Why Context Matters for Early-Stage Investing in Africa

by Tony Chen

After spending 3 years living in Kenya, we returned to the States in 2018. I had invested as an angel investor and built a portfolio of 15 Kenyan companies, and I felt convicted in my prayers: “Tony, what you had started doing in Kenya, go deeper.”

This gave me new clarity and compelled me on a journey to better understand the funding models for Africa and to launch a new fund. I also became instantly curious about how funds launch, and more importantly, how funds pivot and iterate over time. How do funds change course to better achieve product-market fit?

As a 5-time tech entrepreneur, I love the process of pivoting and iterating the next version of a potential product in 5-week sprints. We code like crazy, let adventurous beta-customers try it out, get feedback, and then based on that feedback, rinse and repeat every 5 weeks. I received some great advice from a friend who’d transitioned from tech entrepreneurship into tech VC, “Yes, you can iterate on funds. But instead of 5 weeks, it might take 5 years to get your first data points. The worst thing you could do is deploy all this capital today, and in 5 years, you’d be very wise, and very broke.”

How do I squeeze 15 years of wisdom into 15 months? That motivated me to learn from experienced investors who’ve iterated. We asked them: What drives outcomes in early-stage ventures in Africa, and how have you changed your approach? I partnered with two African thought leaders, and together, we interviewed 100+ Africa-centric entrepreneurs, investors, and LPs, took 900+ pages of notes, coded our findings into 15 key themes, and synthesized our findings. We published the resulting report this past January entitled Chasing Outliers: Why Context Matters for Early-Stage Investing in Africa (free access at kinyungu.com/chasingoutliers).

We learned a ton. First, the obvious.

Silicon Valley venture capital is largely a mismatch for most African ventures. The VC model works when the context has these critical ingredients: huge markets, high lifetime value of customers, efficient infrastructure to capture and retain customers cheaply, and plentiful investors at every stage of the business lifecycle. In most African markets (and actually in most markets globally), none of those ingredients are present. Context matters.

Another important contextual element is time horizon. Things often take longer in Africa (and many emerging markets). Exogenous shocks — a shaky transition of power, a drought, a new head-scratcher regulation — are frequent. Relationships and trust take time to build. Also, an entrepreneur trying to solve problem A realizes she can’t unless she also solves problems B & C. How do you create the “Amazon of Africa” if there aren’t addresses? How do you loan money if there isn’t such a thing as credit scores? These foundational problems — reframed — are massive opportunities. Investors willing to look deeper into the context will be rewarded. But most overestimate what can be done in 1 year and underestimate what can be done in 10.

Venture capital is like a race car. With smooth, straight roads, good weather, and a pit crew, you can get places fast. It’s a beautiful vehicle designed for a very specific purpose under very specific circumstances. But too often, too many have copy-and-pasted it into other arenas too widely. Why aren’t we talking more about 4-wheel off-roaders built for versatility or even little motorbikes designed for agility?

Now to a non-obvious lesson.

One of my personal take-aways from the research was that these $50-500k checks into early-stage African tech companies are crucially strategic, still represent jaw-dropping opportunities, and yet are almost impossible to pull off as a stand-alone fund using typical investment structures. I found 4 groups who had tried launching $20M early-stage tech funds who all failed. I looked at the ~30 groups that were writing $50k checks in Kenya, and every single one had other revenue streams: donor capital and/or a parallel business (usually advisory or intelligence). To be honest, this was hard to accept. I thought I was being faithful by “going deeper” into launching the fund.

So, what do you do when the exact thing you thought you were called to do isn’t feasible?

Ironically, one of the crucial things I look for in investable entrepreneurs is their pivoting ability. The best entrepreneurs are the best pivot-ers. It reveals a certain curiosity and humility that they can learn from the market. It also reveals that they haven’t fallen in love with their solution. No, they’ve fallen in love with solving a problem. Looks like I needed to follow my advice.

I began exploring alternative structures with longer-term focus and niche investment strategies. I became quite encouraged by the entrepreneurs and investors who are pivoting within these realities. One fund’s primary investment thesis was companies that solve those “problems B & C” — reducing the friction of doing business. Some are innovating around fund structure and instruments used. A group within the Faith-Driven Investor community is innovating how due diligence “lite” can be done so that smaller $50-500k checks can be written in more sustainable ways. Some agri entrepreneurs are pursuing end-to-end vertical integration to build unique moats. I’m excited to see more and more notable CEF members like Verdant Frontiers, Talanton, and Saad Capital (and other Faith-Driven Investors like Future Africa). All four are working in Africa, executing unique niche strategies, utilizing non-traditional structures, respecting the local context, and gaining great traction.

In the midst of this exploration, in God’s timing, an opportunity came up, and I joined one of those innovators — Verdant Frontiers — as a Partner.

Verdant will also acquire my firm Kinyungu Ventures and the existing tech portfolio.  Together, we’ll bring a long-term value creation approach in the African tech sector. I’m excited to be able to continue investing in African tech companies, while also being part of a broader entrepreneurial team passionate about building large-scale businesses across the African continent.

I’m excited for a new season that is dawning. There’s no doubt in my mind:

Africa’s moment has arrived.

Opportunities abound, and redemptive entrepreneurs and investors have pivoted to capture this opportunity by building great teams, executing with resilience, respecting the local context, and thinking long-term.

Article originally hosted and shared with permission by The Christian Economic Forum, a global network of leaders who join together to collaborate and introduce strategic ideas for the spread of God’s economic principles and the goodness of Jesus Christ. This article was from a collection of White Papers compiled for attendees of the CEF’s Global Event.