Venture Capital (VC) firms operate in a myriad of different ways across diverse geographical regions, industry sectors, niche areas and lifecycles of businesses, and they are driven by each VC’s mandate which defines the investments. These investments should be in-line with the VC’s goals which are in turn based on quantitative, qualitative, commercial, financial and socio-economic measures as determined by the VC, its shareholders and/or its limited partners (investors).
At HAVAÍC, our overarching thesis is to invest in early stage post-revenue businesses that have the potential to use technology to scale into, and service international markets. We choose this as our mandate for three primary reasons:
Technology companies emerging from Africa offer unique world class solutions and can compete on the global stage;
Technology enabled businesses are readily scalable, can service a cross border market from a competitive and efficient home base, and are less geographically constrained by challenges more traditional businesses in Africa may face; and
Technology companies with low-cost bases, scalable business models and international revenue sources, attract the largest exit prices.
In this edition of Smart VC we focus on the last point, as for our investors, it’s all about the exit.
When assessing a potential investment one of the first questions we ask ourselves is -“ How are we going to exit?” Before proceeding with an investment, we must be confident that our position has the potential to facilitate an exit and make multiple returns for our investors. A critical part of our investment process is to understand the flow of capital in both quantum and source, as understanding where the capital will come from, why it will come our way, and the likelihood of this is key to an exit.
With this in mind, when considering the flow of capital in the hunt for “big money”, HAVAÍC’s strategy follows learnings from two internationally proven VC markets where we see similar attributes to the investments we are making in Africa.
Firstly, where businesses are well placed to develop technology locally at a lower cost, with potentially lighter regulation, and enter developed markets such as the US we look to follow the lead of VC in Israel, which is recognized internationally as the Start-up Nation. With a limited local market for their high-tech products, services and solutions are designed for a global world stage, From day one start-ups in Israel kick off by thinking globally, all whilst leveraging off local skills and competitive domestic cost advantages.
SA, like Israel, has strong tertiary institutions, internationally comparable skill sets, albeit with a much more competitive cost base, cultural similarities and understanding of more developed economies, and a relatively “small” domestic market This is all supported by world class infrastructure, particularly in the technology and connectivity space. Thus just like with their successful Israeli counterparts, these factors motivate and empower SA innovators to build businesses that are scalable across borders, producing businesses that are robust and suited for breaking down the early barriers to enter foreign markets.
Our portfolio companies Sortd, BigTeam, 3X4 Genetics and hearX have all benefited from this unique SA skill set and initial market opportunities, have been developed locally and then have either moved their IP to the US, have international Dollar or Euro paying clients or a combination of both, HAVAÍC’s exit strategy here is to capture the flow of ‘big money’ for an exit from an international trade buyer or follow-on funder. This potential buyers understand the successes that the “start-up nation’s” model has enjoyed, and recognises the value that can be created for them by acquiring or investing in adjacent and comparable opportunities originating from Africa.
Secondly, in the context of the rest of Africa, and particularly in East Africa, we see the route to exit differently. The opportunities that interest HAVAÍC are those where the pace of infrastructure, commercial and corporate development lags the population and economic growth of these areas. Here we draw on lessons from South East Asia, where VC ‘dry powder’ and capital inflows into the sector have increased 11 fold in the last 6 years. Increasing global investment, growing institutional and personal savings pools, urbanisation, access to new markets and technology have reshaped many previously poor, underserviced Asian countries into world leaders with large addressable markets, an emerging middle class, and an internet-savvy population. The gains that were made off investing in these countries are impossible to ignore, and we see similar types of opportunities arising in Africa.
Start-ups in East Africa that HAVAÍC focuses on are predominantly aimed at solving local and regional problems that support development and growth in the vast informal sector, while VCs like HAVAÍC and our local and international co-investors provide networks, expertise and a sounding board to support these efforts. This region, though on average poorer than the Asian examples, have large economically active, upwardly mobile populations that are eagerly adopting new technologies that facilitate solving everyday challenges. Furthermore. our rationale for focusing on East Africa as our primary non-South African market centres around COMESA, the regional trade block of East Africa. Although COMESA doesn’t have a common monetary system like the EU, they do have relatively free regional trade policies, and generally if one of the larger economies in the region take on new policies, the rest of their neighbours follow. Taking this into account, like South East Asia, where you have a large local population, rapid rise in domestic consumption and relative ease in regional trade, tapping into local solutions that have regional impact, means that with the aid of technology, East African start-ups have the potential to impact a vast addressable market and population of 150 million.
Our Kenyan based companies, MPost and Tanda, exemplify this as they both use technology to provide access to services, postal delivery and financial inclusion respectively, that have recently been inadequate to support the growth in the population’s numbers and wealth, not to mention the changing requirements of both consumers and regulation. Simply, the demands have outpaced the growth in services and infrastructure.
The strategy of following the flows towards a ”big money” exit, centres around East Africa, and specifically Kenya, where large pools of capital are being applied to support developing African economies, to gain market traction by acquiring large numbers of customers or new and innovative models that have grown out of scarcity.
You will note that no matter which African start-ups we invest into, we have a very clear and distinct thesis around which markets they should be expanding into and why. With East Africa being the largest recipient of FDI in Africa, and the US being by far the biggest investor in technology solutions globally, we are setting up our locally based start-ups for potential global success and always with the view of a meaningful “big money” exit.
We at HAVAÍC are thrilled to share the journey - and the gains - of investing in African innovation and global elevation with you.