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!


However, it was previously thought that Silicon Valley VC firms wouldn’t realistically invest in companies beyond a cycling radius from their offices on the outskirts of San Francisco, but I think recently, evidenced by the Savannah announcement, times are changing. India has been leading the charge, tapping into approximately $337 million of Silicon Valley venture capital in the last quarter of 2011. I asked Ben Lyon from Kopo Kopo in Kenya his thoughts on raising capital in emerging markets. I was particularly interested in what he had to say, as he and the Kopo Kopo team have been fund raising recently. On interest in funding, “investors worldwide are beginning to realize and act on the potential of emerging markets, which means more avenues - and better deals - are becoming available to entrepreneurs”. However he did note that in East Africa, it is “getting more difficult to raise funds in the $100,000-$1 million range, and that investors seem to favour safer growth stage investments over high-risk early stage investments”. This was interesting, and reflects the view I have had from other venture capital firms focused on emerging markets that technology was a little too risky and hard to understand, and that traditional industry such as manufacturing or banking was a safer bet.

Growing interest in the technology sector in Africa however has attracted a number of venture capital funds in addition to Savannah, including Adlevo Capital and Sawari Ventures. Entities such as Accion are also playing their part, with the announcement in May of the US$10 million Accion Venture Lab fund for seed investment and advisory support. In addition there has been huge growth in the development of technology hubs, accelerators and incubators in Africa, with more than 50 now in 20 countries. These entities are building strong relationships with governments and the private sector to position Africa as a market where innovation will prosper. The development of this innovation infrastructure will build confidence and expertise in start-ups, and potentially address the issue of investors being more attracted to growth stage and mainstream industrial initiatives.

In Asia (with the possible exception of China), the approach seems to be somewhat more fragmented, and in markets such as Singapore, supported heavily by the government. Organisations such as JFDI are working hard to develop the accelerator and incubator infrastructure with events such as Start Up Weekend Phnom Penh, and membership of the Global Accelerator Network. Start ups in the Philippines and Indonesia comment on the difficulties accessing funds in those markets and the lack of a start-up culture. However a market that will have half the world’s online population by 2016 presents a massive opportunity and we must see growth in start-up infrastructure in the same way it is developing in Africa currently. There is room in Asia for more private incubators, accelerators and venture partners connecting innovative start ups in mobile and digital with developed market capital.

Whilst emerging markets have been attractive as growth stage infrastructure investments to date, they also present significant opportunities to investors in digital and mobile. We are seeing the next billion people come online in these markets using a mobile phone as their browser, rapid advancements in payments infrastructure and a growing middle class. Some venture capital funds are sensing this opportunity and are testing the waters in Nairobi, Jakarta and Mumbai. As we see the start-up infrastructure build and governments recognise the impact the digital sector could have on their GDP, I firmly believe we will see rapid growth and investment in this sector. Massive revenue opportunity and the raw talent is there in emerging markets – what is needed now is further investment in accelerators and incubators, and funds like Savannah. 

- Brad Jones