In Africa, venture capitalists rising as innovations beckon

And the beat goes on. Venture equity investments in Africa hit an estimated Sh200 billion according to the latest data by Partech Africa. While that number may seem insubstantial compared to the global figure, it is a mighty step up from years prior. In 2015, venture capitalists (VCs) struck deals worth only Sh27 billion.

For 2019, the report estimates a total of 250 deals struck with the average check amounting to Sh800 million. For Silicon Savannah entrepreneurs (and aspiring ones) hungry to attract funding, this is most definitely a welcome development.

It is not hard to see why VCs are finding it hard to resist the continent. According to Global Innovation Index (GII) 2019, as in previous years, Africa shines in terms of innovation relative to its level of development. Out of the 18 innovation achievers cited in its latest study, six (the most from any one region) are from the sub-Saharan African region. Importantly, Kenya, Rwanda, Mozambique, Malawi and Madagascar notably stand out for being innovation achievers at least three times in the previous years.

Going back to the Partech report, it is easy to draw some notable similarities between Africa's VC scene and the bigger and much-celebrated US one. For instance, a whopping 80 per cent of all VC money is estimated to flow into just three US states. Similarly, in 2019, three African countries accounted for 75 per cent of the total funding - Nigeria (37 per cent), Kenya (28 per cent) and Egypt (10 per cent).

Likewise, on deal volume, three African countries accounted for almost two-thirds of the number of deals - South Africa (26 per cent), Kenya (20 per cent) and Egypt (18.8 per cent). Perhaps discouragingly, as the share of VC dollars flowed to less than three per cent of US women-founded start-ups, only 13 per cent of the total funding went to Africa female founded start-ups – the number should drift closer to the US figure once the standard "at least one of the founders is female" is not applied.

Another fact revealed in the report is that much of VC funding does not go to fund new basic innovation or into new tech start-ups. On the contrary, what are considered as early bets (which accounted for a third of the total funding) are actually follow-on deals or projects already exist. This means "angels" (first-line investors) alone are the only true risk takers here.

But that's not to take away credit from the VCs. These guys do fill the void between sources of funds for innovation (chiefly, entrepreneur's friends and family) and traditional sources of capital (banks) available to on-going concerns. VC's niche exists because someone with an idea or a new technology often has no other institution to turn to.

What's missing in the Partech report (and in most VC reports) is the average level of returns. This remains a well-guarded secret. Nonetheless, one can safely assume, as in most investments, returns follow the Pareto Principle or the Parable of the Sower theory – 80 per cent of the wins will come from about 20 per cent of the deals.

It is therefore possible that some VCs are not actually returning enough money to justify the risk, fees and illiquidity their investors are taking on by investing in their funds. But in all, it's all good to see the African ecosystem attract funding. It shows a hunger for value creation and outcomes for investors. So, long live entrepreneurs and the sidekicks that support them.