Venture capital deployed in Africa in 2022 grew compared with 2021 and the continent was the only one to attract more venture capital than in the prior year, which indicates growing trust in the broader investment ecosystem.

There are, however, still a lack of companies providing early-stage solutions, venture capital development company Founder Factory Africa investment manager Philani Mzila said this week.

"Africa needs more instruments to develop companies, especially smaller technology-based companies. For example, an agricultural technology company in Kenya, despite being principally a software company, has to pay a lot to secure equity.

"However, such a company should not need to rely solely on equity funding to support its growth, but should rather have access to other instruments, such as grant or debt funding. Therefore, it would be ideal if there were more players in the investment ecosystem to provide competition and greater risk appetite," he said.

Mzila was speaking at a roundtable discussion on African investment opportunities and challenges in 2023 hosted by Founder Factory Africa.

Southern Africa-focused private equity firm Spear Capital partner Bryan Turner expressed similar opinions, noting that, while the firm found many investment opportunities and could take its time to craft the most appropriate funding solutions for all parties to investment opportunities, there was insufficient capital in the region.

It would be better if there was more competition and more investment companies competing to fund companies looking to grow across value chains.

"We fund companies in the consumer space, and their main constraint is working capital. Debt funders, for example, do not provide working capital for such companies and we therefore have to work with these companies to fund this constraint from other sources of capital," he said.

Debt was playing an important role in covering the gap in funding between traditional finance and senior lender offerings, which focused on secure funding, and the funding mid-market and growth companies needed to grow, said impact investment and private credit company Norsad Capital investment director Zubair Suliman.

"Once this gap is bridged, that is where we come in to provide structured facilities, such as stretch debt, and other credit solutions aimed at achieving a desirable impact. Our solutions provide mid-market and growth companies at this inflection point with the capital they need to reach the next level of development," he said.

There are investment opportunities available across the continent, although each country and each company and their fundamentals are different.

"The most important thing we consider is the character of the company, its people and its leaders, and then we look at how the company can make a postive impact. Our focus is not on the returns. If the company makes an impact, it will make money, especially in growing the economies on the continent," he explained.

"Further, we then look at the resilience of the business. All the challenges businesses experience, such as the impact of Russia's war on Ukraine, the predicted global recession and the disruption of supply chains, happen periodically every five, ten or fifteen years. The most important things are the fundamentals of the business and its management, and resilient companies will be able to navigate through the challenges," Suliman said.

Turner posited a similar opinion, explaining that most investors would look at Africa and say that there were not opportunities or that they were too risky.

"However, billions of people on the continent need to eat and want to better themselves. They want a better life and economies. Investment companies must be able to see what is on the other side of an investment journey to identify opportunities.

"Spear Capital is headquartered in Harare, Zimbabwe and, to be able to identify the opportunities, you need a view from within an economy. For example, our investment in Zimbabwe dairy producer Dendairy contributed to good quality and more affordable dairy products put on the shelves by a local producer, as most dairy products were being imported. This is not an opportunity you would see on a trading stream in London," Turner noted.

Similarly, Founder Factory Africa invested in 18 ventures across the continent over the past year, said Mzila.

"In the African context, you must invest in an uncertain environment. However, there is also a lot going on, with various investment climates and factors in each country and region. This view has allowed us to identify opportunities, even in volatile markets. This is also one of the reasons we are bullish about the opportunities," he said.

SUSTAINABILITY INVESTMENTS
Meanwhile, each of the speakers highlighted how they viewed sustainability of investments, especially in the context of the global energy crisis and the need to align developments with United Nations Sustainable Development Goals.

Mzila, for example, highlighted the investment Founder Factory Africa made in macadamia shell filtration systems to produce potable water for farmers and local communities on a renewable basis.

"Water challenges are under-addressed, and there are significant opportunities, as the scarcity of water is well known," he emphasised.

Turner highlighted that Africa had many of the minerals that were essential to combat climate change and for which the world was scrambling. Africa should look at developing value addition in mining and minerals and, similarly, there were significant investment opportunities in agriculture to allow the continent to feed not only itself but also export its produce, he said.

Further, he emphasised that there was a significant opportunity to get more women into all aspects of economies in Africa, thereby potentially doubling the workforce and helping to unlock the exponential growth it needed for development.

Meanwhile, Suliman said he would focus on providing power for the commercial and industrial space.

"This is already happening, but these opportunities are not yet part of the typical bread and butter investments of companies. We are looking at this space to identify where we can have the most impact.

"For example, providing rooftop solar panels in rural areas and for small houses can enable them to be electrified without the need for transmission infrastructure. Payment for electricity used can be made directly to the company. Such systems are mobile and would have an immediate impact, simultaneously improving the investment climate. Supply chains for other products and services can then come through and build other infrastructure thereafter," he said.

Further, Turner added that Spear Capital would probably not necessarily fund solar panel manufacturing but would focus on the additional products and services required to make such a value chain successful.

Mzila proffered a similar opinion, noting that, to create solutions from renewable energy technology, the adjacencies were necessary to allow for the efficient deployment of renewable technologies and allow startup companies and eventually portfolio investors to participate.