Need x Entrepreneur - The Nkali Story
A Paradigm Shattered
4:58 AM was a weird time to have a paradigm shattered. The sun had not yet risen, so it still felt like the previous day. Nothing extraordinary seemed to have happened, but I had a weird suspicion that things were about to change fundamentally. Then, like new knowledge to an old worldview, the dawn light crept through my windows, intruding into the darkness of the night. The dawn light was strange. It wasn’t that bright, and it wasn’t very warm - it didn’t grab my attention. So I was tempted to ignore it and try to go back to bed, back to the way things were.
But I couldn’t go back to bed. I had been up all night pondering the paradox of the continent with the highest need, simultaneously being a major hotspot for entrepreneurship. Two words. Need, Entrepreneur. The first evoked thoughts of poverty, hunger, and struggle. The other brought to mind enterprise, wealth, self-sufficiency, and power. But what happens when those two seemingly disparate worlds clash? Well, in short, you get Africa.
So how does one reconcile such bustling entrepreneurial activity with the stark poverty Africa faces? It’s simple. Break down entrepreneurship. How, you ask? Well, a source described as “The World’s Foremost Study of Entrepreneurship” might be a good place to start. Since 1999, the Global Entrepreneurship Monitor (GEM) has carried out a comprehensive annual study of entrepreneurship around the world. One of the primary frameworks the GEM employs to characterise types of entrepreneurship is “necessity-based” and “opportunity-based” entrepreneurship. Put simply, necessity entrepreneurs start businesses due to a lack of employment options, while opportunity entrepreneurs seek to fulfill identified market needs.
But why does the way entrepreneurs are classified matter? The secret lies in the traits ascribed to each. Necessity entrepreneurs are driven by a lack of options and turn to entrepreneurship as a means to fulfill basic personal and family needs. As a result, their businesses typically do not prioritise innovation, and they rarely expand or serve as a significant source of employment beyond the family circle. Conversely, opportunity entrepreneurs are held up as the gold standard - the true engines of the economy. They typically expand quickly, drive productivity and employment, and develop innovations that address market needs. One study in the UK found that opportunity entrepreneurs made up only 6% of entrepreneurs, but drove an immense 50% of national job creation over a 6 year period. The conclusion seems simple - no opportunity entrepreneurs, no economic growth.
So what happened when I read a GEM report affirming that Africa had the highest rates of necessity entrepreneurship globally, and consequently, had relatively few opportunity entrepreneurs? Well, I swallowed the conclusions hook, line, and sinker. Because looking at Africa’s high poverty and high entrepreneurship rates, it was the only answer that seemed to add up. Opportunity entrepreneurs were more likely to create jobs and prosperity, so if a continent didn’t have them, its high rates of entrepreneurial activity meant nothing. In short, if nothing changed, Africa would always be industrious yet poor.
This idea of Africans as primarily necessity entrepreneurs quickly became a paradigm, a viewpoint from which to assess and understand entrepreneurship on the continent. I became obsessed with opportunity entrepreneurship, because I viewed it as a potential way out of Africa’s long-standing, cyclical poverty. So for years, I devoted my life to answering one big question - how could we support African necessity entrepreneurs to become opportunity entrepreneurs? This question drove my academic research on sustainable entrepreneurship and francophone economic neocolonialism, and my subsequent professional pursuits in bridging the digital divide as a means of creating economic opportunity.
Fast forward six years later. Seeking to better understand Africa’s relatively high rates of startup failure, I researched to find the latest version of the GEM report. After a few cursory clicks, I found it. But wait, something was wrong. The conclusions were too different. After spending years believing that African entrepreneurship was constrained by its need-driven nature, the words on the page were telling me an unfamiliar tale. New research had revealed that the vast majority (74%) of entrepreneurs across the world (yes, including Africa) were driven by opportunity, not necessity. Wow.
Here’s a confession. After being confronted with this new idea of Africans as opportunity seekers, I tried to go back to what I knew. My initial reaction was to find the report which tagged Africans as primarily necessity entrepreneurs. So I checked the 2019 version of the report. Then the 2018, then the 2017. But they had all shifted to an opportunity-driven worldview on Africa. Damn. Then a simple question popped into my head, uninvited - why fight progress? Why was I so attached to a worldview of African entrepreneurs that failed to accurately capture the realities of the various countries and economies in which they work, and the complexities each presents?
I pondered the question for a bit. Then it hit me. Viewing African entrepreneurship as necessity-driven was the easy explanation. It fit easily into the typical “save Africa” narrative perpetuated by neo-colonialism and a million NGO “save-the-starving-African-children” ads. So why was it so hard to let that paradigm go?
Well, as flawed as it was, that mindset was the foundation of the opportunity entrepreneurship question I had spent years working to understand and contribute towards addressing. So reevaluating the foundation certainly complicated things. Then I asked myself - did the change in my worldview really invalidate the question? No! Far from it, the change gave me a reason to explore the other reasons why African startups were less likely to succeed than their global counterparts (Africa’s 8.4% annual startup discontinuance rate is the highest globally). So I got to work to try and find some answers.
Africa’s Startup Challenges
From research conducted by the World Bank, and validated through conversations with entrepreneurs around the continent, I present three (non-exhaustive) factors that limit African startups:
Challenging governance and macroeconomic environment
Lack of skilled work force and limited technical skills
Limited access to sustainable financing solutions
The first factor (governance) is the most prevalent stumbling block, but also appears to be the hardest to shift on an individual level. The second (workforce and technical skills) holds more promise for change, but significant progress on a broad scale would require concerted efforts across national educational and apprenticeship ecosystems. It would also require rethinking the relationship between educational and professional institutions to ensure that graduates emerge with skills and experiences that are more relevant to employer’s needs. Thus, addressing the third issue (access to capital) seems to be the most individually accessible yet high impact avenue to accelerate the growth of startups around the continent. However, the problem has not historically been an easy one to solve.
It is worth noting that the past decade has seen significant progress in increasing access to finance for startups in Africa. This is highlighted by the fact that 2019 was the first year African startups attracted over $1 bn in venture funding. But a closer look shows that the rosy landscape this billion-dollar milestone paints isn’t the full picture. Access to capital in Africa is plagued by significant disparities and challenges. While a few outstanding organisations secure the majority of Venture Capital (VC) funding (6% of startups attracted 83% of total funding in 2019), most startups view funding as a major challenge. In fact, 25% of businesses in Africa view access to funding as their greatest constraint, almost twice as many as any other region in the world. This is reflected in the net funding gap of over $420 bn experienced by startups on the continent, per the IFC.
While the $420 bn funding gap is staggering, it is the cumulative result of a range of factors that plague the finance ecosystem in Africa, including cumbersome traditional financing mechanisms. For years, legacy banking institutions and their loans have represented the primary formal channel for entrepreneurs seeking capital to start and scale their businesses. However, gaining access to finance via these institutions can prove challenging. High interest rates, a lack of sustainable long-term finance options and daunting collateral requirements contribute to an exclusionary financial system which stifles entrepreneurship. This scale of the issue is reflected in the fact that over 50% of VC inflows into Africa went to fintech companies aiming to overhaul the legacy financial system (this disproportionate allocation is itself a challenge). As a result of these high barriers to entry, only 42.5% of people in Sub-Saharan Africa (SSA) have access to a bank account and related financial services, including business loans. Indeed, less than 20% of African companies below 5 years access loan funding, compared to almost 40% in other developing countries. In essence, too many Africans who need capital to create economic value cannot access it.
Similar to other social challenges, the difficulty in accessing formal financial systems disproportionately affects women. For context, this is not exclusively an African problem - only 2% of VC funding went to female-founded businesses in 2018. However, deep-set traditional gender roles, disenfranchisement and economic exclusion exacerbate the issue in the African context. For instance, in SSA, there is a 9% gap between men and women’s access to finance. The gap actually doubles in North Africa, making it the largest gender access gap for financial services globally.
Furthermore, the regional disparity in financial access goes beyond gender. Of the five highest recipients of VC finance in Africa, Kenya and Nigeria alone accounted for over 80% of funding. Additionally, despite being home to 70% of the world’s french-speaking population, no francophone African country made the top five countries for VC investment. Clearly, funding for startups in Africa has a challenge with geographical distribution.
While geographic distribution above referred to the countries receiving funding in Africa, it could just as well refer to the countries where funding for African startups comes from, as well as the countries where founders who receive funding originate. Put simply, control over funding for African startups does not lie in African hands. Over the past 5 years, only 20% of all VC for African startups came from within Africa, with more than double (42%) originating from the US alone. This lack of African influence over funding opens the door for other systemic issues, particularly regarding race, in the funding ecosystem for startups in Africa.
Foreign Funding = Bias
Here’s a crazy statistic - white founders are 50,000% more likely to get funded for a business in Kenya than they are in America. In fact, across the East Africa sub-region, only 10% of startup funding went to local founders. But the racial disparity in funding is not just an East African issue. Of the top 10 VC deals made in Africa in 2019, only two startups were led by Africans. Outside the top three African countries for VC funding last year, 45% of the companies funded were led by expats, with only 32% having local funders.
While there could be a temptation to consider whether foreign founders may be better qualified or have some special insights into the African startup ecosystem that local founders lack, the evidence points to the contrary. In Kenya, only 15% of foreign founders could be considered experts in their fields, while a mind-boggling 65% of expat founders had not lived in Africa prior to starting their companies. Furthermore, A study comparing founders from emerging markets and high income countries showed that emerging market founders have equivalent or higher educational qualifications, employ more people and generate higher revenues than their counterparts from high income countries.
So if the issue isn’t skills, experience, performance or perspective, what drives the disproportionate funding of white founders in Africa? One word - bias. Per Harvard professor Laura Huang, many funders rely on gut instincts to supplement the raw figures and facts surrounding a funding decision. The issue here is that gut instinct is based on experience and familiarity. Thus, if the majority of venture funding in Africa comes from white people, who are they most likely to fund? You guessed it, other white people! Further research by Emory University and the Aspen Aspen Network of Development Entrepreneurs also attributes the gap between expatriate founder quality and investor perception to bias. Their findings showed that “cultural bias might be driving the perception of lower entrepreneurial skills” and a lack of experience for emerging market entrepreneurs, despite evidence to the contrary. Given the often subconscious nature of human bias, it seems that the only surefire way to grow the number of African founders who receive funding is to increase the amount of capital from African funders.
From the various disparities outlined above, the picture seems clear - Africa’s already limited financial inflows are disproportionately concentrated geographically (and by sector) and can be exclusionary to women and black Africans, i.e. the vast majority of the population. In short, Africa needs funding mechanisms that are accessible to ALL Africans, which enable innovation across various sectors of the economy, and which minimise the effects of bias and dependence on foreign funding by consolidating money from African funders.
Meet NkaliFund
Enter NkaliFund. Announced, as most truly important things are, via a tweet from founder-to-be Victor Asemota, NkaliFund will be a “venture cooperative” by Africans, for Africans. In case the words venture cooperative seem counterintuitive when paired, a venture cooperative is similar to a traditional VC fund because it funds early stage ventures with significant potential. However, there is a key distinction which makes NkaliFund an interesting proposition in light of the existing challenges with the African funding ecosystem. Unlike a traditional VC fund, NkaliFund will not be comprised of capital from the wealthy few, but is designed to be crowdfunded from Africans all around the continent.
NkaliFund Logo
While no single organisation can solve Africa’s deeply entrenched SME funding challenges, Nkali could very well be the first domino that triggers a more inclusive funding ecosystem for African startups. Here are 5 reasons why I think NkaliFund has incredible potential to alter Africa’s investing landscape:
NkaliFund’s Promise
1. NkaliFund is designed to democratise funding for African startups
Traditional VC funds are established using funding from high-income individuals, who become Limited Partners (LPs) upon the fund’s incorporation. While researching this article, various sources placed a small VC fund anywhere from 1 million to 20 million. It’s worth noting, however, that the average VC fund manages over $130 million. This gives you a rough idea of the amount of money you would need on hand to invest in early-stage startups under a traditional fund. Other alternatives that seek to make funding promising African startups more accessible, such as Future Africa, have a minimum investment of $10,000. Again, while this is magnitudes more affordable than the six to seven-figure amounts required to invest in a traditional VC fund, it is still far beyond the reach of most Africans. NkaliFund changes the game by giving everyday Africans the opportunity to invest in the continent’s most promising startups for just $100 a month.
2. NkaliFund will diversify and mitigate risk significantly
Traditional VC funds invest in anywhere from 1-20 companies annually. While there’s no magic number of companies that guarantees success, the Pareto Principle (20% of inputs determine 80% of results) seems to justify NkaliFund’s decision to invest in 50+ startups across the continent. In fact, for funds that returned 5 times their capital, just 20% of companies were responsible for 90% of returns. In essence, for a VC to be profitable, it doesn’t need all investments to succeed (most fail), it just needs enough of them to exceed expectations. Simply put, since VC fund performance relies on the number of hits rather than the number of misses, then NkaliFund’s strategy of diversifying geographically and investing in more companies will not only reduce risk, but make the fund much likelier to score big.
3. NkaliFund has a tech focus without a fintech bias
While the heavy focus on funding fintech companies in Africa can seem unbalanced, it is not altogether misguided. Technology can be an incredible enabler, multiplying outcomes in fields as disparate as baking and microbiology. In fact, of the 326 unicorns (companies valued at >$1 billion) in 2019, 229 (70%) were tech companies of some sort. For NkaliFund to succeed in making high-growth funding opportunities accessible to everyday Africans, investing in technology-enabled companies across various industries is critical.
4. Profit focus helps build more sustainable businesses
Per the NkaliFund prospectus, the cooperative will provide capital that is “patient for growth and impatient for profits.” This is in contrast to traditional VC funding, which has a focus on rapid growth above all else (growth is the primary path to an exit, where VCs typically make their money). Being profit-focused ensures that the businesses that Nkali helps to scale would have already found product-market fit and can grow sustainably (and profitably), instead of potentially scaling fundamentally flawed models and squandering capital.
5. Community backing of funded companies could create virtuous cycles
What traditional VCs have in sheer financial power, they somewhat lack in social leverage. In contrast, NkaliFund’s biggest strength lies in Africa’s most abundant resource - people. By creating a network of over 10,000 people across the continent to support early stage startups, NkaliFund will create a support group for each funded company. Imagine 10,000 people constantly telling friends (who tell friends) about your business, patronizing your products and providing in-kind resources (networks, industry expertise etc) to your organisation, all because their fates are intertwined with yours. When African startups win, we all win. That’s the power of Nkali.
The World Bank estimates that SMEs form 95% of businesses in Africa. Without a doubt, these burgeoning enterprises are the backbone of our economies, and must be supported to thrive and scale to reach their potential. At a time when coronavirus has caused 75% of African SMEs to experience reduced sales, action must be taken to ensure the survival and growth of our most vulnerable, yet most promising organisations. NkaliFund is one step in the right direction towards a future where all Africans have an opportunity to invest in the incredible innovations developed on the continent, while African founders have a fair chance at accessing the finance they require to realise their visions.
Looking at the Nkali logo, one thing stands out - a quill. It stands proud, a fiery splash of orange against the cool blue tones that dominate the logo. For centuries, the quill was the writer’s weapon of choice as they sought to create new worlds and shape existing ones. Today, the quill could once again remake the world, by rewriting Africa’s financial future.
The future of African finance is coming. Don’t be left behind.
