Globally, there is a tendency to hyper-focus when it comes to venture capital investments, whether in specific geographies or verticals. But in the nascent African tech ecosystem, this may not be the best approach.
In episode 15 of Disrupt Africa’s “The month in VC” podcast series, launched in partnership with Atlantica Ventures and Goodwell Investmentswe reached out to investors to discuss the pros and cons of focus, whether geographic, industry-based or otherwise, when it comes to VC plays.
Investors can focus around geography, industry, scene or theme, say financial inclusion, and the decision to focus is usually made around how they can add the most value. However, there are challenges with focusing on emerging markets such as Africa.
Wim van der Beek is founder and managing partner of Goodwell Investments, he advises funds that choose to focus on one, say, sector, to be more general elsewhere.
“If you have a very specific area of focus, you can do that across multiple geographies, and in the same way, if you focus on just one geography, then you can be more general in terms of area focus,” he said.
“If you limit yourself as an investor too much in terms of both geography and industry and type of business, then I think that’s a risk for our type of investment. You have to be clear that you have some kind of focus, but when you become hyper-focused and only do a certain type of business and only a certain type of geography, then your ability as an investor to really add sufficient value will drop. to be very limited.”
So let’s look at the different types of focus, starting with geography. Justin Stanford is its co-founding general partner 4Di Capital, an early stage technology venture capital fund manager based in Cape Town, South Africa. He believes that many companies, including 4Di, had entered the market with a stated geographic focus, but his company had relaxed a little on this.
“We found that borders are increasingly blurring and almost all companies operating in Africa are now located in many different company countries, sometimes spread across the continent,” he said. “It’s so hard to really understand these days that we don’t even try anymore.”
So what about the different diagonals? van der Beek says there is an emerging generation of fund managers who have clear sector orientations and tend to be successful in singling out and partnering with fast-growing businesses in sectors such as healthcare and education.
“At the same time, I’ve also seen that funds that have a particular focus on, say, mobility, logistics or financial services, have had to broaden their focus and adapt to this trend where you see convergence across sectors and industries. ” he said.
“Many of the financial services businesses, as well as the mobility and logistics businesses, have started to expand their own scope. I’ve seen an increase in the specific focus of some funders, but at the same time I’ve also seen other funders broaden their scope because they see that what’s happening in the market is actually that those boundaries between sectors are disappearing a little bit.”
The blurring of boundaries between different geographies and verticals, then, makes hyper-focusing more challenging. Another challenge to focus on was the birth of Africa’s technology ecosystems. Although Stanford says the startup ecosystem is now developing to the point where companies can choose to focus on a single industry, he believes doing so is still a bit difficult if you’re focused on Africa.
“The market is not yet broad enough or deep enough, and so if I think about, you know, the bigger VCs that are focused on, say, fintech, most of them are also investing in other emerging markets. They are not limited to Africa. You’re limiting yourself to a very narrow slice if you’re going to choose both Africa and just one vertical,” he said.
Stanford says that even those companies that narrow down to one industry do so in the broadest possible sense, and that only later-stage funds can afford to hyper-focus.
“You might say fintech and insurtech, and any adjacent vertical, actually expands it quite a bit. So there’s value in having experts, having focus and having specialized skills and building that,” he said.
“But especially if you’re like us in the early stages, you have to be a little bit broader. As you go later, you can specialize more and more, if that makes sense.”
There is another type of focus that some investors have, and that is on the stage of a company.
“This is something we have adopted from more developed markets. You will have separate sets of investors – pre-seed, Series A, Series B, Series C…” van der Beek said.
“Diversity in this focus of investment firms in the development stage of a company assumes that the whole ecosystem is there again, but it assumes that all the other investors who are focused on the other rounds are also there, and that is not the case in Africa. If you look at the landscape, there is a lot of concentration at a very early stage.”
This also means that many companies that have raised capital in, say, Series A, are struggling to raise capital in Series B and C because the capital that makes these investments simply isn’t there.
“A lot of foreign capital has disappeared in the last year. There is not enough international capital in these routes. So what you’re seeing is that a lot of companies that specialize in just that early stage are actually struggling to help their portfolio companies when they need to raise the next round of capital,” said van der Beek.
“There aren’t enough other funders around to help raise funding, and so the funding tightness you’re seeing in the market right now is also due to a lot of these companies coming together for specific reasons.”