By David Munnich and Hugues Vincent-Genod, I&P
Is it possible to invest equity in African early-stage companies in a sustainable manner?
Has anyone ever invested equity and provided support to early-stage companies in West Africa in a sustainable manner for amounts as low as EUR 50,000? Why not and why is it so hard? Another way to see this question is to ask: can equity investment bridge the financial gap encountered by entrepreneurs from the lower end of the missing middle of African Small Growing Businesses (SGBs)?
As we know, SGBs in Africa (as in all continents) usually have little equity, no collateral and weak management standards. This is precisely why they need equity investment, but also why professional investors are having a hard time reaching these promising, high-growth-potential entrepreneurs who are still starting their business. The next “Bill Gates” is certainly in Africa! But he is still working from his garage, and he needs a springboard to get out of it. More precisely, not only does he need money, but also skills, strategic advice and a multifold support from a shareholder, and this is costly.
But as we also know, no economy has ever sustainably fought poverty without developing SMEs, employment and an economic fabric. The yearly 5%-growth rate in Africa will not reduce inequalities if it remains circumscribed to the sectors of infrastructure, IT and oil & gas. That is why, if we want growth in Africa to be inclusive (see example of IOT supported by I&P), we have to come up with an innovative way for small companies to have their say and their way.
At I&P we have tried to address these challenges over the last ten years since we have invested in 50+ SGBs in West Africa through our 2 funds. These SGBs have received equity & quasi-equity resources for amounts ranging between EUR 50,000 and 1,000,000. Overall, they achieved strong operational and financial performances that allowed I&P to exit from the first 10 companies with good gross returns. Nevertheless, as described below, the lower the amount invested, the lower the net return to the investor; this is what makes this activity both difficult and necessary.
One of the first investments made by I&P was with a tile factory in Mali in which we invested 50,000 euros. 50 jobs were created and strong increases in sales and profitability were achieved. I&P exited after 5 years and made a 3x return. But despite this success, the net IRR was close to 0. All that I&P had earned was spent on travels in the field and on the hands-on work with the company. The smaller the amount we invest, the higher the relative transaction cost, and the more difficult it is to provide the support/skills that the company is in dire need of.
What I&P strives to do is to reduce these transaction costs in order to make it possible and profitable to support and finance small SGBs for small amounts, thus lifting these companies to the standards required by larger investors. We have given it a try and we came up with the SINERGI model, which is to downscale equity investment to SGBs whose investment needs range from EUR 50,000 to 300,000.
SINERGI NIGER was started in 2008 as the first investment fund based in Niamey, Niger dedicated to small SGBs. SINERGI NIGER raised EUR 750 000 of investment capacity mainly from local investors: 6 business angels, a bank, an insurance company, 2 large international companies based in Niger and international investors including I&P. A team was recruited and trained by I&P. The methodology and know-how of investment were transferred successfully. Today, SINERGI NIGER has invested in equity and quasi-equity in 8 start-ups for an average of 50,000 euros per investment. The investees have achieved an average 40% annual growth rate of sales. The first 2 exits have just been realized with good returns for SINERGI. Additionally, 200 jobs have been created.
Thanks to the 2014 Argidius-ANDE Finance Challenge (AAFC), I&P was able to replicate this sustainable model to neighboring Burkina Faso, and launch SINERGI BURKINA, a EUR 2,5 million investment company with local shareholders: a bank, an insurance company, an international company based in Burkina, 8 business angels as well as 3 international investors. A team has been recruited and trained and the first investment has just been approved. Through SINERGI BURKINA, 50+ high-potential SGBs will be financed over the next 10 years for amounts ranging between EUR 50,000 and 300,000. As in Niger, the team and the majority of the shareholders are national, which ensures local ownership and develops investment capacities in Africa. SINERGI BURKINA will unlock access to finance for entrepreneurs and extends the reach of the investment fund to invest in the most promising but still small businesses.
This model relies on a high commitment of the investment team in support to the SGBs, though. An investment officer is a board member in each SGB in his portfolio. He contributes to the governance and to the strategic decisions made by the entrepreneur. While maintaining operational costs low, this model has to keep a very high level of monitoring and involvement with each investee if it is to reach its financial and impact targets. This is why an investment officer monitors not more than 5 investees at a time in his portfolio.
The final committee of the AAFC selected this project as the winner of the competition. Thanks to the EUR 1 million grant, I&P will be able to scale up the model with the launch of 10 African investment companies led by African teams and investing mostly African capital. We believe that supporting African investment teams is necessary to promote early-stage companies and entrepreneurs and generate inclusive growth in Africa.
We’re looking to support the next emerging SGB investment teams in Africa. Who wants to take up this challenge?
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