneurs themselves than on the business models or technologies. The founders of Nigeria’s Gidimo, a mobile learning platform, learned that some investors cared less about the exact business proposition than about the people running the company. Those investors may not understand the complexities on the ground, but they’ve found someone capable who does, and that’s enough.
Finding locally knowledgeable and connected entrepreneurs may indeed be vital. Adesemi Communications had great networks in the United States, but not in Tanzania. Without a local power broker, it failed to hammer out a revenue-sharing deal with the national phone company. M-Kopa, by contrast, has drawn on seasoned hands such as Nick Hughes, who was involved in M-Pesa’s creation. Verve k.o, a Kenyan enterprise-software provider, draws on CEO Karani Nyamu’s local startup experience, which helped the firm anticipate such challenges as intermittent electricity at some clients.
When Western investors arrive in Africa for the first time, they soon notice that their prior experience is of limited use. Many get burned and pack up quickly. Others see the continent’s uncertainty as opportunity. Although unreliable infrastructure hobbles conventional kinds of companies, it opens the door to novel business models, especially those centered on mobile internet. It’s impossible to know which ideas will carry the day, so investors need to go beyond bold bets. Building a wide array of relationships with capable local entrepreneurs is the key.
Originally Appeared on HBR
Ronald Klingebiel a professor of strategy at the Frankfurt School of Finance and Management in Germany. He focuses on technology management and all things Africa.
Christian Stadler an associate professor of strategic management at Warwick Business School in the UK .