GETTING INVESTMENT IN AFRICAN ICT COMPANIES - WHAT THE ENTREPRENEUR NEEDS TO KNOW
25 January 2002
The opening up of new internet and telecoms markets in Africa has created many opportunities for potential and existing entrepreneurs. New companies are blossoming and some have already grown impressively. In order to start and to grow further, these ICT entrepreneurs need investment. Last week’s Entrepreneurship Workshop in Accra (see People and Jobs) offered a useful route map for those going down this road. Russell Southwood looks at what’s on offer and what different finance institutions are looking for.
For African entrepreneurs wanting to start their own ICT company, one of the first visits is usually to the bank. Whenever you talk to anyone who’s done it, there is always the memory of the bank saying "no" to loaning them money unless they put up their house or some other asset as security. High Street banks are not in the risk business. As Daniel Osei-Yeboah of Empretec puts it:" Most banks do not consider SMEs as ‘responsible borrowers’ who follow agreed plans and repay on schedule. Some divert funds even when projected incomes are realised."
So in order to get launched, most potential entrepreneurs "beg, borrow or steal" from friends or relatives. It may seem harder but once you’ve done it, you’re on your way.
Investment finance comes in many different shapes and sizes and the easiest way to understand it is to see it as a spectrum of opportunities. At one end is a small loan from a parent wanting to be encouraging and at the other end is the stock exchange (either in Accra or elsewhere). This spectrum is like a hill and as you go up it the sums available get larger. If you have a very large company (like South Africa’s Didata or African Lakes) then the capital available in the local stock exchanges is too small and you go to somewhere like the London Stock Exchange. At each stage, the person loaning money or investing will want to know how they can "exit": in other words that their loan will be repaid or their investment has value and can be sold on to others. Most investors will take a share in the company (an equity stake) and sell on to someone else.
At the early stage of this spectrum, an ICT entrepreneur might attract small-scale investment in the form of loans from a business development agency wanting to encourage SMEs: small and medium sized enterprises in the jargon. These business development agencies can be found in most countries and they are either government-run (or funded) or set up by external donors. Much of Africa’s private sector falls into the SME category: for example in Ghana 80-90% of registered businesses fit this description. If your company survives its first year in business (the time when most fail), then a small loan may be relevant.
Empretec is a business development agency in Accra and it has a number of programmes to help SMEs become "responsible borrowers". These include not only small-scale finance but training, consultancy and advisory services and accounting and book-keeping services. In the transition to becoming a responsible borrower, Daniel Osei-Yeboah maintains that:"The availability of credit during this transition period is very crucial not only for the survival of the business but also to bring into play the necessary management and production skills." Its Credit Sourcing Scheme (which is not just for ICT companies) has been quite successful and as at December 2001 the initial capital of 1.14 billion cedis has been rolled over five times and financed 6.4 billion cedis worth of loans.
Next up the ladder is someone like Fidelity Investment. It looks for investments between US$100,000-800,000, although its maximum is likely to be between US$500,000-800,000. Its funds come from private and donor sources (Dutch and Swiss). It operates what is known as a 10 year closed fund and it seeks to exit through selling its stake in the form of convertible bonds. All investments are dollar denominated. Kwamina (Ken) Thompson, Head of Venture Funds Management at Fidelity is interested in investing in things it can understand and through this understanding can feel confident it can see how the business might develop. Fidelity has invested in BusyInternet and has other ICT investments in prospect.
So what do they look for in an ICT entrepreneneur:"Management, management and management." This is Thompson’s way of emphasising the importance of getting people who have had experience of this kind running things. If you’ve not got this experience, take a few years working for an ICT company you admire and acquire it. Obtaining investment is like applying for a job, everyone will be interested in what you’ve actually done, not just what can be written down on a c/v and will almost certainly take "soundings" to confirm your claims. During the "due diligence" process all that you are claiming will need to be confirmed in some detail. The company will want to see a business plan that shows how the business will grow and make sufficient returns for its investor. Investors will often look to you as the entrepreneur to put your own money into the business to show you are committed. If the company has been going for over five years and you’ve not been taking large amounts of money out of the business, they will accept "sweat equity" as part of your contribution.
CDC Capital Partners in Ghana looks at investments of between US$0.5-2 million. Again it operates through ten year closed funds. Its Country Manager Paarock Van Percy is interested in particular sectors of the ICT market that have the kind of capital requirements they can provide have sufficient growth to make a return:"The mobile market is still growing and there will be further opportunities once the current (telecom) duopoly is ended in Ghana."
Based in Accra J Kofi Bucknor provides corporate finance advice and looks at investments between US5-20 million, although investments can be for as little as US$1 mullion. It looks for a 20% return a year and raises its capital from private individuals and the corporate sector. So what does it look for?:"A variety of things. A tried and tested operator with a bit of a track record. Things that are tremendously undervalued. Finally technical management is very important."
In telecoms terms he believes that Nigeria has a great deal of investment potential and is interested in companies with multiple licences. He is sceptical of the internet at present because there is insufficient advertising revenue. He is much more interested in tech applications in the financial services field like smart cards. He again believes the end of Ghana’s telecoms duopoly will provide an investment opportunity and thinks the government should sell up to 49% of its stake to someone like Telefonica.
Ghana is unusual in having this spectrum of investment opportunities. Most African countries are too small in market terms and therefore where this function exists, it is operated by Government (eg Botswana). Larger markets like Egypt and South Africa have venture capital companies but these tend to be small in number. There is often not a great of specialist knowledge in the investment community about the ICT sector and therefore an existing entrepreneur will need to take time and trouble explaining the market to potential investors. There are a number of international funds that are either donor funded (IFC) or mix private and public funding like the Modern Africa Fund based in Washington: we will return to look at these in a later issue.
The challenge for Africa’s ICT entrepreneurs is to create companies that can operate across several markets in the continent. They need to be able to operate at scale if they are to attract investment. Africa’s business environment is not sympathetic to this scale of ambition but the determined player can do it.
Before as a potential ICT entrepreneur you get your hopes up, you need to know about the ratio of proposals to investments. At the smaller end Empretec accepts about half of its applications for loans. Further up the scale, companies may see 100 applications, only 10 of which do they investigate further and only one of which they will invest in.
A final caution. Time and time again we are approached by individuals and companies looking for investment finance, especially those wanting to start businesses. Money is not often the first thing you need. Establishing a promising business can often be done for surprisingly little money (but lots of personal effort). What do you want? A business that’s already owned by someone else as it grows big or one in which you can take some reward for the hard years you’re going to put in?