The Role of Inclusion in Venture Capital

Wednesday, 06 November 2019

 

A few weeks ago I attended a two-day national conference that invited some of the most prominent women in leadership, business and economic empowerment in both the private and public sector. The line up included the likes of Economic Advisor to the Republic of South Africa, Trudi Makhaya, World Champion and Human Rights Activist Caster Semenya and UCT’s incoming chancellor Dr Precious Moloi-Motsepe. In bringing together these women under the theme of empowering an inclusive and empowered economy, the role of investing in women owned and led businesses quickly became an emphatic theme. And in this editorial, we’re going to explore not only the role of inclusion in Venture Capital (VC), but the consequences of innovation and discrimination that has lead to the future of alternative capital.

VENTURE CAPITALISTS ARE DEVALUING THE DATA

It is no secret that the more diverse your team is, the more likely that your business is to thrive, and moreover, when that diversity is lead by women. In a study conducted by Mass Challenge and the Boston Consulting Group entitled “Why Women-Owned Startups Are a Better Bet”, over 350 startups were interviewed and assessed to determine which enterprises were not only more risk averse, but who yielded better financial returns. The results determined that businesses founded by women deliver higher revenue (at that, more than two times as much per dollar invested) than those founded by men. To add to this, the study also provided insight of how much more VCs could’ve made (an additional $85 million over five years) had they invested more money equally into both women and men-founded startups. This is a global phenomena, not only unique to the United States. The growing equality parity in both entrepreneurship and venture capital translates to men being more than 92% of the Top 100 venture capital firms and as an impact investment correlation, female-founded businesses are only receiving 2% of total investments by these VCs. This underpins the essence of what we’ll unpack soon, of how the VC mind works, and later why individuals (both men and women) and organisations have to deal with the consequences of the VCs decisions to devalue and disregard the data.

But first, let’s bring the ball back to the continent for a moment, and frame not only the consistency of the return on investment statistics, but also the challenges that female entrepreneurs face in an attempt to acquire or raise capital.

According to the MasterCard Index of Women Entrepreneurs 2017, sub-Saharan Africa has the world’s highest growing rate of women-owned and led businesses at 27%, with Uganda (34.8%) and Botswana (34.6%) leading the pack globally. As great and impressive as these statistics are, what compliments this ideal is that while on the surface more women are entering and playing the field, the staying power doesn’t read quite well. The continental region also lists it as the community that has the most women-owned startups shutting down due to little for opportunity for growth and lack of access to capital and resources.

In 2016, Venture Capital for Africa (VC4A) disclosed in their ‘VC4A Venture Finance in Africa' report, which captured the performance of early stage, high impact and growth enterprises from Africa at their crucial stage of early stage investor activity. Some of the data that is based on data collected from 1866 ventures from 41 African countries and 111 Africa-focused investors from 39 countries around the world unveiled included that only 9% of startups have women leaders, and that there is a direct correlation to the success rate of the venture based on the gender balance of the entity.

So why, as revealed in the African Development Bank’s inaugural Africa Investment Forum in 2018 hosted in Johannesburg, South Africa, do women entrepreneurs experience a significant funding gap of US$42 billion annually even though the numbers, time and time again support that they are better yielders of seeded capital?

A thought leadership piece in the World Bank blog shared by Makhtar Diop, the World Bank’s former Vice President for the Africa Region and now Vice President for Infrastructure, may help us in shedding some perspective.

BETTING ON THE HORSE, NOT THE STATISTICS

In his opening remarks, “Walk around a major city in Sub-Saharan Africa and you will quickly realize that women are a highly visible part of the economy, selling all manner of products and services. In some ways, women are powering the economies of the continent to a greater degree than anywhere else in the world; Sub-Saharan Africa is the only region where women make up the majority of self-employed individuals.” Diop affirms what the many studies conducted and reports released say about not only growing but visible rate of entrepreneurial activity by women on the continent. He then textures this foundational introduction with a much more granular approach in partially answering why this is the case of stumbling growth in women-owned ventures.

“What this fact conceals, however, is that on average women-owned firms have fewer employees, and lower revenues, profits, and productivity. In many cases, women’s businesses contribute little beyond basic subsistence. This limits the potential of women entrepreneurs and hinders economic growth and poverty reduction in Africa.” he continues.

Is he incorrect in his statement? No. However, two ideas that I do want us all to be cognisant of which one he further explains in the article, is that the patriarchal systems which are still in place for African women across the border of the continent. Women do not, and lack the access to the collateral that is required to enable them to access the credit capital, like land and property, these policies and framework are things that need to change so that women can start or develop their businesses.

The other big elephant in the inclusion conversation of venture capital that is widening the investment gap, is that of not only who carries the capital, but why and how that capital distribution always ends up circulating amongst the same racial and gender recipients, call it intentional super inclusive circular and shared value economies of and that scale. In as much as VCs look at outliers and the business and investment cases of startups, it is no secret that they also bet on horses that mirror them. Men (whom we unpacked earlier comprise of 92% of the Top 100 VC firms) are much more likely to invest in men-owned businesses than female ones, and according to a study led by Babson College's Entrepreneurship chair Dr. Candida Brush, it found that startups lead and managed by all-male teams were “four times more likely to receive funding than companies with even one woman leader.”, even with the shocking discovery that gender diversity at the top improves a startup's performance.

If VCs are such risk takers, why not take the biggest risk of them all, women?

THE INNOVATION CONSEQUENCES OF EXCLUSION OF ACCESS TO CAPITAL

It’s happening, too slowly but surely. This gender investment gap has actualised innovative solutions and some, even going back to the basics of group economics to ensure that more entities owned by women are funded and grow to the scale of potential that they truly deserve. Let’s unpack some of these solutions:

·             Using metrics like partnerships, capital investments, total number of companies invested in and the social and financial return on investment, Billion Dollar Fund for Women (TBDF) is committed to ensuring that its holding venture companies to investing in more women-founded companies. Implementing a self-funded, non-profit model, TBDF is a global consortium of venture funds that have committed to date (November 2018) $650 million to tackle the gender investment gap by pledging to increase their investments capital pools to women-owned companies, globally. The lobbyist approach has garnered some success stories like Rethink Impact, with continued increased investment in businesses founded by women.

·             Group economics is an ancient economic practice that’s now positioned itself as one of the most pivotal ways in which to raise capital, for pre-seed and early stage investment businesses. Entities like The People’s Fund, UpriseAfrica, iFundWomen and Portfolia are some of the companies who are doing exciting things in the space of impact investing and creating not only diversity of opportunities for minorities, but also enabling entrepreneurs to tap into capital that they wouldn’t have otherwise, had the access to.

·             The rise of the gender gap also gave rise to women-owned venture capital firms and venture networks who are intentional about investing in women owned businesses. Africa has provided great case studies and momentum to this with venture companies like Dazzle Angels, and Rising Tide Africa which is a group of women angel investors that are harnessing their power, network, passion and capital to positively impact and invest in an empowered and inclusive growing economy, and society.

·             Startups and organisations have now had to become technology adjacent in understanding their customers, business model and particularly financial services company, HOW they deploy capital. In his book Tech Adjacent, serial technology entrepreneur and thought leader, Mushambi Mutuma engages on doing business in the future and the importance of constantly evolving with the exponential technology and innovation that’s also growing quite exponentially in business. “What would make you absolete in a day? What technology are you terrified your competitors will figure out? How would we run this company with 10 percent of our current staff? How would you monetise if consumers expected you products/services to be free?”. These questions are some of what, I believe, have influenced how capital and credit is becoming more inclusive for women to be able to bypass the archaic banking structures and enable them to get their food in the door. The Women’s Entrepreneurship Development Project has contributed to the rise of female-owned businesses in Ethiopia by providing women with an alternative to collateral. This is in the form of a 45 minute psychometric test that provides a reliable indication of whether an entrepreneur and whether you will be able to repay a loan without any collateral required. At present, the repayment rate is at 99.4%. Another example of how being technology and future adjacent has served the venture capital and investment ecosystem is through the constant data science application and introduction of technologies like machine learning and artificial intelligence to aid with decision making, and also democratising who can become an investor. The funds in magnitude still lie with the wealthy to invest in “lesser risk averse male-owned entities”, but the opportunities to value the data and tap into the industry with impact investing and seeding the billion dollar potential of the global economy is fair game.

 

With all the data on the table supporting why inclusion, and particularly why investing in women owned businesses is important for the current and future of the economy, and AfDP’s President Akinwumi Adesina’s call for increased support to for women to be active stakeholders in the economy, why are we constantly accelerating towards the opposite direction when it’s time to seed the capital? The answer may not be as complex as we may make it to turn out, however we can applaud the innovative strides being taken to drive inclusivity and capital returns on these investments. The future of venture capital and investments is democratized, technology and data science adjacent and inclusive of breaking down archaic, exclusive and oppressive systems to ensure that we build inclusive futures and shared growth economies.

 

 

Published in Inno trep tech

A week ago, I attended in Cape Town, South Africa, the launch of the Southern African Venture Capital Association (SAVCA)’s 2019 Venture Capital Industry covering the 2018 calendar and its investment activity across South Africa. Since 2017, this is the association’s third consecutive year of publishing the survey, in previous years, the results would published every two to three years, which means that means that more growth is occurring in the industry and that coherently, more data has become available. Let’s unpack the landscape a bit, and understand what continues to make South Africa one of the primary hotspots for early stage investing in startups across the continent.

A total of 181 new deals were recorded in 2018, increasing by 13.8% from 2017; with the top five industries owing to deals invested mainly by value in manufacturing at 14.2% and food and beverage coming in 12.3%, medical devices and equipment at 10.5%, with energy at 10.2% and just missing the ten percentile at 7.2% is the business products and services sector. Manufacturing and energy still dominated in the market share of deals invested by number of deals, with consumer products, software and fintech specific portfolios joining them in the top five industries invested in. If anything, this shows the large investment opportunity in diversification of sectors outside digital and e-commerce, and also, brings to light the conversation around the harsh imbalance in and opportunities for other sectors like biotechnology and agriculture to break through.

 

The Western Cape headquarted investees dominate the pie at 48.2% of deals, with Gauteng coming in second at 42.5% and followed by Kwazulu-Natal at 6.8%, which has grown its activity and share in the ecosystem immensely since 2017. The rest of South Africa and non-South Africa firms total the transactions at 2.5%. The incremental growth that Kwazulu-Natal has shown, is a positive indicator of the diversification of location, from R13 million in 2015 of total deal investments to R71 million in 2018. Although the volume and value of deals increased in 2018 from the previous year, the distribution of equity preferences over the years is quite the opposite narrative. Expectantly so, due to the new deals being made, 74.5% of investors hold a 0-25% stake in these startup ventures, an increase in 2017’s results at 54.3% in equity. The second category of equity sits between 25-50% which has also subsequently decreased at 10.6% in 2018 as compared to 25.5% in 2017. The results owed to this data could either result in exits, new fund management firms created, new startup entrants who have no follow up funding and/or investors seeding a volume of investments in ventures that require much more startup and growth capital than other forms of capital post the growth stage – it’s also reported that a total of 79% of deals concluded in 2018 were for investments R10 million or less, with an average deal size of R8.3 million.

 

With the bigge deals concluded by Captive Government (funds primarily sourced from a government department or public body) and Captive Corporate (funds primarily sourced from a corporate entity such as a listed company) investors and amounting to R492 million (more than the five biggest deals in 2017 which totalled R315 million) who combined, make up 48.4% of fund management types. The rest of the types of management are fund sourced from family offices, independent funds and the smallest fund management makeup are angel investors at 4.2%. The composition of fund management also highlights something that the data doesn’t show, the gender and race that I’ve no doubt, through mechanisms like the introduction of the Section 12J tax incentive to introduce more players in the industry. As transparent and apparent as the situation of parity is in the ecosystem as investors and investees is, it’s important to highlight so as to better inform decisions made by the investors, as well as government’s role in introducing policy to level the playing field.

 

There’s much opportunity to diversify the industry, with not only location and sectors but also race and through gender as with the curated list that I created showcasing the data and campaigns geared towards listening to the gender of higher Return On Investment (ROI) in their capital. Repeat investments are a great indication of good faith in business, industry must afford transparency through these transactions beyond high-level number of exits and different types of investment activities that are great for panel-lead conversations, however, in order to bring true transformation, supporting the formation of firms like Dazzle Angels, AlphaCode and Africa Trust Group and SAVCA’s Fund Manager Development Programme are the kinds of mechanisms that we need to drive and actualise the opportunities that are untapped in the market.

 

Here’s to looking forward to results of accelerated and diversified growth of South Africa’s VC industry in 2019!

                                           

 

Published in Inno trep tech

 

A few Sunday afternoons ago, a friend shared an article written by a thought leader and known angel investor on the continent on the momentum that angel investing has been gathering on the African continent, and his hopes for the ecosystem in the near and far future. Once we’d both had time time to unpack the read, the conversation then triggered into the origin of this kind of investing and one of the major underlying themes of financial inclusion – collaboration, and in essence group economics. In Africa, the idea of group economics may be unfamiliar by English terminology, but the practice of accruing investments to enable financial inclusion is no foreign concept. 

What is Group Economics?

Group Economics is a concept that explains how individuals engaging in economic and financial activities yield better value for their money at the expense of lesser resources in savings by sharing the cost. An example of this would be through carpooling or a lift club and what Somali informal shop traders in South Africa do to grow their consumer base (and more businesses) in townships by buying their stock in bulk for other shop owners in the network. In true Africa-is-not-a-country style, different African countries practice similar components of group economics but under different names and models. In Ethiopia it is known as Iqub, while in Kenya it’s denoted as Chamas and Village Savings and Loan Associations (VSLAs) in Ghana. In this article, we’re going to explore what is called Vicobas in Tanzania and Stokvels in South Africa, informal savings clubs and how they are modelling financial inclusion respectively.

Banking on Stokvels in South Africa

According to the National Stokvel Association of South Africa (NASASA) there are more than 11 million stokvel members and the market is worth close to R50 billion (US$ 3.57 million) with over 820,000 stokvels currently in the country. In a recent study conducted by Nedbank, the most popular types of stokvels are savings, grocery and burial societies, with only 5% of stokvels focused on investment savings and 41% having bank accounts. While the profile of stokvels has always been middle-aged black women from low-income earning backgrounds convening and saving to buy groceries in December, the landscape is gradually introducing younger and middle class audiences who are using the model to generate wealth through means of property, investment and travel stokvels.

It’s not only banks that are wanting a piece of this inclusion pie, but so are financial startups like Stokfella who are bringing in a data and financial management piece to the puzzle. The platform is a management tool that enables members to facilitate their payments and claims, and grow their savings through investment channels, also enabling safety and transparency with all the members of the society. With over 9000 registered users who personally registered or were registered by stokvel executives, this application is an example of how the sector is unhurriedly being optimized both in revenue and the level of sophistication in formalising it.

Venture Capital with Impact through Vicobas in Tanzania

With a much more elevated and flexible approach from stokvels, vicobas carry out the mandate of empowerment through a model of micro-financing with economic, socio-economic and environment impact at the backend of it. Coined and conceptualised in September of 2002 by major organizations Social and Economic Development Initiatives of Tanzania (SEDIT), CARE International and World Climate Research Programme (WCRP), VICOBA is an acronym for Village Community Banks.

 So, how does the model work and how is it different from stokvels? And, how are the societies sustainable investment opportunities for the vicoba members and the wider communities at large?

It begins with members forming five unit groups and each of these groups and then joining each other to make a vicoba group of 30 members. Once the rules and regulations of the group have been set and amount of resources to subscribe is agreed upon, the members contribute their savings (shares) and social protection and then begin what can be a year long training and follow up cycle with financial institutions. After the financial education from a field trainer is completed, the vicoba members can start to support their own startup enterprises with each loan is then returned to the group basket account with added value.

The premise of the vicoba model is to stimulate low-income earning citizens by equipping them with the tools and finances to develop and manage income generating activities and catalyze developmental initiatives much like the Pastoral Women’s Council (PWC) through their economic empowerment programmes.

Investments Accrue when Sustainability is Optimized

Much like PWC, the heart of the group savings model was aimed at women enabling themselves to participate in the economy actively due to the systematic (and still very nimble) patriarchal society. Group economics has licensed gender and socio-economic empowerment to greater access to education and general participation from citizens otherwise not permitted because of their economic standings. And, don’t get me wrong, not all vicobas or Stokvels work out or are rosy, in fact, most of these savings groups fail at the stage of infancy due to lack of accountability, late payments, theft and lack of transparency within the members. However, the optimist and intrapreneur in me believes in these financial models of inclusion and their opportunity at optimization of exponential empowerment to accrue more investment, and to create more impact.

Conclusion

I truly believe that the future of financing businesses and impacting communities lies in the power of group economics, and next month, I’ll be unpacking this ideology in “Group Economics in Africa: Part 2, Impact Investing is no foreign African Concept”. Whether you’re a startup, a technology or financial expert or a citizen with money and an idea or a dream, this is definitely an idea worth betting on. 

Do you belong to any savings and/or investment groups? If so, what do you and your members save up for? Let me know in the comments section, I’d love to hear from you!

Published in Inno trep tech

New Role, New Industry

Monday, 24 June 2019

 So it’s been quite a first six months of 2019, which meant closing a couple of chapters, stepping up into a few and the start of new blossoming ones. As my journey with the global intelligence and media firm, Thomson Reuters came to a close in March of 2019, a new one began in June of 2019 with a pan-African investment and advisory firm Impact Amplifier. The career change has been an overwhelming and energizing experience so far that allows one’s creativity and expertise to be stretched at the opportunity to turn industry upside down through the business of ideas and impact acceleration.

 I'm in a new industry, which is quite an interesting, exciting and intimidating to say the least - that of the behind the scenes outlook at creation in private equity and venture capital investments. The firm looks at Social Enterprise Acceleration, Impact Ecosystem Strengthening, Impact Investment Services and Entrepreneur, Investment and Ecosystem Research which all have their particular sub-categories that respectively look at elements like investment readiness, new funding mechanisms, deal sourcing, advisory and so much more. The essence of these capabilities are all rooted in the working with enterprises who are committed to actively and intentionally do business that is impactful through the socio-economic and environmental lenses.

My role as an Associate in Impact Acceleration includes unpacking impact assessment coordination and management, coordination and participating in primary and secondary market research activities, driving internal and external investment/grant readiness and capital raising acceleration process for investment readiness programmes, building a new pipeline for business development and supporting the partners in investment readiness deals. Now I should warn you, no day is the same, and that’s what’s not also rewarding but allows for practices like deep mind when you’re focused on research on one day and being in the field with the customer and unpacking their theory of change. Now, in any workplace setting, one cannot mostly achieve anything on their own without the collaboration with an incredible team and colleagues. What’s really cool about the space that I’m in is that everyone comes from different backgrounds with a diversity of ideas, which when challenges arise, continue to push creativity and solutions envelope.

The impact investment and advisory ecosystem is an industry quite in its infancy globally, and moreso due to the costs associated with the processes and metrics in measuring impact. Stakeholders see the value in impact assessment - investees for their investors, investors for their boards, businesses for growth and organisational strategy etc. I'm really excited to deep dive more into the space, there is a lot of intelligence that exists, and moreso the value added to profits greater than economical. Here's to measurable and accelerated inclusive development, and learning and doing work that matters. 

Would you be interested in a Day of the Life of An Associate later in the year? Let me know in the comments section and we’ll make it happen J

 

                                                         

 

Published in Inno trep tech

My name is Vuyolwethu Dubese and I am 23 year old Girl in Media and Technology, exploring Innovation, Intelligence, Inclusion and Entrepreneurship. With a focus on African technology and entrepreneurship, the intent is to be a part of the ecosystem and organisations driven to develop the African lives and the narratives that are shape shifters in how Africans and the world perceive the continent.

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