London — There's a 'missing middle' in investment terms for African ISP businesses that have got beyond launch but can't afford expensive local capital. Connectivity Capital's solution to the problem is to offer loans to help them scale up. Russell Southwood spoke to Jim Forster, General Partner and Ben Matranga, Managing Partner, Connectivity Capital about their plans.
Jim Forster joined Cisco in 1998 and since leaving has always focused on roles and activities that extend the reach and usefulness of the internet. Over time he has invested in a number of ISPs in Africa and elsewhere.
In 2008 he brought together these investments in INI Holdings as a way of attracting more investment capital. It offered equity and convertible notes and started as a tech fund before narrowing its focus down to ISPs. The portfolio includes airJaldi (India), Mawingu Networks (Kenya), Habari Node (Tanzania), CTN (Malawi) and Too Much WiFi (South Africa).
Jim and Ben met when they were both on the Board of early agtech pioneer eSoko in Ghana. Ben was working for the Soros Economic Development Fund and had made an investment in eSoko alongside Jim. They got on well and Jim invited him to work with him on INI Holdings.
"Ben kept pointing out the advantages of debt. There's twice as much debt as equity in the USA. We had discussions with Facebook who liked the idea and Connectivity Capital was born out of those discussions". So INI Holdings became an investor in Connectivity Capital.
Three factors have attracted Connectivity Capital to investing in the "poor sisters" of the communications world, ISPs: falling hardware costs, falling CAPEX costs and the falling costs of backhaul. They have been looking at a mixture of companies, some building terrestrial networks and others fixed wireless networks.
The logic is that "everyone's using WhatsApp and they want to get on to a WiFi network to use it." They believe that Africa is at the point Asia was ten years and it will grow rapidly:"Mobile customers will continue to exist but will want access to both services."
Although the ISPs will have to be making money, it also sees widening connectivity as part of a broader social purpose:"All the development SDGs ride on cheap connectivity. If we can provide that, then these things will continue to flourish."
It offers loans from US$200,000-US$2 million (the missing middle in investment terms) and has started with a pilot fund of US$3 million raised from INI Holdings, Facebook and a Family Office:"Transactions will be at market rate or slightly below."
There's a lot of interest from the DFIs (Development Finance Institutions):"They can invest at six digits but can't hit our price point. It's much smarter for ISPs to build out infrastructure as you develop a network of networks and there's a culture of ISPs working together.
The aim is to allow ISPs to expand without having to go through the whole process of investment. It means that they can start expanding in bite size chunks:"The aim is to take on an entity that works and help it recycle the money fast."
The fund is global but in terms of the countries it has its eye on, these are the countries where backhaul costs have been driven down and there is a reasonable regulatory environment. In Africa, these include: South Africa, Nigeria, Kenya and Tanzania.
Examples of its loans include Too Much WiFi in South Africa:"It's a great example of the right product, a massive problem and latent demand. It's using the same tech stack as WiFi hot-spots but bringing the product to the home. It's innovating in terms of pricing, billing and street level marketing. It can give you twenty times more bandwidth value than MNOs. People are being drip-fed the internet on prepay purchases." Matranga makes the point that people use the internet very differently when they're not worried about running out of bandwidth.
Its second South African loan went to Voice and Data based in Johannesburg. Historically it ran a distributorship for PABXs and through this got involved in supplying connectivity. Over time it became a much larger part of its business and it now sells internet and VoIP services over both fibre and wireless.
It's also close to signing a loan deal in Kenya:"We've looked at some but had to say no. We said to them, get your financials in shape and come back to us. The ideal loan opportunity for us is to finance a capital expansion over the next 12-24 months. In that way, the borrowers aren't taking funds they don't need. If they miss a loan payment to us or revenue targets, they don't get their next loan payment."
So what's its five year ambition?:"It would be good to take ISPs from thousands of subscribers to tens of thousands to millions of subscribers. We want to see them build the operational systems to be able to manage an investor. There's no perfect 'missing middle' investment but we're shepherding people through the process. It's a two way exchange of information."