Why We Must Invest in the Future

Why We Must Invest in the Future
August 23, 2021 Oreoluwa Aremo
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Introduction: Africa’s Wicked Problems

In September 2000, world leaders gathered at the UN headquarters to sign the historic Millennium Declaration. They committed to achieving a set of eight measurable goals that ranged from halving extreme poverty and hunger to promoting gender equality and reducing child mortality. Fifteen years later, in 2015, when these targets were supposed to be hit, the global achievements were uneven, with most African countries not reaching their goals.

As a bold commitment to finish what the MDGs started and tackle some of the more pressing challenges facing the world, the SDGs were adopted in 2016 as a set of 17 interconnected goals, meaning success in one affects success for others, and vice versa. However, more than five years in, and despite the widespread adoption and progress toward these goals, Africa lags behind most of the world.

With less than ten years to the deadline of 2030, it is anticipated that the continent might not achieve its targets. A 2019 report by the Sustainable Development Goals Center for Africa revealed that minimal progress had been made and, in some instances, there was complete stagnation. This progress assessment rings true, especially if you observe that the continent is still home to what can be categorised as some of the world’s most challenging and wicked problems.

Wicked problems are socially complex and therefore not easy to solve because they have no straightforward solution. On the other hand, any surface attempts at solving them only create worse, previously unintended or unforeseen consequences. One good example of a wicked problem in Africa is education – over 37 million children were out of school before the pandemic. A simple solution to this problem might be to build more school buildings. However, you may end up hiring untrained and unprepared teachers who will find it challenging to deliver a decent education to these children. In the end, they won’t have the necessary skills to get good jobs, further reducing the utility of education to individuals and families. Instead, perpetuating the cycle of illiteracy, unemployment and poverty.

Given Africa’s population is projected to more than double by 2050, to 2.5 billion, with the continent’s young people soon constituting more than half of the world’s working population, it is paramount that these wicked problems are solved and solved right. Because failing to solve problems such as poor education, hunger and youth unemployment has profound consequences for global productivity, peace and prosperity over the next half-century and beyond.

To understand the impact of not properly attending to these wicked problems, simply look at some of the currently unfolding events across Africa. In July 2021, we witnessed unpalatable visuals of primarily young black people looting and vandalising property and infrastructure in South Africa, bringing economic and social activity in the country’s largest city to a standstill for weeks. Many observers attribute this to the rampant and rising unemployment in the country.

This assessment may not be far off. It was previously confirmed that one of the leading causes of young people joining terrorist organisations such as Boko Haram in Nigeria and other African countries is often the lack of employment. Another dreadful consequence of unemployment across Africa has been the growing number of youths determined to cross the Meditteranean and Red sea to head to Europe or the Middle East at whatever cost, even when this poses risks of exposure to modern-day slavery and loss of lives.

Beyond these labour and unemployment concerns, Africa has a broken and deficient or even non-existent infrastructural network which ideally should form the backbone of a healthy and thriving economy. The continent’s infrastructure needs amount to $130–$170 billion a year, with a financing gap in the range of $68 billion to $108 billion, but the largest economies like Kenya and Nigeria have comparatively tiny budgets even when compared to municipal governments worldwide.

Most African countries are already buried deep in recurrent debt service expenditure, leaving nothing to spend on developmental infrastructure. For example, Kenya’s entire annual budget is less than one-third of that of the City of New York, yet one-fifth of the country’s budget is allocated to interest payments on public debt. It is therefore hard for African economies, on their own, to make a dent in addressing the continent’s most significant problems because there simply is not enough capital to do so.

Africa’s infrastructural deficiencies stretch from healthcare, logistics and transportation to the financial inclusion of the poor and the informal economy. And, although they have always been known, the continent had figured out how to work around them on a day to day basis. In the process, Africa managed to weather minor economic and health induced shocks, as we saw with the 2008 financial crisis, the occasional currency devaluations and the Ebola epidemic.

However, when the World Health Organization declared COVID-19 a pandemic at the beginning of 2020 and engulfed the whole world in fear and panic, there was an extraordinary level of concern for Africa. Many feared that the pandemic would exacerbate the adverse impact of these numerous infrastructural, social and economic deficiencies. That is precisely what happened. As the rest of the world is slowly emerging from the pandemic and its effects, with sports arenas in the UK now operating at full capacity, there is little sign that Africa is about to figure out the way out, let alone how to deal with the resulting adverse effects.

Even though there is no accurate assessment of the exact level of impact that the pandemic will have on the future of Africa, there is a clear consensus on the fact that it has erased the decades of progress that Africa had recorded, setting it farther behind the rest of the world. As of July 2021, 69 million children in Eastern and Southern Africa were out of school due to pre-pandemic drivers, which COVID-19 amplified. This will directly lead to many school drop-outs, and a considerable chunk of the generation lost to crime and other illicit activities.

Yet, if demography is destiny, Africa is at the heart of the world’s shared global future. Over the following decades, the continent will either be the engine room of the world or a vortex of chaos that will eventually swallow the world as a whole. Whatever world we end up with will depend on the foundation built today, making it mandatory and urgent that investment into Africa’s future is prioritised. If we don’t or don’t do it the right way, the consequences will have a resounding global effect, as the future of the rest of the world is tied hand in glove with Africa’s.

Our Belief: Invest in Market-creating Innovation

Given the scarcity of resources and the complexity of Africa’s situation, the only way to solve many of its wicked problems is through innovation, specifically market-creating innovations. A term coined by Clayton Christensen, the father of Innovation Theory, alongside researchers Efosa Ojomo and Karen Dillion in their best selling book – The Prosperity Paradox.

Market-creating innovations transform a product or service historically very complicated and expensive that only the rich can afford to one affordable and accessible for the masses. These innovations, which on the surface seem deceptively simple, can create and scale new markets in ways that reward those with solutions. One of the most outstanding examples of a market-creating innovation that has completely transformed Africa is the mobile phone.

In 1998, Mo Ibrahim decided to start a wireless telecommunications company in Uganda, Gabon and other countries, some of which were the poorest in the world. Seven years later, his company – Celtel – had grown and transformed the telecommunications landscape in every African country where it operated. When Celtel sold to Kuwait’s Mobile Telecommunications Company in 2005 for $3.4 billion, Mo personally pocketed $1.4 billion, and the staff shared $500 million with 100 people, most of them African, becoming millionaires.

However, beyond minting a new billionaire and numerous millionaires, Celtel also inspired several pan-African competitors such as MTN and Vodacom that created distributed Cell tower infrastructure, well-paying jobs, self-sustaining value chains, and entire industries such as mobile money. In less than two decades, Sub-Saharan Africa leapfrogged from single-digit millions of fixed lines to over half a billion mobile phones connecting the continent and its people in every way. The World Bank estimates that for every 100 people across sub-Saharan, 87 are mobile cellular subscribers.

As of July 2021, MTN Group and Vodacom Group, both listed on the Johannesburg Stock Exchange, have a market capitalization of more than $16 billion each. Putting them among the 15 most valuable companies by market capitalisation in a country where banks and mining companies were the most dominant. MTN Nigeria and MTN Ghana – two subsidiaries of the MTN Group – are also among the top 10 most valuable companies in West Africa by market capitalisation. Another telecommunications provider, Safaricom, is the most valuable company listed on the Nairobi Stock Exchange, with a market capitalisation of more than $15 billion.

All this is happening more than twenty years after Mo Ibrahim unorthodoxically started Celtel. And the growth, as well as impact, of the telecommunications industry, is yet to slow down, thanks to continuous market-creating innovations such as mobile money. This shows the impact that innovation can have on economic growth, especially in a region such as Africa.

Today, technology and the Internet make it easier and faster for innovators to build market-creating innovations that transform Africa’s most complex challenges into global business opportunities.

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With this kind of evidence, one would assume that such innovations would be the sole focus of development and finance efforts across Africa. Unfortunately, in a classic case of “Money Miss Road“, the opposite is more often the case: too little capital, if at all, goes to fund market-creating innovation. Many African governments still choose to solve the wicked problems by wasting the scarce resources on obvious but expensive ‘solutions’ (like building schools), creating even worse issues like corruption in public procurement.

At the same time, capital in Africa mostly comes from highly conservative governments, international development agencies, pension funds, traditional private equity funds, insurance companies and other traditional financial institutions. By default, this capital tends to simply sustain innovations that incrementally improve the performance of existing products or services. In other cases, it facilitates efficiency innovations that only optimise the performance of existing products by doing more with less.

With this kind of risk appetite, and based on evidence from other parts of the world, traditional forms of capital will not be responsible for addressing Africa’s wicked problems. For example, in the US, Venture Capital – not traditional capital – is still typically responsible for funding market-creating innovations such as Google, Amazon, and even Moderna. Six of the ten most valuable U.S. companies by market capitalisation are products of venture capital.

Join the Future Africa Collective – an exclusive community of investors who invest in African startups building the future. With your $1,000 annual subscription fee or $300 quarterly fee, you get access to invest a minimum of $2,500 in up to 20 African startups annually or up to 5 startups quarterly.

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However, in Africa, this has not yet happened because venture capital, too, is broken. The best evidence for this is that even though investment in African innovation and technology has grown by an annual average of 47.44% over the last five years since we started investing, the proportion of that investment going into seed investments has consistently gone down. Today, less than 10% of all investments into Africa go into the risky seed stage where African innovators most need capital and coaching to succeed.

Additionally, as with all wicked problems, the intervention of misaligned capital has created other problems. Currently, the way venture capital is being deployed across Africa has created a challenge with racial dynamics. This racial funding problem is mainly due to a misalignment in funding sources for innovation. White founders who are better funded at the seed stage reap the long term benefits of a rigged race as we see a small bubble in late-stage investing.

While local banks and pension funds are statutorily barred from investing in Africa focused venture funds, development finance institutions, which are heavy on governance but light on context, hold sway. In the end, the few credentialed General Partners who have received their capital have a finance background and no operational knowledge of building a startup in Africa at any scale. These are often complemented by LPs and investor committees composed of development consultants and investment bankers who neither live in Africa nor completely understand the context of African innovators trying to solve these wicked problems.

 

 

Unfortunately, these General Partners, LPs, and investment committees decide which innovators get funded or not. And, rather than invest at the earliest stages, which in our experience is the most critical stage to shape the trajectory of a business, they decide not to take any risks, opting to wait until the company is big enough for them to overpay. Of course, this results in sub-par fund returns over time as the valuations never live up to the lofty expectations projected in their spreadsheets.

In the end, what Africa needs to spur more market-creating innovation is a new generation of African venture capitalists built in the mould of Andreessen Horowitz, First Round or Sequoia Capital.

Small but mission-driven operators with African startup experience can sincerely support African innovators in creating innovative solutions to our many wicked challenges. That is what Future Africa is focused on, armed with a team of operators who have decades of experience building and scaling startups across Africa.

As proven operators ourselves, we bring more than capital to the table for entrepreneurs by providing business coaching and a strong community of angel investors, venture capital, advisors, government officials, and talented professionals who can support our innovators and their companies as they grow. By providing these services, we improve the chances of survival and success for these innovators, enabling them to build a future where prosperity and purpose are within every African’s reach.

Through making these early bets, we will uncover the next Mo Ibrahim (and those early Celtel staff), who can bring to life a market-creating innovation with a similar or more significant impact as the mobile phone has done.

Investment Strategy

No matter the sector or geography, as long as we think that an investment opportunity addresses a wicked problem on the continent and meets the evaluation criteria stated below, we will invest. Our investment per company, typically made at pre-seed and seed, ranges between $25,000 and $250,000 and usually starts with between $25,000 to $50,000 as the initial check with pro-rata for follow-on rounds.

We currently target to invest $5 million a year into 100 early-stage innovators solving Africa’s most complex problems. However, because even the most courageous foreign funds which can stomach a little Africa risk will watch their appetite, the big question is, “where will this capital come from?”

Our colleagues in the West have the privilege of a robust capital value chain stretching from pension funds to university endowments and charities, amongst others. In Africa, there are no such vehicles. Even the existing few are incredibly conservative and sometimes legally unable to dabble in venture capital. This is why our answer significantly differs from those in the West.

In our case, we are going directly to the people and corporations, specifically the diaspora and local professionals and the corporations who understand the importance of Africa, to raise this capital. We have already built a proven system that accommodates individual and corporate investors no matter where they are in the world or how little they are looking to start with.

For example, we aggregate the capital from the diaspora and local professionals through a member-only community of co-investors through syndicates and a rolling fund. At the same time, we are also finalising plans to deploy capital from the corporate entities through our thematic funds focused on critical sectors of the continent such as education, healthcare, insurance, retail, financial services etc.

Below, we give an in-depth description of how each vehicle works.

1.Future Africa Collective

The Future Africa Collective presents a unique opportunity to invest in the best early-stage tech ventures in Africa. It is an exclusive membership club that allows members to invest alongside the Future Africa team on a deal-by-deal basis. We remove the barriers of investing in startups by giving the collective members access to vetted and verified startups transforming Africa.

In a year, we aim to provide 20 deals to the collective community by presenting them bi-weekly through investment syndicates. A syndicate is a venture capital fund created to make a single investment. With a syndicated fund, we are to pool capital from our community of co-investors into the particular purpose vehicle or fund and then invest the pooled funds in one specific company.

Collective members pay an annual collective subscription fee of $1,000 or a quarterly fee of $300 to get access to invest with us on a deal-by-deal basis and 20% carry-on exit. The minimum investment that a member of the Collective can make on a syndicated deal is $2,500. To create faster liquidity for our LPs, we aim to exit an opportunity around the $100 million valuation ballpark. Since we started, we’ve seen this happen within 24 to 48 months of investing.

If you are interested in co-investing with us, learn more here.

2.Future Africa Fund

Unlike the collective, where investments are only accepted for a limited time, the Future Africa Fund continually accepts investments. We’ve built it as a rolling fund via AngelList, accepting capital in the form of auto-renewing quarterly commitments to invest in different innovators building fantastic stuff. This way, LPs get diversified returns without having to take on deal-specific risk.

We source, analyse and vet the investments by following our extensive due diligence process outlined below. We only present innovators and businesses we believe meet our high standards for a good and ethical investment. That is why deals presented bi-weekly to the collective community are also presented quarterly to the Rolling Fund.

The minimum investment that an LP can make to the rolling fund is $25,000 each quarter, and investors in this fund are charged a 2% management fee per year over the fund’s 10-year life, and 20% carry upon exit. We follow the same principles for exiting investments here as we do with the Collective.

If you are interested in becoming an LP in the Future Africa Fund, learn more here.

3.Thematic Funds

We recently saw an opportunity in establishing funds dedicated to only funding companies within specific sectors such as education, healthcare, insurance, retail, financial services etc. These funds will allow the opportunity to capitalise on the growth trends in these sectors and create a unique ecosystem for the founders and other investors.

Our strategy is to have proven operators run each fund. Because we have a strong track record of successfully partnering with innovators to build high growth technology businesses, these operators will be able to leverage Future Africa’s platform, resources and support during fundraising, sourcing deals and fund administration as well as operation.

Each operator has a sector-specific track record of relationships, networks and experience that enables them to easily navigate challenges that founders and other investors in the sector face. We will get early access to the best deals before other generalist investors through these operators, who have a strong sense of emerging trends, partnerships, and distribution channels. More importantly, they can do much more profound and meaningful due diligence with their expertise in the respective sectors.

We typically require $500,000 from an individual and $2 million from an institution as an anchor LP for the thematic fund.

We will soon announce more details about the thematic funds. However, in case you would like to know more now, send us an email to investors@future.africa.

Evaluation Criteria

We understand that raising can be challenging, and our goal is to make it as transparent and straightforward as possible for founders. All investment opportunities are evaluated using our profiteers proprietary framework called TD3 – Talent, Data, Design and Distribution – which you can learn more about our process for investing in startups here.

a.Talent: Since we invest very early, the focus is to invest in the people. Investing in founders solving Africa’s biggest challenges is at the core of what we do. To increase their odds of getting funded, founders need to demonstrate excellent knowledge and expertise in the industry that they are building for. They must also be mission-driven and passionate about the problem they’re solving and the desire to make a true impact.

b.Data: Stears, one of our portfolio companies, uses a quote that captures this perfectly: “In God we trust, everyone else must provide data”. For an investment opportunity to be prioritised, there has to be actionable insight about the market, the context, and the problems. We look for these by sifting through publicly and privately available data about the industry, the market, the problems the product is solving, and existing solutions in the market.

c.Design: This includes how the product looks and feels, how it works and how users interact. We consider how well-thought-out the product’s design is and have been adapted to the target market.

d.Distribution: The key questions we ask here are; Is there a market for this product? If yes, what are the plans to get this product in the hands of customers or clients? How easy is it for the product to scale in multiple markets, and what’s the plan for market entry?

Track Record

In 2019, we decided to formalise our investment firm and work with globally recognised fund partners to bring outside capital into our deals. However, the team behind Future Africa has been investing far longer and has built some of Africa’s most notable startups today.

Future Africa’s Co-founder and General Partner, Iyinoluwa Aboyeji, spent the last ten years building early-stage technology startups in Africa. Two of the companies he co-founded – Andela and Flutterwave – are some of Africa’s most prominent and fastest-growing startups. Andela connects brilliant African software engineering leaders to remote job opportunities at global technology companies. Flutterwave, with a private valuation of over $1 billion, enables local and international merchants such as Uber and Booking to accept and send payments across Africa.

In 2015, while at Andela, Iyinoluwa used a small part of the secondary transaction from the company’s seed round to begin writing angel checks of $5,000 to $30,000 to founders and funds in his network. Many of these founders were equally as, if not more talented, but simply couldn’t access funding for some unacceptable reason.

Similar to Iyinoluwa, some of Future Africa’s key members were actively writing checks to their networks. At first, they looked at it as simply helping friends. However, as time went on, they built an excellent reputation as operator angels who could roll up their sleeves to help companies with getting into top accelerators like Y Combinator (seven portfolio companies got into YC on our recommendation) and Techstars, landing big enterprise customers and getting other high profile institutional investors into a round.

Today, many founders and investors consider Future Africa a must-have on their cap tables for their pre-seed and seed rounds. They decided to build on top of that reputation and scale the services – capital, community and coaching – which we consider the key ingredients to the success of any startup to the rest of Africa. Between 2015 (when we started writing cheques) and 2019, we invested $1.46 million in 25 startups.

In 2020, we launched the Future Africa Collective and the Future Africa Fund, through which we have invested in some really amazing companies. Our current portfolio value stands at $14.28 million, which is roughly 10x our investment amount. The Future Africa portfolio includes some of Africa’s biggest winners, such as Andela, Flutterwave, Lori Systems, Kobo360, 54Gene, MAX.ng, Frontier Car Group (Cars45), Smile Identity, MdaaS and Bamboo, amongst several others.

To date, the 66 companies in our portfolio have attracted more than $300m in funding, made $120 million in revenue in 2020 and are worth more than $1.5 billion in aggregate value. We’ve also managed to exit some of our positions with double-digit multiple returns, and are already on track to return 3X our fund within 5 years.

Join the Future Africa Collective – an exclusive community of investors who invest in African startups building the future. With your $1,000 annual subscription fee or $300 quarterly fee, you get access to invest a minimum of $2,500 in up to 20 African startups annually or up to 5 startups quarterly.

Join Future Africa Collective

To back the Future Africa Fund or any of our Thematic Funds, please send an email to investors@future.africa.