By Tim Weiss on June 26, 2013
In a series of articles on VC4Africa, Tim Weiss explores private equity investment challenges in East Africa.
When investing, it is important to be aware of context-specific hurdles. Although investing is a risky business anywhere in the world, each market has its own characteristics. Below I’ll discuss 7 key hurdles to take when you are investing in East Africa, based on recent interviews I had with 22 representatives of (social) equity investment funds, consultancy companies, online news platforms and development finance institutions (DFI) focused on East Africa.
Highly fragmented investment market
In the East African Community (EAC) a diverse set of actors with an equally diverse set of objectives is at work. International foundations, NGOs, social impact investors, DFIs and government projects are mingling in the same space as incubators, accelerators, international & local banks, venture capitalists and private equity firms. The more players the better? This nexus of actors has huge potential, however, grant-giving institutions usually tend to impose different milestones on businesses then private sector investors.
Just to mention one example, getting a social enterprise off the ground with a grant might force an entrepreneur to concentrate increasingly on the target group and service delivery, rather than improving the business model so that it gets into shape for the next investment round.
A nonexistent labor division among the actors can create market distortion (i.e. overvaluation of companies) and substantially increase transaction costs for all. The loser in the end: the entrepreneur. In conclusion, an assessment is needed on the role that each actor takes up in the investment market right now, juxtaposing this with an ideal scenario that would allow adequate financing for entrepreneurs and an adequate deal flow for investors.
Most deals are realized within the more developed and thriving economies. Investing where the needs, but also the risks, are highest should be, per definition, task of social impact investors. However, do we see their major deal flow coming from Burundi, Tanzania or extending the scope, South Sudan or Zimbabwe? Whose task is it and who could be a partner in mitigating risks? A critical reflection is needed.
With regard to the seed funding stage incubators, hubs and risk-taking foundations seem to instigate a first wave of solutions to support not only startups but also the necessaryindustry infrastructure.
The deal flow, a constant concern for every fund manager, poses a huge challenge, as structures to catapult new business ideas to the investment-ready level are not yet fully in place. A confluence of factors is at work, though the scarcity of organizations that provide risk capital and the missing link to subsequent financing rounds are crucial and need to be addressed. Much needed seed financing requires risk-taking programs which identify and accompany promising entrepreneurs. Who is to take over? Avant-gardists, such as the Omidyar Network or now the Shell Foundation, jointly with incubators (i.e. iHub &Village Capital) and accelerators (i.e. 88mph) provide risk capital in the seed stage.
A successful blueprint on how to properly organize a deal pipeline in emerging economies is yet to come. It could have huge impact on the Pan-African region. Certainly, the current programs active in this space are of utmost importance, though they will not capitalize if a subsequent financier is not available that can bring the business to the next step, namely, scaling up.
Three factors are at play which influence day-to-day business : the way entrepreneurship is understood, the entrepreneur’s ultimate goal with the business and the new generation of entrepreneurs.
Firstly, entrepreneurs in East Africa are involved in a variety of business activities pertaining to various unrelated sectors. One may find that, in light of high uncertainty, an entrepreneur spreads the risk and therefore diversifies. Being engaged in various ventures is not a bad idea, on the contrary, it demonstrates an understanding of the market dynamics and what it takes to be successful. However, as an investor ready to invest in one of the entrepreneur’s ventures, what will be the repercussions of the investment for the other ventures? Will the entrepreneur dedicate all the resources to the portfolio company?
Secondly, the entrepreneurs’ or managements’ objectives in running a business may not necessarily follow the same rationale as the investors’. For a fund manager, the primary aim is to exit with the highest return (and/or social impact) as possible. The way down that route is manifold and an entrepreneur may follow a different mindset.
Thirdly, a new generation of entrepreneurs is coming up that is heavily exposed and interlinked with foreign business concepts. It is no longer a necessity to study abroad in order to get a sense of how other economies organize and structure their businesses. Academic concepts have been adapted and are being replicated at prestigious business schools, spreading wisdom on how to do business. External financing and (social-) innovation are prominent topics. In times of Massive Open Online Courses (MOOC) even high quality courses from Standford and other top universities are within ultimate reach. The African equivalent has just been set up by the African Management Initiative. This adds a dash of change to the “traditional” ways of doing business in East Africa, particularly observable in the tech industry and the increasing accessibility of rigidly structured family businesses.
Buying into a company is a serious commitment with certain obligations and rights. Enforcing rights, if necessary, can be tricky and it often times needs case specific and creative solutions coupled with patience. It is clear that the EAC member states continuously reform their judiciary system but it still leaves significant loop holes which can amount to a costly and time-intensive process with uncertain outcomes. Again, being aware that the judiciary backbone is not as strong as in other markets calls for explicit caution while structuring a deal and increased monitoring & control measures during the investment phase.
High prevalence of corruption
Unfortunately, when talking about business, corruption has to be addressed. Many people have written about corruption but the actual question remains: how to deal with it? From an investor’s perspective, the agenda is twofold. The investor needs to make sure that the equity fund and the portfolio companies stay out of it, otherwise, serious problems on multiple fronts will arise. No matter how small or big the investments are, the business context is influenced by unwritten norms. This calls for increased sensitization on corrupt behavior, be it in the own organization, in the portfolio company or with external stakeholders. Internal processes might have to be adapted and refined to actively reduce the likelihood of getting drawn into corruption.
Once invested, the question arises: to whom to sell? Even though we have seen exits occurring, a proven track record of successful exits and preferable exit routes is still missing. A deliberate approach on documenting these exits would greatly enhance investors’ and limited partners’ confidence. Up to date an IPO, at least nationally, is a dead end. An LBO or, if possible, an MBO, seems to be the most likely event of an exit. The question of who will be buying in will soon be answered as multinationals (i.e. Walmart, Google, Microsoft, KFC) and large private equity funds increasingly expand their outreach.
An article from VC4A – http://vc4africa.biz/blog/2013/06/26/7-key-hurdles-to-take-when-investing-in-east-africa/
Entities that would like to make worthwhile investments in Somaliland should not hesitate to contact Guul Group. That is because investment should not be done blindly, but should be spearheaded by a well informed entrepreneurial team with up to date hands-on information about the potential business environment. That is what Guul Group has to offer. With a wide network, business experience, projects management and marketing projects, Guul Group is the exact service provider that you need to provide you with invaluable consultancy services that will guarantee your business prosperity.
Business in Somaliland is lucrative, but that can be elusive if the initial process of setting up the business is not well done. There are a number of challenges that are associated with investing in Somaliland, particularly if it is by someone who has not done extensive research or contracted the services of a well informed consultancy company like Guul Group.
If you really want to do business in Somaliland and in extension, the Horn of Africa, you should contact Guul Group for its consultancy services in business, management and marketing.
Get in touch with Guul Group
HARGEISA (Somalilandsun) – Residents of some rural and urban communities in Somaliland are now utilizing
solar power as their main and only source of electricity.
According to Ms Asha Khalid 37, thanks to the portable solar bulbs sold by Guul Group-GG her 12 years son Master Hussein who is a 5th grade pupil can now do his homework at ease thus an improvement in his academic grades.
Hussein Adan who is one of the brightest students in Obsiye, used to struggle with studies in his darkened home due to lack of sufficient light as he mostly relied on the one kerosene lamp the family owned thus in great demand, but after his parents brought home the GG supplied solar bulbs things have improved rapidly for him especially at school.
“Apart from the brightness in our home, the solar powered bulbs have also negated the eye soreness our children used to perpetually complain about says the Asha Khalid who became a celebrity in her rural home in Togdeer region after she became the first to own the Guul Group Solar powered bulbs.
Informing that she always wished for such as a solar powered bulb without having ever seen one the mother of four says that she decided to buy four bulbs at a cost of $15 each after a demonstration by Guul Group sales teams in Burao town where she had gone to sell 2 goats with proceedings meant for her family’s month long dry rations.
Said she, “I made the decision impulsively as we boarded the truck back to Obsiye other women kept asking me why I had not bought food for the family and my response was to touch the fragile bundle on my lap”
With her main worry not the non-purchase of basic items she had gone for but her husband’s wrath she was lucky to arrive at her village at the onset of darkness thus light one of her bulbs which shone like a street lamp in the dark shopping centre”
“This was my salvation for instead of condemnation I was welcomed like the queen that the Guul group bulbs ultimately made me” said a smiling Asha.
As for her son Hussein, Now the 5th grade pupil can benefit from the solar bulbs Guul Group sells across the country. Hussein hopes the new bulb will light the way to his goal of becoming a teacher. “The solar-powered bulb is really a great help in finishing my schoolwork, particularly after sunset,” he explains, sitting at the table where he studies in the family’s mud-brick home in Obsiye, some 100km south of Burao, Somaliland’s second capital.
After attending school, the 12-year-old spends the afternoons working with his father and two brothers on the family’s three-hectare grain field; only having time to complete his homework in the evening, after sunset.
“I am happy that the Guul Group solar bulb has eased my study and doing school assignments has become easier,” Hussein says, smiling.
Promotion of usage of solar energy among pupils in Somaliland, who are future drivers of the country, will clearly send a message to them that in this country renewable energy has massive potential; raising awareness of alternative energy resources, in order to reduce their dependency on the power grid and kerosene whilst improving environmental conditions through clean energy technology. This vast potential remains untapped because of lack of recognition, low investment in renewable energy technology & research, and poor adaptation of technology to local needs,
Not only has Guul Group’s solar bulbs lit up education but small businesses as well
The country’s government is trying to tackle one of the unintentional consequences of growing power problems in Somaliland – the poor performance of students who cannot study at home – with Guul Group providing alternatives to help high-scoring students like Hussein.
BETTER, BRIGHTER, CHEAPER and CLEANER; Solar bulb
The Guul Group solar bulb combines the best in solar and LED technology to create a superior, yet affordable solar light. It’s made to last with up to 10,000 hours of LED light lifespan. The clear globe is made from the same shatter-resistant polycarbonate used in car headlights, and its high-temperature battery ensures it will charge efficiently even in the world’s hottest weather. Affordable, safe, sustainable and a healthy alternative to kerosene. The light cast from a kerosene lamp is poorly distributed, has a low intensity and is expensive. The poor lighting levels from kerosene lamps makes it difficult for children to study, affecting literacy and education, and minimizes the effective working hours for income generating activities. The open flame, smoke and soot from kerosene lamps endanger lives by reducing indoor air quality and increasing the likelihood of fire.
- The World Health Organization (WHO) report that there are over 300,000 deaths every year from burns
- Nearly 4 million women suffer from severe burns from open fires and kerosene lighting each year: similar to the number who are diagnosed with AIDS each year.
- More children die from fire related injuries than fatalities from tuberculosis or malaria.
Solar Bulbs mean more Business and income
Thanks to our solar lights, the likes of Amina in Hargeisa can benefit most and can work extra hours a night to generate more income for her 6 children and herself. Amina currently pays 4,000 Somaliland shillings per night for electricity in the market, equivalent to $222 annual savings. This money that could be used for food and medicine is spent on fuel instead. With quality solar light, a family can continue being productive – cooking, studying, earning extra money for the family – into the night. Each Solar bulb costs $15, portable with no strings attached; you just display and play (or work on this occasion). 6-8 hours of light during the night. It operates automatically from its light sensor so saving more energy. Of using disposable dry cell batteries therefore decreases the risk of contamination.
In the 2012 report by the World Bank, Doing Business in Hargeisa, access to electricity is the biggest obstacle for enterprise in the region, compared to corruption and tax administration, 21.5%, 7% and 2.1% respectively. Since 2010 the group has sold 2.4 million energy saving light bulbs through GK Businesses which operates in the UK, to over 100 customers from more than 33 countries including Holland, Poland, Greece, Japan, South Africa, Zimbabwe, Russia. Customers included multiplex construction firms, international traders & exporters. GK Businesses had taken advantage of a small window of opportunity and a UK government subsidy which was to provide energy saving bulbs to every household in the UK.
“This partnership illustrates our commitment to alternative energy, combating climate change, sustainability and green growth. Our green products include cutting-edge solar technologies that are 1) practical, 2) Affordable, and 3) Intuitive.” GG’s partners are at the forefront of the renewable energy revolution, using ingenuity and innovation to harness sunlight’s ubiquity & employ it in ways that will potentially change the lives of the 1.3 billion people living without access to electricity around the world.
A socially enterprising product that focuses on providing affordable lighting specifically for low income populations that do not have access to electricity Guul Group (GG) is on a mission bring affordable, renewable and efficient lighting to 500,000 people in Somaliland by the end of 2014 & 3.5 million people across the Horn of Africa by 2017 and help eradicate energy poverty.
A business that invests, continuously seeks investment opportunities, provides forward thinking services whilst striving to ensure that there is a great push for Corporate Social Responsibility. The Group’s vision for an environmentally friendly and sustainable growth is guided by strong values of trust, credibility, quality, integrity and transparency. Guul Group recognises that we are all custodians of the environment and is committed to playing a purposeful role in reforestation as well encouraging a greater use of solar energy. One of our strategic pillars is ‘Green Guul’, with a priority to ensure the environmental and socially responsible development of new industries and to boost local value edition.
Guul Group is a corporation that has a sizeable portfolio and is operating across a range of sectors that include agriculture, livestock, and consultancy. It has striven to establish and bolster trade within Somaliland, Somalia and the rest of the Horn of Africa. Drawing upon extensive local knowledge, experience and contacts it is well placed to facilitate investment and commercial activity with impact.
For more information on Guul Group Solar power bulbs
Call: 0634018166-Telesom or 9098181-Somtel
Or visit the company’s premises
At the Star Tower, Main Bridge Road, Next to Telesom Tower, Hargeisa, Somaliland
Guul Group www.guulgroup.com
Doing Business in Hargeisa http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Subnational-Reports/DB12-Hargeisa.pdf
Forward thinking services
Horn Of Africa Business Association http://ha-ba.com/somaliland%E2%80%99s-returning-diaspora-proving-to-be-a-dynamo-for-development/
Green Growth with Guul Group
It’s true, things are changing out there, and if you’re a business, you need to change with the times. These days, if you want to have any kind of market share you have to have what is commonly known as ‘authority’. People will only trust your marketing efforts and your company as an entity when you appear to have authority. Why? Well, there are hundreds of companies that do what you do. To step out from that particular group you need to show that you have something of worth. And knowing more than the other company does about your field immediately marks you out as a company worth listening to. Here are some quick tips and pointers to help you do this.
Your first real job is to establish through showing. This means making sure that your website and marketing materials show just how much of an expert your company is in your field. The true marketing magic comes in showing that your company has established a position of authority. This only comes when you show them rather than tell. It is easy to say that you are the best at what you do, but showing them through testimonials is one hundred times more effective.
Make content important
Expertise is also shown through expert content. Your company or organisation has to show that you know what you are talking about by providing content that people want to read. This means whitepapers, articles, press releases and so on. Make sure that you, or the writers that you hire, create content that your customers and prospective customers are truly interested in. It is of no use to create content that means nothing to them.
Expertise comes with showing that you are viewed as an expert. The simple solution here is to ensure that you have a lot of content all over the Internet. For example, a guest post on a highly ranking blog will guarantee that people will see you as someone who has insight and deep knowledge of their field. This means that people will then naturally gravitate towards you as someone they can trust. Pick any of the top companies today online and they will have acres of space devoted to them by the Web. This space may be on their own website and platforms, or it may be on other platforms, such as guest posting or articles they have created for other people.
You must develop authority online if your company or organisation is to be viewed as one that can be trusted and then bought from. This means hard work ensuring that content is relevant and up-to-date. Hire the best writers and marketers, and ensure that they produce the best content for you. This way you will be guaranteed high quality work that brings in leads for your company. Any company or organisation that does not build authority in this way will not be around for long.
If you are looking for support in managing your business in Somaliland and Somalia then get in touch with us here at Guul Group. We provide specialised Somali consultancy, marketing and project management that has helped Somali businesses thrive and manage their project goals throughout Africa. ‘Guul’ meaning ‘success’ in the Somali language has been incorporated with the English word ‘Group’ to portray and highlight the amalgamation, collaboration and affiliation of successful Somali and foreign investors. Drawing upon extensive local knowledge, experience and contacts it is well placed to facilitate commercial activity with impact.
Guul Group www.guulgroup.com
Doing Business in Hargeisa
Forward thinking services
Horn Of Africa Business Association
Green Growth with Guul Group