Corporate Venture Capital in Africa: how startups and big corporates can benefit from working together

Sean
Big corporate investments in Africa are increasing. We read more and more about companies like IBM, Intel, Microsoft and Google, MTN, VodaCom, Orange, SafariCom, and many other big companies, investing into startups in Africa. Coming May, the Global Corporate Venturing Symposium in London, UK, will for the first time include a
half day session on corporate venturing in Africa. We spoke to Sean Ndiho Obedih, Founding Partner of UK based Corporate Venture Capital advisory firm Sobek Ventures, to learn more about corporate venture capital trends in Africa. Read the interview below.

Why is Corporate Venture Capital (CVC) such a hot trend in Africa, and what does it mean for the African startup / VC ecosystem?

“Corporate Venture Capital (CVC) has been a key part of large companies‘ strategy to remain competitive in a fast changing market for more than 40 years, largely in America and Europe, but in Africa it remains a relatively new phenomenon.

Startups tend to be very good at innovation but very bad at execution, while large corporates tend to be very good at execution but extremely bad at innovation. Companies have come to embrace and understand open innovation: the need for collaborations has never been greater that it is today. By leveraging each other’s strengths we can certainly have large deals coming out of Africa.

Because corporations are investing off their balance sheet, they aren’t constrained to the same 3-5 year cycle that most VC and PE firms tend to have, so this gives companies a chance to invest in startups that are strategically aligned to their existing business operations regardless of how long it takes to scale the company. CVC can only be a great thing for the whole African ecosystem. We tend to see that there is lack of follow on funding at series A, B,C and above. I believe that CVC can plug this gap very well.

The different market conditions and current ecosystem in Africa actually forces both international and national companies to create new business models using their existing technologies. A good example of this is MPESA of course; we all know how successful that has turned out to be for Safaricom’s parent company Vodafone, which funded the initial trials and launch back in 2007 with £1Million. Like they say, success breeds success, and other companies also want a piece of the action because they have seen that the rewards are there for everybody to see.”

Who do you see as the key players in CVC in Africa? Are there key similarities and differences?

“The contradictory thing about CVC funds is that they are all different because their investments are made with the parent’s company mandate, and this differs from company to company, sector to sector. I explored some of these trends in a previous article at Tech Africa. The only thing that has been consistent is that all the corporates want to be financially rewarded for their efforts and the strategic alliance becomes a bonus, which gives them the edge over the competition.

Even though I can’t reveal any particular information about specific clients due to confidentiality clauses, I can certainly say that almost all of the companies mentioned in the introduction above have set aside significant funds to invest in exciting and innovative companies in Africa.”

logos

What does the CVC trend mean for platforms such as VC4Africa and AVCA and other actors?

“Platforms such as VC4Africa are a rich hunting ground for innovative startups and connect angel investors to their local ecosystem. This in turn creates investable companies that VC firms can start funding and helping to create viable businesses, but the size of the deals required to get the attention of large PE firms isn’t yet there. Large corporates can fill this gap because at this stage, the startups have validated their business models and tend to have a decent management team. By tapping into the resources and infrastructure of these corporations these startups can grow and scale their products much faster and efficiently.

Organisations such as AVCA are going to be crucial in this endeavour because most of their members are in a position to syndicate deals with the corporates and offer the on the ground knowledge required. We have seen this in Nigeria, Ghana, Kenya and South Africa already where Intel Capital has been very active. CVC funds are now behaving more or less like traditional VC firms, as clearly noted by Techcrunch.”

What do you expect for the coming years when we look at corporate venture capital in Africa?

“We envision that Governments will get involved to create legal conditions and incentives to attract more investments from the corporates. There are going to be more home grown funds created to invest into local ecosystems. We saw this recently with the recent investment deal among MTN, Africa Internet Holdings (AIH) and Millicom allowing them to take a 33.3% each, which will see MTN “develop” and “accelerate the growth” of AIH entities, including Jumia, Zando and Hellofoods, across Africa.

I have made it my personal mission to advocate for conditions that allow CVC to flourish across Africa. Luckily enough the CVC community is very small and are all open to collaboration and sharing deals, needless to say that contribution made by platforms such as VC4Africa should not be understated and should be supported. Judging by the number of corporate that was present at the last Demo Africa event, it is safe to say that the future is certainly bright.”

SobekVentures

What in your work on CVC at Sobek Ventures has surprised you?

“The biggest surprise has been how excited people are on both sides of the table. We made a conscious decision to highlight the importance of CVC and how it can contribute to Africa’s growth. We are also starting to see interests from local African companies wanting to learn how to create their own CVC funds, because at the end of the day they know their landscape better than any of the multinationals.

Of course this creates a fertile mergers and acquisitions landscape. This has been the case in China and Russia where the CVC market doubled between 2012-2013.  We are very humbled to be part of this wave and the future is certainly bright for CVC in Africa.”

What is your message to entrepreneurs in and outside the VC4Africa community who are working to build the next wave of promising companies in Africa?

“My message simply is to learn how to collaborate with various stakeholders in the investment ecosystem. Another way of looking at CVC funding is to stop short of a merger but to build a broad alliance. A more common way to exploit the advantages of scale without the drawbacks of a full merger or broad alliance is through partnerships to share the costs of specific technology and to share costs as well as risks.”

Interested to learn more? Next week Sean Ndiho Obedih will share key tips on the VC4Africa blog for both startups and corporates engaging in Corporate Venture Capital in Africa!

See the Global Corporate Venturing Africa Summit website for more info on this event  showcasing best practice and industry opinion on the state of Corporate Venture Capital within the emerging economic growth zone of Africa. This event will take place Wednesday 21st May 2014 at the Millennium Hotel, Mayfair London, UK.