As investors ramp up their activities, and we welcome new investors to the table, what are some of the mistakes being made and how can we learn from them?
African countries are quickly on the rise. For 2012, there are already reports that show Ghana and Nigeria as some of the world’s fastest growing economies. We know there are at least 35 technology incubators spread across the continent and counting. Every week there is a an event, bootcamp, competition or hackathon. New funds are coming online and the flurry of activity is getting harder and harder to track. As more foreign and local investors look to get involved, what are some of the challenges and hurdles investors face today? Here is a top 5 list of issues we have identified so far. We encourage you to add to the discussion by taking part in our #poll ‘What are the key mistakes investors make?’ We will revise and update this conversation as we go along.
1. Unrealistic Expectations –Too often investors want to come in fast and make a quick win. The opportunities are timely and scoring some success is critical to scaling investment activity, but if anything, any business/market is unique in more ways than one can appreciate at glance. It takes time to develop the relationships, network and partners needed to successfully navigate the business development process. Sometimes lacking institutions or regulation slow the process, there can be unexpected disruptions in power supply, etc… each of the challenges can be overcome given the investor has a realistic time frame for return. Is it three years or more likely to be 5, 7 or 10? Are you there for the entrepreneur till the end?
2. Lack Of Knowledge – Uganda is quite different from Kenya. Ethiopia is a world apart from Nigeria. Each of the continent’s 55 countries has a unique regulatory environment and tax regime. Investing in one country comes with different terms, possibilities and restrictions than another. Too often there is a lack of planning in advance. Research needs to be conducted on the target market before investments can be made into particular ventures. Is their a minimum capital requirement in country, is this legislation up for renewal, how can capital eventually be exited, how does the tax system historically deal with the sector? There are many questions and areas that need to be considered in order for an investment to make sense long term.
3. Culture Gaps – Sometimes Diaspora come back to their country of origin and it takes longer to adjust than expected. Sometimes an investor has never been to the country at all or simply shares a different background and perspective than the entrepreneur. For whatever reason, there are always gaps between cultures. Many investors continue to overlook these differences only to appreciate them later when things have gone wrong. Taking the time to not only understand, but to even appreciate cultural differences, is not only a preventative measure but potentially a process that will reveal hidden assets. It is the entrepreneurs keen feel for a particular demographic or target group that is essential to getting the solution into the hands of the user.
4. Local Ownership –In certain African countries there are laws that require local shareholders, directors and % of staff. This has implications for the DNA of the company and its important these requirements are met with care. At the same time, too often investors seek to bypass local parties and again come to realize their mistake after the fact. It is critical there is local ownership in an idea, a company, in its shareholding, operations and structure. Again, this is not negative, and too often a missed opportunity. Tapping into existing networks and infrastructure is essential to gaining traction. A local firm in Tanzania might have a distribution network simply impossible to organize from South Africa.
5. Financial Regulations –What is the minimum share capital required? Sometimes this can be a significant sum of money and might even be more than the scheduled investment. Does the country of business tax the business on worldwide profits? What is the taxation rates the business will face and does this include the costs incurred indirectly? Does it matter where the business is listed? Does it make sense to look at operating environments like Mauritius? And what are the rules or procedures for repatriation of capital? Sometimes its easier to put money into a market than to take it back out.
From the different conversations we have at VC4Africa human capital is really the key constraint moving forward. In new and emerging markets there remains a lack of seasoned entrepreneurs, local investors and the quality managers needed to close the loop. Investing in the development of people will remain a key focus area for the sector.