It’s Time to Connect African Entrepreneurs to Global Venture Capital
Minh H. Chau, Presidential Innovation Fellow, Millennium Challenge Corporation
When it comes to innovation, Africa has an abundance of entrepreneurial talent. Nowhere is early-stage, technology-driven innovation more exciting than it is in Africa right now. Comprised of 54 sovereign nations, it is the world’s youngest continent in terms of population, with a median age of only 19 and youth representing 60 percent of the total population.
The global venture capital community has noticed this potential and has started to direct exploratory capital towards the continent’s major entrepreneurial ecosystems, with funding increasing from $400 million in 2015 to $1.43 billion in 2020. While this is a notable increase, it is still a mere 1.1 percent of the $130 billion US-based startups received.
The supply of talent is there…and so is the demand. So why are African entrepreneurs receiving less than two percent of the global venture capital funding their U.S.-based counterparts receive? How can the development community help to unlock Africa’s innovation potential to catalyze African-led economic growth and prosperity from the ground up? The answer to both questions comes down to two factors: a lack of ecosystem access for the entrepreneur, and preconceived fear of the unknown by global investors. If the development community is seeking to achieve poverty reduction in Africa through sustainable economic growth, it needs to do a better job at bringing both parties — entrepreneurs and venture capitalist — together at the earliest stages of funding strategy development.
The projects and ideas we have seen in these communities are, dare we say, more innovative than what we have seen in New York City, Boston, or any other part of the United States. This is due to the circumstances an entrepreneur, encounters in order to succeed, in a context, like Maseru (Lesotho), for example. Why? Because in a country of 2 million, she or he is forced to develop a business model with expansion at the forefront while building technology that can be adaptable to multiple countries from the start. However, this person’s chances of success are much lower as they will most likely not have access to the high-powered friends and/or professional connections that their North American counterparts enjoy.
So, how do we address this? The most effective way to even the playing field in supporting early-stage innovators is through grant funding that helps with proof of concept to validate a business model and sustain the entrepreneurs as they find product-market fit. For the last five years, the Millennium Challenge Corporation (MCC)-led Data Collaboratives for Local Impact (DCLI) program has been doing this by supporting innovators and entrepreneurs through a series of innovation challenges resulting in grants, mentorship, and technical assistance. This has led to nearly 60 data and digital solutions. One of the many success stories from the DCLI program is Employable Africa, a highly scalable platform that empowers and provides economic freedom to the 4.2 million disabled Tanzanians who are seeking employment.
Now, MCC is taking an additional step: We have brokered a unique partnership between the Tanzania dLab and Grindstone XL, a South African based venture capital partner, to select the most promising grant-funded participants from the broader pool of piloted innovations to help them scale through a tailored African Accelerator Program. Beyond the earlier DCLI grants through which some of the selected participants may have received funding to pilot their innovations, the accelerator’s specialized, targeted approach toward business training, funding, and high-powered mentors are a gamechanger.
A unique element that the Tanzania dLab and Grindstone Accelerator program offers is for cohort teams to access mentors outside of their network. The program pairs teams with mentors abroad affiliated with tier-one global institutions such as Google, Microsoft, McKinsey & Company, and The Gates Foundation. Once they graduate from the program, grant-funded entrepreneurs gain direct access to interested investors and a growing network of mentors that should continue to pay future dividends, cultivating organic relationships that will last well beyond the accelerator program’s end date.
We have seen elements of this model play itself out in other locations. Kenyan-based Twiga Foods is an excellent example of a combined grant funding and venture capital approach. Twiga Foods is one of Africa’s largest business-to-business marketplace platforms that sources products directly from farmers and delivers them to urban retailers. In 2017, three years from inception and after a mostly flatline growth pattern due to lack of capital, Twiga received its most significant injection of funding through a $2 million grant from USAID — one of USAID’s largest for a single early-stage startup. USAID provided both capital and strategic support and access to its “network.” This two-pronged approach led to over $100 million in follow-on capital from the likes of Goldman Sachs, Index Ventures, and the U.S. Development Finance Corporation (DFC). In this situation, U.S. taxpayers not only provided grant funding towards a public good and local innovation, but they will also enjoy a sizable return on their investment through the DFC’s investment.
If the international development community is committed to not leaving anyone behind, it is time to take risks and create opportunities for entrepreneurs in Africa that are built on partnerships, data and innovation.
However, for every success story like Twiga there are hundreds of other entrepreneurs that see their ventures fail due to a lack of access to follow-on capita in the post-grant funding stages. Like any relationship, a startup and investor can take many months and sometimes years to cultivate a relationship before the first check is written. Early-stage investors need to be assured of the business model, positive growth projections, and the composition of the team — all elements that take time and trust to develop. Especially as they make their initial investments into a foreign market.
Ultimately, now is the time as we further our work to enlist Africa’s youth to enable resilient development from the ground-up. I have been encouraged by the promising results shown in Tanzania through the dLab and the Accelerator Program. Additionally, I am inspired to see that elements of MCC’s DCLI model of training, mentoring, and organically connecting local innovators to global investors is being adapted by other USG partners. An example of this comes from the U.S. Department of State’s Office of Global Partnership’s StartOpps program — an innovative new program that leverages State’s resources to a consortium of tier one venture accelerators and investor partners seeking funding opportunities in new markets.
MCC’s DCLI program was launched in 2015 and initially funded through a partnership between MCC and the Office of the Global AIDS Coordinator. DCLI’s goal is to build local data and digital skills and enable better policy, program and budget decisions. MCC is leveraging lessons learned and evaluating forging new partnerships to replicate its success and continue to build the foundational interest, awareness and skills needed to catalyze locally-led, resilient and inclusive growth through data use, innovation and civic technology.
