Sunday, July 22, 2012

Connecting Developed Market Capital with Developing Markets Innovation

I was genuinely excited to read a number of weeks ago about the launch of the Savannah Fund in Nairobi. This US$10 million incubator and accelerator has been established purely to invest in digital and mobile initiatives in Sub-Saharan Africa. Once they raise the capital, they will use the funds to provide mentoring to start-ups, provide follow on investment to those that graduate from the incubator, and then also invest in more mature businesses in the region. Nairobi has been selected as the location for the fund, which makes a lot of sense given the focus and energy that is being generated from the success of M-Pesa and associated businesses. The efforts by Eric Hersman of iHub fame and his partners to generate interest and investment in East Africa technology projects should be widely acknowledged.

What is interesting has been the attention that has emanated from this announcement on the venture capital, accelerator and incubation industry in emerging markets. Traditionally, entrepreneurs in markets like the United States tend take the path of raising initial seed funding from friends and family, before connecting with incubators or accelerators who may provide early stage funding and advisory support, often coupled with co-working spaces with other start-ups. Whilst the product is being built and launched, entrepreneurs will start the well-worn path to Silicon Valley to pitch for Series A funding. This model has worked effectively in the United States for many years and while investment in venture-backed companies only equates to between 0.1 percent and 0.2 percent of U.S. GDP annually, these companies employ 11 percent of the total U.S. private sector workforce and generate revenue equal to 21 percent of U.S. GDP. That is quite an impact!