How can Africa’s entrepreneurs get growth capital?

Innovation is on the march across Africa, with the help of young, tech-savvy entrepreneurs. Yet while small and mid-size companies are responsible for much of the job creation in Africa, many struggle to find the capital they need to grow and hire, says Dr. Frannie Léautier, chairperson and co-founding partner of Mkoba Private Equity Fund, which offers growth capital to small and medium enterprises in Africa.

“African entrepreneurs are the backbone of the economy, creating the bulk of the jobs needed today and for the growing number of youth coming onto the job market,” says Léautier. “At present, they are starved for growth capital.”

She helped found Mkoba a couple of years ago to address the funding gap, support development and tap into what she sees a compelling investment opportunity.

Yet despite the opportunities presented by a world increasingly interconnected by technology and trade, the challenges of launching a business remains tough in many parts of the continent.

The hurdles are well known — from red tape, corruption and a lack of financing to weak infrastructure to provide adequate power, water and transport. “Despite all the opportunities in Africa, a lot remains to be done,” she says.

Companies can also improve the investment environment, by developing infrastructure, capitalizing on Africa’s “youth dividend” and helping develop Africa’s current and future workforce, Léautier says in the second of a two-part interview:

What’s necessary to address some of the obstacles holding back African economies?

As I like to say to my children, “Africa is a big continent, someone has to link it.” We need to invest in roads, railways, airports and ports that can move people and goods across countries and provide the internal links that are so critical to render the vast spaces of Africa connected.

Such investments would ensure that food shortages in one region do not cause starvation when there is abundant food in another region. Investment needs to go to the hard infrastructure, but also to the service side of the supply chains like cold chain logistics, warehousing, and intermediary and first-stage processing of perishable goods.

Africa is also one of the darkest continents as seen from space at night, but one of the brightest when seeing by day. We cannot industrialize without energy. Our kids cannot do homework without electricity. Vaccines deteriorate without refrigeration. We need a huge push to get the energy Africa needs, and we can rely on solutions that are unique to leapfrog ahead in renewable energy, smart bundling of gas and hydro with other forms of energy, and the use of small grids and distributed systems. We also need to invest in long-distance transmission and enhance cross-border energy trade.

We need to share water resources between energy and agriculture. Irrigation is a critical area of investment to delink Africa from dependency on rainfall puts the continent at risk given changes in climate. Yet Africa is rich in underground water resources, which we just have to drill a bit to get to in most places.

Also critical are health centers and their energy needs to treat the diseases of development and those related to lifestyle that Africa finds itself grappling with — not to mention being ready to handle pandemics.

What opportunities do you see to mobilize capital for these kinds of projects?

Despite all the opportunities in Africa, a lot remains to be done. There is a huge pent-up demand for financing of entrepreneurs, with more than 85 percent of companies unserved or underserved. Private equity markets are still less prevalent, making up less than 0.1 percent of the region’s GDP — just one-seventh of the penetration in India.

Governments can do a lot to address this gap through policy reforms:

• First, investments need to be targeted to meet the infrastructure gaps that make doing business in Africa very costly, particularly for the small companies. Prioritizing investments and ensuring implementation of projects in transport, energy and water is critical.
• Second, governments can focus on putting in place the legal infrastructure underpinning property rights and contracts, as well as harmonizing tax and accounting principles and corporate governance regulations. This will allow entrepreneurs to move away from trust-based systems — where family and friends provide the capital and advice — toward structured financial institutions that function across political and policy cycles.
• Third, there is a need to focus on human capital and the education system, reforming them to bring in problem-solving skills that are needed to run effective businesses.
• Fourth, policies that allow speedier implementation of cross-border trade could go a long way toward attracting finance and supporting entrepreneurs engaged in agriculture, agribusiness, consumer products and cross-border services such as health.
• Fifth, governments could improve how cities are functioning, to address service gaps in electricity, water supply and waste collection, as well as traffic congestion.
• Finally, countries need to continue to strengthen their fiscal, monetary and financial policies to secure growth in the long run and support the development of local capital markets.

Such policies could deliver the jobs needed for the burgeoning number of youth coming on the labor market and provide the opportunities for efficient pairing of domestic revenues with foreign capital.

Why is pairing domestic and foreign capital so important?

African entrepreneurs are the backbone of the economy, creating the bulk of the jobs needed today and for the growing number of youth coming onto the job market. At present, they are starved for growth capital.

At the same time, there are increasing opportunities to increase the volume of domestic finances, such as from pension funds and insurance and health funds — all seeking better returns. Unlike in other parts of the world, Africa has not used such domestic revenues as much to finance its entrepreneurs. With a growing working population and increased contributions to pension funds, there are large untapped resources on the continent.

The critical missing link is the experience of how to use such domestic resources to finance local entrepreneurs and the capacity building needed for such entrepreneurs to grow sustainably. This is where Africa needs support from outside to learn how to invest effectively, grow small companies so they are not stuck at the micro level and use capital efficiently to fund the growing needs of the private sector.

Partnering with funds and firms from outside can be an excellent way for African entrepreneurs to learn by doing. This is why our fund focused initially on getting resources from within Africa and is now looking to complement those resources with financing from outside Africa.