Need for Venture Capital in Africa

In order to promote the development of the private sector access to finance is crucial. This can take many different forms form bank loans to overdraft facilities. Unfortunately, Africa is still seen as a risky and expensive place to do business. Indeed, transactions costs are often higher than elsewhere. Speaking to entrepreneurs actively working to set up their business they will tell you that getting a loan from a bank in Africa is like getting a root canal. They always take more than you expected and the process is painful at best.

As reported in Uganda’s the New Vision on Thursday the 24th June, 2010, ‘Data shows that the lending rates remained high over the past year, standing at over 20% but consistent with trends over the past five years. Despite a slight decrease over the financial year from a peak of 21.8% in August 2009 to 19.6% in January 2010, lending rates remain high by international standards and significantly higher than in any of the other four East African Community partner states, where the average is about 15%.” East Africa is not alone and entrepreneurs face these rates or worse across the continent.

And don’t think its only the small business who struggle, I remember interviewing Mo Ibrahim, the founder of Celtel, and hearing about the challenges he had getting funding for a telecom proposition that was already in the black and operating in thirteen countries, otherwise the lucrative foundations for what is now Zain (recently acquired by Bharti). Amazing to learn that a company that eventually made 100 people millionaires the day it was sold had just of a hard time finding the financial support and business trust needed to make it happen. Of course few would turn him away if he called this afternoon, but where was the support when he started out and how many other entrepreneurs on the continent are in this situation today?

Venture Capital can be characterized as long-term, risk equity finance in new firms where the primary reward is capital gain.

Complementary to existing lending facilities and micro-finance programs, there is a growing need for Private Equity and Venture Capital, to fuel the development of the private sector in Africa. Equity investments can be instrumental in helping small enterprises grow into medium-sized enterprises and semi-formal into formal businesses.  An important role in this respect can be played by Venture Capital (VC) Funds. They can support business opportunities through investment relations with private companies in the South and the North, introduce new business concepts and offer mentorship and guidance many entrepreneurs need to tackle tough challenges they will face along the way. Hence the VC impact on the business environment can be significant.

Looking to support the continent’s aspiring entrepreneurs there is reason to believe we need a lot more of it. The VC4Africa comes together around these ideas and in a celebration of what’s possible. Let’s get started!