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A digital network for entrepreneurs across Africa

Ben White, Miguel Heilbron | 20 November 2014

Innovative early stage ventures that potentially have a high social and environmental impact, but require less than €1 million in capital are the most difficult segment of the SME pipeline to reach. Yet their potential for growth is immense.

Innovative early stage ventures that have the potential to yield high social and environmental impact, but require less than €1 million in capital, are the most difficult segment of the SME pipeline to reach. Yet their potential for growth is immense - SMEs are responsible for roughly 40% of GDP and 50% of jobs on the African continent, yet are at the same time the most capital-deprived businesses.

Often, these early stage ventures have a minimal track record and lack the collateral needed to secure debt capital from a local bank. In Sub-Saharan Africa, for instance, a mere 17% of small enterprises receive bank loans or lines of credit. Moreover, local banks and traditional financiers too often do not appreciate the dynamics of the entrepreneur’s specific business and therefore cannot add necessary value beyond capital. As Michael Grimm pointed out, entrepreneurs with innovative ideas remain constrained gazelles.These market conditions starve opportunity-driven entrepreneurs working to build scalable ventures.

VC4Africa estimates that there are 3.6 million opportunity-driven entrepreneurs in Africa using the Internet to do business. Seeking to build business relations between these individuals via one online network, we connect entrepreneurs in 45 countries across the continent.

In an otherwise information-scarce environment, entrepreneurs can build up meaningful track records that develop over time on the platform. The aggregation of various information points about each company in the system and the organization of data in different ways makes VC4Africa a potent resource for investors. In this way, we are working to build a market place that efficiently connects supply and demand, as it exists across the African startup ecosystem (i.e. the 'system' of actors surrounding entrepreneurs and investors). And where connecting entrepreneurs to investors is certainly an important part of our work, equal emphasis is given to helping entrepreneurs build their professional networks and securing access to critical business knowledge. Connecting capital and a peer-to-peer approach used to unlock knowledge and networks makes the site mutually beneficial for entrepreneurs and investors.

VC4Africa has more than 17,000 members across 159 countries, and more than 2,000 SME entrepreneurs present their African companies on the website. The ventures are usually early stage and require investments between USD $10,000 and 1 million, with primary sectors including web, mobile, clean-tech, renewable energy, sustainable agriculture, education, food and health care. Each venture is screened for social and environmental criteria; 30% of the registered ventures have an explicit social mission and could be qualified as social enterprises.

Entrepreneurs have access to free online tools, mentorship opportunities and private deal rooms. There is a peer-to-peer mentoring program in which registered entrepreneurs have access to an international network of more than 100 experts and business professionals who offer their expertise free of charge.

On the investment side, we currently engage more than 600 investors, which makes the platform the largest network in Africa focused on SME investors. Investor Pro Account users can set up intelligent alerts, follow progress, conduct due diligence and connect directly with the continent’s leading entrepreneurs.

Entrepreneurship development

VC4Africa is based on the idea that entrepreneurship is a key driver for Africa’s economic growth, in particular the small and medium sized enterprises that provide much of Africa’s employment, income and hope for a better future. SMEs contribute around two thirds of national income and provide the foundation for a stable middle class in many African countries. They help form strong communities and are a powerful force for poverty reduction. SMEs play a significant role in building economic stability and sustainability for the future.

A core vision behind the project is that VC4Africa is only a platform within a larger social movement. We operate as a peer-to-peer network and champion an open source approach, encouraging collaboration between members, both entrepreneurs, mentors, investors and others. In this sense we apply a bottom-up, grassroots, and peer-to-peer approach to SME development.

It is our belief that the most meaningful impact will come from grassroots level i.e. entrepreneurs bold enough to start potentially great companies. VC4Africa aims to connect these individuals with the network, knowledge and capital they need to realize their potential.

Connecting a global network of business professionals

Cameroon for example is not an ‘investor favourite’ and few non-Cameroonian investors consider supporting entrepreneurs building companies there. What is the value VC4Africa creates and how is this relevant to entrepreneurs and investors building companies in countries like Cameroon?

Rodrigue Fouafou, member of the VC4Africa community since 2013, is a Cameroonian-born Canadian entrepreneur, owner of Vertamin Inc./ Gourmandia.com and angel investor. Looking to invest in an innovative entrepreneurial project from Cameroon, Rodrigue is the founders of two companies, Njorku and Kiro’o Game on VC4Africa’s Mentorship Marketplace. Njorku is a job listing service and Kiro’o Game seeks to become the first digital gaming company in central Africa. It is through these mentorship-based interactions that Rodrigue got to know each founder and understand the business they were building. Being a Cameroonian, Rodrigue understands the business climate and is able to assess the market risks. As a result, Rodrigue has made investments in both companies and is now working with the teams to see how he can help them grow and develop their visions.

This exchange captures the value, importance, and relevance of the VC4Africa community and platform. This story exemplifies a simply idea; that by connecting a global network of business professionals we are better able to unlock resources as they exist across the African startup ecosystem.

SME Performance Index

In the second half of 2013 we reached out to our online community to gather more data on investments in small and medium enterprises, leading to VC4Africa’s first “SME Performance Index”. 160 ventures participated, of which 92 were successful in securing around USD 12 million in funding. The survey results indicate 75% of the ventures that join VC4Africa are pre-revenue startups, and 25% join as ventures seeking growth and expansion capital. We found that the startups registered with VC4Africa secured on average USD $80,000 in funding, versus expansion companies securing on average USD $237,000. In 2014, 257 ventures participated, of which around half were successful in securing approximately USD 27 million in external funding in total.

It is clear the companies are growing in size and adding full time positions (FTEs) year on year. By 2012 the companies registered on VC4Africa employed a combined 449 people. By 2013 the same companies expected to increase their combined staff to 1,000 FTEs and by 2015 these same companies expect to employ 5,351 people. Ventures are also improving their revenue performance over time. For example 57.1% of the ventures registered in 2010 show less than USD $5K in revenue. 43.8% of those same ventures expected to generate more than USD $50K in 2013.

It is clear these companies are growing over time. They are securing increasing amounts of investment and their revenues and number of employees grow in parallel. As these enterprises formalize they contribute to the revenues of their local governments who are then able to invest in infrastructure and social services. More importantly they create meaningful employment opportunities for their fellow citizens, a critical economic contribution when taking into account that 46% of the African population is under the age of 14. In many ways the future of the continent will be shaped by its ability to create opportunities for the young, a challenge the VC4Africa community of entrepreneurs meet head on.

References

Beck and Demirguc-Kunt, “Small and Medium-Size Enterprises: Access to Finance as a Growth Constraint,” Journal of Banking and Finance, November 2006.
Beck and Demirguc-Kunt, “Small and Medium-Size Enterprises: Access to Finance as a Growth Constraint,” Journal of Banking and Finance, November 2006.
Dinh et al, “The Binding Constraint on Firms’ Growth in Developing Countries,” World Bank Working Paper No. 5485, November 2010.
Mel, McKenzie and Woodruff, “Returns to Capital in Microenterprises: Evidence from a Field Experiment,” The Quarterly Journal of Economics, November 2008.

Photo credit main picture: Lukas_Litz / via flickr

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About the author

Ben White

Ben White is the co-founder of VC4Africa and has been working in the African technology and media...

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Miguel Heilbron

Miguel Heilbron is Director of Outreach for VC4Africa.

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