ICTworks by Inveneo

In April I am travelling to Cameroon to visit the African Center for Technology, Innovations and Ventures (ActivSpaces), otherwise the leading technology incubator in the country. ActivSpaces is actually a project that has been in development since January 2009. The founders Valery Colong, Bill Zimmerman and Fua Tse unknowingly built what is likely the first technology incubator in Sub-Sahara Africa. Appfrica Labs based in Kampala Uganda, founded by Jon Gosier in March of the same year, being the other.

Like Appfrica Labs, ActivSpaces is building a model organization that serves to facilitate socially-responsible investment and the incubation of African small and medium sized enterprises (SMEs). This is a response to the generally accepted idea that SMEs in African countries have greater difficulty in obtaining the necessary financial support and mentorship services they need to effectively scale up and grow their businesses. Access to traditional growth capital, including debt and equity, is not only limited in developing countries but often prohibitively costly due to various factors such as insufficient legal and regulatory policies, and inadequate financial markets. Labs like this serve as a platform for the local tech community, helping to pool resources and generally serve as a launchpad.

Recently business incubation in Africa has emerged as a means of accelerating the growth of technologies, industries and business skills in otherwise challenging conditions. Combined with an incubator, ActivSpaces is also a coworking space with professional office services and income generating opportunities. The running costs are covered with a 10% on the invoiced commercial projects, giving members a chance to upgrade their skills and generate an income they can use to further develop their own concepts. All activities serve to foster collaboration between members. By using a flexible model, a qualitative approach and on-the- ground experience, ActivSpaces seeks to fulfill a broad spectrum of financing, business development and socio-economic needs.

The ActivSpaces vision builds upon the following core objectives:

- Support for SMEs with high growth potential
- Assessing a company’s risk profile
- Promoting innovation
- Developing products & services for the local market
- Employment & wealth creation
- Technology & skills transfer
- Enhancing links between universities, research institutions & the business community
- Adherence to and advocacy of the highest standards of business ethics
- Reputation as a socially-responsible and innovative firm

I asked Bill (my business partner in Sanaga Ventures – a combined effort that supports initiatives such as ActivSpaces, Afrilabs and VC4Africa) why he believes so strongly in ActivSpaces and he responded, ‘Based on my current analysis, observations and personal relationships, I increasingly believe the preconditions exist for rapid growth in the Sub-Saharan African technology sector. ICTs have many of the same features (i.e., they may be produced, bought and exchanged) as traditional commodity-based industries, but have a far lower barrier to entry and carry lesser capital requirements for young companies.’

Asked how some of the challenges in Cameroon could be translated into strengths he says, ‘Africa is a continent renowned for technical innovations conceived and built from limited resources. Countless examples exist of indigenous technologies borne from constraints (lack of infrastructure, poor governance, poverty, etc.) that have created sustainable SMEs. Among them, mobile money (M-PESA, Safaricom) is a profitable service created in Kenya whose model has only recently been prototyped in the West. Likewise, research and development in fields such as physics, chemistry, GIS & mapping, electronics, security, embedded systems, alternative energy and so on have good potential to be productized and spawn sustainable SMEs.’

He goes on to say, ‘for these reasons, ActivSpaces seeks to foster the growth of physical spaces for innovation, creation, research, development and collaboration. Popularly known as ‘Hacker Spaces’ there are 96 known active hacker spaces worldwide, with 29 in the United States, according to Hackerspaces.org, with another 27 U.S. spaces in the planning or building stage. Local demand exists for a Cameroon- based hacker space. This is integral with our vision and will be financed with a combination of member dues and profits spun off from ActivSpaces.’

As in many African countries, the population in Cameroon is young: an estimated 40.9% are under 15, and 96.7% are under 65. Outlets such as ActivSpaces are critical in leveraging the emergence of technology and the opportunities it presents local entrepreneurs. I am excited to see the space, to take part in celebrating their 2 year milestone, host two VC4Africa meetups, and to spend time interviewing and getting to know the team. It’s exciting times when you see projects emerging from ActivSpaces that carry the mission to ‘disrupt the SMS industry’ as Fritz plans to do with iYam.mobi. I look forward to working with ActivSpaces and the entrepreneurs part of its network.

Small and medium-sized enterprises (SME's) are the backbone of most economies in Africa. Innovative and creative entrepreneurial approaches are needed to help African SMEs adapt to global standards and realize their economic impact. SMEs in Africa face different social, ethical and environmental challenges, opportunities and dilemmas than their counterparts in Europe or the US.

Their problems are shaped by economic factors (e.g. poverty, debt, industrialization, trade flows), political factors (e.g. level of democracy, corruption, legislation, institutional capacity), social factors (e.g. cultural context, urbanization, ethnicity, basic services, public health, HIV/AIDS), and ecological factors (e.g. drought, desertification, deforestation, resource scarcity, pollution).

SME Challenges & Opportunities

Labor costs may be low but often not enough to offset the high costs of transport, raw materials, utilities, and other inputs. African businesses therefore find it difficult to compete in export markets, particularly in markets outside the region, and to compete against imports of a range of goods from other developing regions.

Moreover, many African companies, especially SMEs, lack reliable financial data that allows financial organizations to scrutinize the health and prospects of the company. Most SMEs in Africa also lack assets that can act as collateral and mitigate the risk involved. As a result, capital in Africa remains too expensive for most entrepreneurs looking to build a sustainable enterprise.

Africa faces the challenge to provide better economic opportunities to its citizens, through sustained growth led by the private sector and to alleviate the poverty that has long plagued the region. A strong private entrepreneurial sector plays a vital role in this respect, in particular the small and medium-sized enterprises (SMEs) that provide many Africans employment, income and hope for a better future. As the Shell Foundation says:

"SMEs contribute around two thirds of national income and provide the foundation for a stable middle class in many countries. They help form strong communities and are a powerful force for poverty reduction. Indeed, SMEs play a significant role in building economic stability and sustainability for the future."

SMEs Need Financial Resources

Paul Collier, in his book The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, he argues that the bottom billion needs private capital and says:

"clearly there are brave people within these societies who are struggling to achieve change. It is important to us that these people win their struggle, but the odds are currently stacked against them.

He goes on to explain the numerous challenges ahead, but introduces a valuable line of thinking that builds the case for supporting local entrepreneurs seeking to implement solutions that are designed for a local context, the needs of a billion consumers rising as a middle class.

Andrew Mwenda, the chief editor of the Independent Magazine in Uganda, argues we need to replace "Poverty Reduction" with "Wealth Creation."

The focus needs to be taken off of symptoms (food, medicine and peace keepers) and in the effort to start addressing the real underlining problems i.e. the ability to generate an income, a trading opportunity and the ability to find a well paying job. His argument is clear; wealth is a function of income.

The focus should be placed instead on entrepreneurs as agents of wealth creation. Entrepreneurs make up about 4% of the population and 16% of the population then follows as ‘entrepreneurial imitators.’ Any development efforts should thus be focused on these individuals and the areas of the economy where there are opportunities to productively grow. An emphasis should be placed on private investment and on the institutions and tools that can empower these individuals to do business.

Traditional Financing Options Fall Short

In order to promote the development of the private sector access to finance is crucial. This can take many different forms form bank loans to overdraft facilities. Unfortunately, Africa is still seen as a risky and expensive place to do business. Indeed, transactions costs are often higher than elsewhere. Speaking to entrepreneurs actively working to set up their business I find that getting a loan from a bank in Africa is like getting a root canal. They always take more than expected and the process is painful at best. As reported in Uganda’s the New Vision:

"Data shows that the lending rates remained high over the past year, standing at over 20% but consistent with trends over the past five years. Despite a slight decrease over the financial year from a peak of 21.8% in August 2009 to 19.6% in January 2010, lending rates remain high by international standards and significantly higher than in any of the other four East African Community partner states, where the average is about 15%.” East Africa is not alone and entrepreneurs face these rates or worse across the continent.

And don’t think its only the small business who struggle, I remember interviewing Mo Ibrahim, the founder of Celtel, and hearing about the challenges he had getting funding for a telecom proposition that was already in the black and operating in thirteen countries, otherwise the lucrative foundations for what is now Zain (recently acquired by Bharti).

Amazing to learn that a company that eventually made 100 people millionaires the day it was sold, had just of a hard time finding the financial support and business trust needed to make it happen. Of course few would turn him away if he called this afternoon, but where was the support when he started out and how many other entrepreneurs on the continent are in this situation today?

The Case for Venture Capital

Venture Capital can be characterized as long-term, risk equity finance in new firms where the primary reward is capital gain.

Complementary to existing lending facilities and micro-finance programs, there is a growing need for Private Equity and Venture Capital, to fuel the development of the private sector in Africa. Equity investments can be instrumental in helping small enterprises grow into medium-sized enterprises and semi-formal into formal businesses. An important role in this respect can be played by Venture Capital (VC) Funds.

VC funding can support business opportunities through investment relations with private companies in the South and the North, introduce new business concepts and offer mentorship and guidance many entrepreneurs need to tackle tough challenges they will face along the way. Hence the VC impact on the business environment can be significant.

Looking to support the continent’s aspiring entrepreneurs there is reason to believe we need a lot more of it. VC4Africa is one way we canhelp bridge the gap between need and solution. Looking at a map like this we can see there is still a long way to go.

This post was originally published as The Need for Venture Capital in Africa.