Influencing and Persuading: Overcoming Bias in Venture Capital Investment in Africa
In the dynamic and ever-evolving world of venture capital (VC) in Africa, foreign VC firms headquartered in North America have played a significant role, accounting for 42% of VC deals over the past five years, according to the Africa Venture Capital Association.
However, the landscape is not without its challenges. Black entrepreneurs in Africa have faced condescension and humiliation from white founders, as some have reported. This issue is further compounded by the underrepresentation of local founders in successful ventures. In countries outside Nigeria and South Africa, out of 31 companies that raised $1 million or more, only 10 were founded by locals. This trend was evident in Kenya in 2019, where out of 17 companies that raised similar amounts, only 1 was founded by locals.
The underfunding of black entrepreneurs in Africa is a topic that has sparked debate. Roble Musse, in a blog post, argues that racism may be a factor, while Eghosa Omoigui discusses that pattern matching by investors can lead to biases in VC funding. The preference for foreign-founded startups, often due to perceived better management skills, access to international networks, and reduced perceived risk, can be linked to racism because it implies undervaluing local founders' capabilities and perpetuates discriminatory biases.
Swaady Martin, an Ivorian entrepreneur, believes that this funding bias in favor of African businesses founded by non-Africans is a form of neo-colonialism. She argues that capital cycles from white funders to white founders in ways that mimic the transfer of World Bank loans from Washington institutions to Africa-based NGOs led by white people.
Despite these challenges, there are initiatives aimed at empowering young African entrepreneurs. The Africa Development Bank, in partnership with the European Infrastructure Bank, has set up a fund called Boost Africa, aimed at funding up to 30 funds over an 8-year period. Ada Osakwe argues that the government should create an environment that allows Africans to thrive, rather than implementing affirmative action or positive discrimination.
Sele Inegbedion states that indigenous founders have an advantage in understanding their local market better than foreign entrepreneurs. Claire Hoey suggests that businesses in the growth phase will continue to require venture capital due to constant cash flow worries. Olu Verheijen, an African angel investor and former partner at Persistent, emphasizes the importance of constructive discussions in resolving issues around a startup's cap table.
Roble Musse suggests greater adoption of revenue-based investing models and less reliance on venture capital. VCs should create structures that attract diverse deals to the table, according to Verheijen. Swaady Martin proposes a three-prong plan: mandating 60% of VC deals to African founders, requiring non-African founders to give equity to a fund supporting local entrepreneurs, and encouraging Africans to invest in Africa.
Despite her network, professional achievement, and sector knowledge, Martin, the founder of YSWARA, a South African gourmet tea company, has been unable to raise funding for her company. This underscores the need for a more inclusive and equitable venture capital landscape in Africa.
Verheijen's call for constructive discussions and the implementation of policies that attract diverse deals to the table are crucial steps towards addressing the challenges facing the African VC landscape and fostering a more inclusive and equitable environment for all entrepreneurs.
