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Impact Capital or Venture Capital: An Africa Tech Financing dilemma

· Technology,Impact,investment

Eneza Education, a Nairobi-based tech company, has been raising its $3mn Series A financing round. Chairman Stephen Haggard led the round from London, and is convening a session on financing at the Africa Technology Business Forum in London on 21 June. His theme is tech founders straddled between growth-seeking investors looking for money rewards, and impact-seeking funders who want African tech to hit social goals.

No African tech business is going to find it straightforward to raise capital. Fund managers evaluate investment options on a comparative basis, so when they look at a tech play in Africa, they see financial models and company/competitor data that are sparser or more unconventional than the other opportunities in their pipelines. Since only a subset of managers consider Tech and Africa, it winnows down to a tiny pool of funds who reckon your financing round can be quantified at all; and a fraction of those will have appetite for your deal and capacity to close it. Add to that the problem of ticket size. The typical African tech requirement at Series A is going to be in the $2-5mn range. Many fund managers won’t get out of bed for a deal of less than $10mn.

To increase these slim chances of a successful raise, tech companies like Eneza need to work across the widest possible funding landscape -- which extends from the impact funds (typically Foundations and Family Offices) to the growth and profit goals of VCs and Private Equity. Grants also are in the mix: they can avoid stress in the cap table but also their requirements can divert you from mission. We have worked with all types of financing, and successfully, but this wide divergence in their goals does create challenges. On a pitching week earlier this year in which my CEO Kago Kagichiri and I Ubered ourselves in and out of fund offices up and down Route 101, we would hear in the morning from venture teams that we were not pushing enough on unit economics or growth, and then in the afternoon from impact teams that we weren’t pushing hard enough on creating social benefits. Well, rejection is normal in any financing round, but this is particular.

This situation is damaging not just because it burdens companies with an additional handicap in getting a vital input to their business, but because it is messing up African Tech valuations. At one large venture capital outfit in Silicon Valley, which rejected us for a high valuation, we were despatched with a parting lament that philanthropist investors were buying stories not earnings when they participated in tech rounds in Africa. The VC Partner said that the valuations some tech companies were getting from foundations on the basis of impact were shutting growth finance investors like him out from African investments. It was just after the Zuckerberg $23mn Andela deal. A sob-story from a venture capitalist doesn’t usually register on my empathy-gauge but this was an important insight. If growth-seeking capital is being pushed away from African tech opportunities, every African company (and ultimately the African consumer) are paying a price: condemned to live outside the global growth curve and depending instead on being perceived as needy by rich benefactors. That’s not a great future. (BTW and for the record, the valuation was reasonable, at about half the DCF price. But VCs aren’t yet ready to believe that African tech businesses can be mature. Eneza after trading 5 years and in its sixth month of 30% month on month revenue growth still looks like an Early-Stage venture when viewed through some people’s lenses)

A particular challenge for me is that as a tech player in the education segment, Eneza Education inevitably searches the same money-bucket as the very successful raises lately achieved by global disruptive ed tech startups. Now those guys - think Edmodo, Class Dojo, Coursera etc - were also riding the disconnect between venture capital and vanity capital: a lot of the financing was hunches by tech billionaires for whom disrupting education is more a policy position than a financial move. Cap tables were stoked up on a pitch of breaking the bureaucratic and patient processes of conventional teaching, and selling pure learning mechanics by tech to cash-rich parents or school boards. Perhaps it works - jury’s still out on whether it has financial and educational merit. Meanwhile they have set some insanely high benchmarks for valuation growth in the edtech sector. This has consequences. Two issues arising from it, which I hope we can kick around at the ATBN forum:

  1. When African tech startups have to stand in segments dominated by rich North American cousins, can we and should we try to put clear water between ourselves and the valuations and ideas emanating from Silicon Valley ?

  2. Where financing appetite for a sector has matured on disruptive and predatory business models, is it ethical for African founders replicate that model? Might our calling be more adding value than disrupting institutions ?

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Eneza Education operates a a telco-based B2C micropayment service delivering courses, assessment, guidance and certification to over 2mn African students in Kenya, Ghana, Tanzania, Zimbabwe and shortly Ivory Coast. Stephen Haggard will be chairing an ATBN panel on 21st June discussing questions like how far impact investment fosters or hinders innovation, the balance between social and financial returns, and the challenge of creating scale with impact investments.

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