15 March 2014

Uganda: Venture Capital Dreams

A student working at Mara Launchpad offices in WandegeyaExperts outline the key challenges that are hindering the entrenchment of a venture capital culture in Uganda

In many developed countries, groups of wealthy investors, investment banks and other financial institutions seek out viable new ventures and give them capital to enable them take off. This form of raising capital is especially useful for new companies or ventures with perceived long-term growth potential but with limited operating history, which makes it difficult to raise funds on the stock market or to access credit from commercial banks. The unpopular thing however about venture capitalists is that they inevitably get a say in key management decisions of course in addition to a portion of the equity.

Over the last few years, venture capitalists have set up shop in Kenya, Nigeria and South Africa and have invested in start-ups that deal in IT firms, agri-business, healthcare, energy and natural resources, retail and consumer services with huge growth potential in almost similar socio-economic circumstances like Uganda.

In 2011, Mara Launchpad launched in Uganda to offer incubation and investment guidance to young entrepreneurs who display a high level of innovation and creativity in the structure of their young companies. They have the money - lots of it- but finding who to give it to has proven to be a challenge. Roy Gauko of Mara Foundation, the parent company of Mara Launchpad, says Uganda has quite some top notch innovations but converting these innovations into marketable products is the challenge. "Most of these innovations do not have market potential and as a result, we have decided to offer things like mentorship and office space to these young entrepreneurs," he says. Gauko also says most entrepreneurs in Uganda do not appreciate the idea of working with investors - they are single-minded. "In Kenya for example, venture capitalists can invest up to $250,000 or more in start ups because of the strong market potential of the business models."

It is possible the absence of these venture capitalists could be attributed to lack of a market potential where these tech-preneurs create brilliant products with the mentality of "build it and they will come". The recent apps developed by students at Makerere University such as Winsenga seem to vindicate Gauko's supposition. The software product is an app that can tap the heart beat of a foetus by connecting it to a smart phone. Such a ground-breaking innovation is a classic example of a start up that can be propped by a venture capitalist because it is high-tech in nature but its market potential is what seems to be its undoing. Ugandan entrepreneurs always complain of 'insufficient' start up capital and cite the long and odious process of registering a business in Uganda as a major hindrance. For lack of venture capital, most people who start businesses have to source money from their personal savings, friends and family members, plus the much dreaded- loans sharks.

Michael Niyitegeka, an IT consultant, agrees with Gauko. "Most of the tech solutions being developed are for the social good but are products that you cannot put on the market," he says. He says the venture capitalists that are in Uganda, would be interested in a short term kind of arrangement because there is lack of variety in start ups in Uganda. Most of these businesses are in poultry and farming. In Kenya, there is a lot of diversity and a number of venture capitalists such as Savannah Fund and Fanisi Capital, which invest in pharmaceutical companies, are slowly shoring up the small and medium enterprise sector. The Ugandan situation seems to apply to Tanzania, Burundi and Rwanda - the other countries in the East African region where the business sector is yet to embrace and appreciate the culture of venture capitalists in their set up.

In the US, where the idea of venture capital originated, 20% of public companies owe their initial start up capital to a venture capitalist. Some of the most targeted start ups for investment capital deal in energy, healthcare technology, software and digital media, construction and biotechnology. However, the true success story of venture capital-backed firms is found in Silicon Valley in California where technology companies have had a massive boost. Since 2009, venture capitalists have sunk $31.5 billion in tech companies, which include Pinterest, Square and Uber and on a higher scale companies like Facebook and Twitter.

The wealthy venture capitalists in the US like Sequoia Capital, Felicis Ventures and Accel Partners were able to incur such high risks investing in these companies because they were tech-oriented and hence possessed a high growth potential in tried and tested markets.

Stephen Kaboyo of Alpha Capital Partners, an asset management and forex trading solutions firm, attributed Uganda's situation to lack of knowledge about the concept of venture capital. "Most small and medium enterprises that are potential candidates of this capital are preoccupied with debt borrowing and do not see sharing ownership or equity participation as an option for their funding requirements," he notes. He says on the policy front, there are no guidelines that can be followed by investors as they sink capital in small businesses that are perceived to have long term growth potential let alone the lack of reliable data on these small and medium enterprises. It is therefore time for the policy makers to wake up if the government's vision of the SME sector being a key employer of the youth and a driver of economic growth is to be realised.

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