The opportunities for start-up investment in Francophone Africa have improved considerably over the last three years but remain challenging. Russell Southwood talked to Olivier Furdelle, co-founder, Teranga Capital about what he's looking for in an investment.
Olivier Furdelle describes the spark for the launching of Teranga Capital happening "by coincidence as happens with many things in business life." He first came to Senegal in 2010 when he was working alongside an investment fund as a consuktant on impact investment.
Through this work he met his co-founder Omar Cisse, then General Manager of Dakar tech hub CTIC:"It took us some time to launch. I supported the incubator and some of the start-ups. Access to finance is very complicated for start-ups. The idea for Teranga Capital was born in 2013/14. We were pioneers and the investors we approached were very cautious about SMEs and start-ups."
One of the initial challenges was what Furdelle describes as the "high level of informality". The local start-ups were not familiar with equity investment and they had to work quite hard to identify potential projects." However, eventually they broke through and found their first investor, Investisseurs & Partnernaires who had invested in West and Central Africa:"We teamed up with them in March 2016."
The fund size was the equivalent of US$7 million:"We were atypical in terms of size and mission. We invest in the low end of the spectrum, between US$50,000 and US$0.5 million in equity. This scale is something that's not traditionally done". In terms of geography, the funds are targeted at Senegal and neighboring countries. Other investors in the fund now include: FONSIS, Sonatel, Askia and SGBS.
It now aims to make 3-5 investments a year at these ticket sizes and as Furdelle puts it:"You don't need to have a large fund to do that." But he's holding open the possibility of raising more funds once the initial amount has been invested.
It currently has eight investments it made in 2017, seven in Senegal and one in Gambia. It invests as a minority shareholder, holds its investment for five years and will then look to recycle its investments by being bought out. It also has got funds from donors to seed fund and accelerate four companies.
It wants to be diversified in terms of the companies it looks at but is interested intech, education, health and agricultural production. One of its main criteria is that it wants to invest at proof of concept stage.
Three examples will give some idea of the kind of investments it's looking for. The first of these is Croissance Golden Nuts and Grain that processes cashew nuts. It had been going for 20 years but a generational change happened when the key figure in the company's daughter took the helm. She wanted to raise funds to "dynamise the company".
Teranga put in US$200,000 in equity and is giving technical assistance. The most immediate step was to create a more modern production facility so that it could meet both local and international demand:"It is proving to be an impactful sector and we are an impact fund."
The second investment example is a rural electrification company in Senegal led by a founder who spent 20 years in project finance. It applied for and got a rural electricity concession aimed at those beyond the main state power grid. The company operates on a pre-pay basis using mobile money.
To provide power it operates on a hybrid model, building out medium and low voltage power lines with solar as a back-up. It needs CAPEX to roll-out its infrastructure and might apply for larger concessions once it has shown it can operate at a smaller level.
The third investment example in its portfolio is a company that has built a delivery network that covers both Senegal and Benin:"It's logistics on the back of e-commerce. People like Amazon do not deliver in Senegal. It is able to offer anything from spare parts from China to clothes on the back of a strong tech platform."
The size of its deal pipeline is interesting. It is approached by hundreds of companies every year. Of these, it will have a full discussion with 30 of them and properly evaluate half of them. Of these, it will invest in five:"There is a lack of maturity and quality in the companies that come to us. There is a lack of formalization and there is almost no information about the markets they operate in. Often it's just a nice product."
"There is a lack of a strong commitment to transparency and there needs to be that commitment going forward. Often proof of concepts lack clear elements of demonstration even though they have been through accelerators and incubators."
Are the Francophone markets large enough to grow successful start-ups?:"They're not big enough but it goes back to our investment strategy and it's about the difference between the traditional and tech spaces. So for example a supermarket can be the right platform for the expansion of small traders and if there's sufficient expansion, there will also be export opportunities. In the example of the first company above, it started exports two years after investment.
He argues that in the tech space you need high scalability and growth rates and that by themselves, Senegal and Gambia are not sufficiently large:"From the start we need to embed a regional strategy covering at least Francophone Africa and then Ghana and maybe Nigeria. We believe that this is something that's extremely important. There are few companies that have expanded regionally. We have seen the challenges and the first but it's been promising."