One of Europe's largest VC funds Partech Venture has launched an Africa Fund. Russell Southwood spoke to General Partners Cyril Collon and Tidjane Deme about what excites them and what they're looking for.
Cyril Collon, and Tidjane Deme got into VC investment out a desire to do something more meaningful than the long corporate slog. As Deme put it:"I was wasting away at Google and we said to each other, let's step out of the corporate comfort zone and do something meaningful. The question was then whether to launch a start-up business ourselves or build a proper network to get top tier partners in venture capital to think about Africa differently. In the end, we said let's raise a fund to invest in African start-ups. We both saw a lot of potential on the continent for start-ups to tackle fundamental problems". Collon had already lived (as a child) and worked on the continent for a large part of his life and was thus very familiar with both the problems and potential to be found on the continent.
The Partech Africa Fund was launched with commitments of around US$70 million and is continuing to raise funds. The objective is to close with €100 million ($122 million) by the end of the summer. The investors are a mix of institutional investors, DFIs, corporates and family offices. One third of the funds comes from family offices, High Net Worth individuals and entrepreneurs.
The corporates include Orange, Edenred (employer benefits), Gisse & Co (urban services like advertising spaces, shared bicycles and smart city services) and JCDecaux. The Africa Fund forms part of Partech Ventures overall portfolio of over US$1 billion in the last 18 months.
The thing that Collon and Deme hope will mark them out as different from other Africa investors is their ability to match the corporate need for innovation with start-ups that can bring about the changes they need to make:"The corporates will have a team on their side to absorb the information and we will invest and get things to proof of concept and contract quickly. This will be one of the main angles we'll develop and will be key in our strategy to being successful on the continent".
So how does the African start-up landscape look to them? Deme notes:"Despite the bad things said about African tech hubs, nearly everywhere has one and they are attempting to create start-ups. At the next level what has changed is in terms of the maturity of start-ups. We're seeing more and more start-ups ready for series A".
"Most funds are focused on Lagos, Cape Town and Nairobi which is where three-quarters of the investment has been made but it is not three-quarters of what's actually happening. There are places like Senegal, Cote d'Ivoire, Ghana, Tanzania and Egypt that are not receiving attention from investors".
Although it has a clear idea of where it would like to invest, attitudinally it's looking for things that will set their pulses racing. Collon observes:"We're generalist and opportunist. It's what excites use. There's a lot of activity in fintech and we're excited by what enables downstream activities: financial inclusion, data and off-grid, the outcomes of fintech".
Their investment strategy has three pillars: fintech, mobile internet consumer services (entertainment, e-health), B2B enterprise segments and a cross-cutting theme, the informal economy. Under fintech it's looking for new ways to provide financial services through mobile, off-grid and things like insurance:"You're building in a different context in Africa."
It sees lots happening in the B2B segment and it's where it has made its first investment:"There's lots happening and it represented 10% of investment last year but only 3% the year before." It sees SMEs and informal businesses as a huge potential market. It wants to help the informal economy by using tech to solve problems people in it face.
Its first investment is in Nigerian start-up Trade Depot in which it has invested US$3 million. Collon lays out the why:"There are three levels of problem for FMCG distribution in Africa. There are big brands and importers, formal entities operating across Africa. For example, Coca Cola has 150 distributors. 2,000 informal wholesalers and 600,000 informal retailers. It's not able to see completely the distribution network below the first layer".
"It can't push promotions because intermediaries will eat it up before it gets to the customer. Wholesalers do the rounds (to see if an outlet needs more) and come back with only a half empty truck. It makes for expensive logistics. Retailers often need to close their shop to go off and get new orders. There's a need for a single platform for retailers and wholesalers using USSD. You then get paid by the brands and distributors".
"That's the FMCG space in Africa but it's also a description of most of the retail space in Africa. Trade Depot have come up with a very lean model. It's getting great response from FMCG brands it's talked to. It's got a great partnership with Coca Cola. It's spent at least two years meeting all the major brands at executive level and can bring this app to a Unilever or a Proctor and Gamble".
"We love the informal market because the impact (of start-ups like Trade Depot) is huge. We see e-commerce as a major trend. We believe it will go from about US$2 billion now to US$375 billion by 2025. The challenge is to provide tools that will help bring about that change".
It is in the closing stages of making other investments:"They are about addressing the digitization of the informal sector from the transaction side".
So what kind of start-ups is it looking for?:"There are many who are big only in say, Nigeria. We're not really going to be helpful to them. They need to have cracked one market and scaling and growth are the next step". It invests in Series A and B rounds with between 1-5 million euros and has the capability to make follow-on investment of between 10-15 million euros.
Collon and Deme feel that some of the current valuations of African start-ups are on the high side, something that they find frustrating:"When engaging with start-ups, some entrepreneurs in some sectors have been exposed to foreign investors. That's easy money and not really thought out. So you have first rounds with very high valuations. That's not our space so we sometimes have difficult conversations where valuations have been too high. We don't want to be the guy pushing for down rounds or flat rounds so we've had a few frustrating conversations".
The Africa Fund will work out of three offices on the continent: Dakar, Lagos and Nairobi:"When were thinking about the Africa team, we knew we had to sit in Africa. There is no (single) good place that works. Sadly the best place to put a team would be London or Paris but we like to be on the ground to get the context, We spend a week a month in Paris and the rest of our time in Africa".
"If you look at the entrepreneur in Lagos, he's often a "repat" (someone back from the diaspora) who knows Nigeria and Europe or the USA well but doesn't have contacts outside of these areas. African people (in a particular country) know their country and sometimes Europe. We should be able to open doors for them. For this reason, our team is larger than is typical in Europe".
So which start-up segments do they see as "over-traded'?:"It's not exactly over-traded but the off-grid energy model will require a lot of capital and it's not entirely proven. It's still in an early stage where a Series A is US$40 million out of a VC. Companies in the sector have begun to separate finance of commodity debt and the services through equity. Debt has doubled and trebled. We have looked at tools for platforms across the sector".
"On fintech, where rounds are very large, they are overtraded on some aspects. If you break it down, there are tons of start-ups doing payments but Fintech is not just that. The rounds and valuations are way too high".