Lack of market knowledge cited as the number one reason investors fail

At VC4Africa we like to poll our members on different issues in the effort to extract possibly useful insights. Recently we asked, ‘What are the key mistakes investor make?’

Investing anywhere in the world is not easy. Each country comes with a unique culture, operating practice and set of challenges. But so where do investors get it all wrong? Do they simply have unrealistic expectations or is it linked to a lack of market knowledge and cultural understanding? Do they create enough local ownership or get stuck in regulation? In our most recent poll, a lack of market knowledge was cited as the number one reason investors fail.

Getting the product to the customer is one of the major challenges for growing a business successfully in any African market. The right distribution strategy is critical and many entrepreneurs know the task forces some pretty creative thinking. One respondent highlighted the point, ‘Investors do not understand the local supply chain.’ Another added, ‘It’s a combination of lack of market knowledge and not understanding the local culture i.e. business culture, political and traditional.’ Asked to explain the point further, the respondent expanded, ‘There are legitimate costs that are simply part of the operations. Investors are not always prepared to cover the costs of the start-up and their cultural arrogance can get in the way.’

This point touches on the relationship between entrepreneur and investor and to what extent their is a true and shared vision. Does the investor appreciate the experience of the entrepreneur and their understanding of how to make the business work? Is their enough trust on part of the investor to give the entrepreneur the ability to operate and to what extent has the entrepreneur earned this flexibility? One respondent added an additional point, ‘It comes down to local ownership and how the relationship is structured.’ A simple point, but clearly where it all starts.

Another issue that was brought up was the role of local management teams and their own ability to manage portfolio companies. Many times issues can be dealt with efficiently and effectively if the right steps are taken in time. Too often the local managers are actually part of the problem and don’t provide the oversight desired by the limited partner. Developing the capacity of local managers is likely to remain a focus area for investors looking to scale their activities in the space.

This conversation is on going. Please tell us where you feel investors run into problems!