Dr Iqbal Surve, Chairperson, Brics Business Council spoke to CNBC Africa about key agreements that were signed at the 10th Brics summit and how they will create opportunities for small businesses.
U.S. government debt stands at more than $21 trillion. Does it matter? CNBC’s Elizabeth Schulze explains. —– Subscribe to us on YouTube: http://cnb.cx/2wuoARM
The Silicon Valley venture capital (VC) model doesn’t work in Africa and other emerging markets, argues Manuel Koser, the managing director and co-founder of Silvertree Internet Holdings.
The funder likes to refer to itself as a “investment growth partner” holding stakes for a longer period in those it invests in than your traditional seven to eight years that most VC funds do.
Koser’s latest remarks — made in an emailed article to Ventureburn — follow those made in November last year by co-founder Paul Cook.
Cook at the time charged that African angel investors and accelerators are doing a disservice to entrepreneurs by mimicking the Silicon Valley model of glorifying the pitching of ideas – rather than helping entrepreneurs to better execute on these ideas (read more here).
In search of unicorns
Koser argues that to have a fund that is self-sustaining, one needs about $25-million in assets under management. “But in an emerging market context, it’s incredibly difficult to find enough quality businesses to invest in to hit that number,” he adds.
At smaller numbers, however, say two or five million dollars deployed, the fund’s economics cease to make sense he says.
The Silicon Valley VC model doesn’t yet work in emerging markets, argues the co-founder of Silvertree Internet Holdings
He says this often leads to poor risk-adjusted investments, as well as limited due diligence due to cost constraints. “In funds operating with, say, $10-million dollars or less, the entrepreneur – the fund’s general partner – also often starts to overcharge the fund,” Koser adds.
“This suppresses returns. Investors soon begin to feel that they should rather have put their money in, say, the JSE, given that the All Share Index earned an annualised return of around 10% per annum over the past 10 years. And which would have been a liquid investment too, versus the illiquid private investment of a VC.”
The core is this: “Most emerging markets are simply not ready. You’re often chasing unicorns in a small market that’s not yet scaling.”
Implications for startups
Far too often, says Koser, startups in emerging markets are also coached to follow the “Silicon Valley” model – finding a disruptive idea, building a proof of concept or minimum viable product, and then hitting the pitching circuit to secure VC funding. If the VC model doesn’t work, however, what does this mean for these startups?
“New businesses in emerging markets normally need to focus much earlier on viable unit economics and even profitability than in established VC hotspots.
Secondly, they need to look beyond classic VCs to other capital sources – which absolutely do exist. Complaining that, “VCs don’t support startups,” misses the point that the VC model itself struggles – so startups need to change their approach to capital access.’
A reality check on returns
Koser notes that the European Investment Fund, for example, recently revealed that its 10-year net annualised VC returns were just five percent, though the numbers are picking up a little more, now, he adds.
“Even on global basis, venture capital as an asset class does not outperform the S&P 500. Meaning VC on average also doesn’t justify the risk, given the illiquidity of the investments,” he says.
So, why the glow? Why invest in VC at all? “Because the top funds – even the top quartile of funds – are completely outperforming,’ notes Koser. “There, you’re seeing exceptional returns, which are becoming self-fulfilling prophecies.”
Write-ups and write-offs
“Take a typical group of 10 companies in which a VC firm invests. In a normal scenario, many of those companies will simply be written off,” Koser explains. “One or two will pay back their investments. One may double or triple investors’ money.
“So then, out of those 10, one company needs to make 50 or a 100 times its investment if the fund is to make decent returns. This is very hard to do in a small market as exits north of $100-million are very rare.”
Koser emphasises: “Exits of that magnitude are only possible with scale. Which is why emerging markets often can’t deliver. Of course, it’s possible for a South African entrepreneur to create a world-beating product with global scale, but it’s incredibly difficult.
“You’re at a disadvantage if you’re trying to build a global business out of an emerging market because you’re competing with developed market networks and capital.
“If on the other hand, if you’re in an emerging market trying to make a product for that emerging market, the local market is often very small. It’s the reason why many emerging market VCs with only five to $10-million on their books are unhealthy – they’re scrambling for cash,” argues Koser.
Featured image: Manuel Kos
Technology Company Google is aiming to provide high-speed wi-fi hotspots in Nigeria through its Google Station in a bid to provide internet access across the country. With an initial launch in Lagos, Google plans to reach 200 locations across 5 cities by the end of 2019. CNBC Africa caught up with Google’s Nigeria country manager Juliet Ehimuan Chiazor for more
INVESTEC Asset Management’s Africa-focused private equity fund has acquired a significant minority shareholding in technology services firm wiGroup for an undisclosed sum.
The plan is to help the firm grow and sell more software to corporate clients and mobile money issuers in Africa.
wiGroup delivers solutions that enable corporates to accept mobile transactions. It helps firms move their loyalty cards to mobile applications. A total in-store mobile transaction value of more than R4bn has been processed securely to date.
“We want to capitalise on its presence and the position it has built in SA. The second aspect is to help the business win more customers and get business outside SA,” Investec’s private equity investment principal William Alexander said.
It is in a partnership as well with Interswitch, an electronic transaction switching and payment processing firm in Nigeria. The Investec Africa Private Equity Fund II has also invested in telecoms towers business IHS Africa in Nigeria and IDM, a debt management company in SA.
China surprised the world on Tuesday by devaluing its currency, in a move likely to boost Chinese exports and support the country’s flagging economic growth. The change to the currency’s value was the most dramatic one-day change in two decades.
The move is likely to stir intense concern, as political leaders, especially in the United States, have long complained that China leaves its currency at a lower value to boost its domestic industries.
Over the past decade, China has let the value of the currency, known as the yuan or renminbi, rise, but the announcement by China’s central bank Tuesday is sure to reignite debate over whether the country is giving an unfair advantage to its businesses.
The Nigeria-UK Capital Markets Project Tuesday launched its inaugural report on the state of the Nigerian capital markets, stressing the need to boost the integrity of the markets, improve information disclosure, reduce potential for manipulation, promote transparency and good governance and generally improve standards and investor confidence.
This came as the Lagos State Governor, Akinwunmi Ambode, said that tax incentives could be a major catalyst for greater capital flows into the capital market in Nigeria.
Generally, the report has detailed recommendations for the legal and regulatory environment, and the overarching aim to deepen market capacity and attract domestic and international investment.
However, one of the key recommendations is the establishment of a platform through which market participants can collectively focus on key issues around market development.
The report was unveiled at a short ceremony at the Nigerian Stock Exchange (NSE) in Lagos. It is the first in a series of research papers that will analyse the state of Nigeria’s capital markets and make recommendations for improvement.
The report is the product of several months of collaborative work between the Nigerian Capital Markets Solicitors Association and the Law Society of England and Wales.
Other recommendations by the report include: reducing the cost of capital markets transactions and tightening the regulatory enforcement process, introducing an efficient and reliable dispute resolution mechanism as a central mechanism to secure investor confidence, reforming elements of the tax system for the markets, alongside a broader suite of additional incentives to deepen capital market activity and focusing on market education and capacity within market operators, as well as deepening the knowledge base of the retail investor community.
Fresh evidence of the dramatic impact of the Greek debt crisis on the health of the country’s finances has emerged, with official figures showing tax revenues collapsing.
As talks continued over a proposed €86bn third bailout of the stricken state, the Greek treasury said tax revenues were 8.5% lower in the first six months of 2015 than the same period a year earlier. The bank shutdown that brought much economic activity to a halt began on 28 June.
Public spending fell even more dramatically, by 12.3%, even before the new austerity measures the prime minister Alexis Tsipras has been forced to pass to win the support of his creditors for talks on a new bailout.
Greece is due to make a €3.2bn repayment to the European Central Bank on 20 August.
Talks with the quartet of creditors, which includes the ECB, the International Monetary Fund, the European commission and Europe’s bailout fund, the European stability mechanism, are continuing, and Tsipras has suggested they are “in the final stretch”.
However, it remains unclear whether the prime minister, who was only able to pass the latest package of austerity measures with the help of opposition MPs, will be able to win the backing of his radical Syriza party for new reforms, at a special conference due to be held next month.
The IMF has made clear that it will refuse to commit any new funds until Greecehas signed up to a new economic reform programme, and eurozone countries have made a concrete offer to write off part of the country’s debt burden.
Sweden’s representative on the 24-member IMF board, Thomas Östros, said there was strong support for a new Greek rescue, “but it will take time”.
He also noted that Greece must adopt wide-ranging reforms first. “They have an inefficient public sector, corruption is a relatively big problem and the pension system is more expensive than other countries.”
Despite the grim news on the public finances, Greek stock markets bounced back yesterday, after three straight days of decline, with the main Athens index closing up 3.65%.
In a separate piece of more optimistic news, official figures showed that the unemployment rate has fallen to its lowest level in three years – though it remains at a historic high of 25%.
Transactions at the Nigerian Stock Exchange (NSE) on Tuesday remained upbeat with investors net worth appreciating by 0.70 percent.
The News Agency of Nigeria reports that the All-Share Index rose by 211.03 points or 0.70 percent to close at 30,458.86 against 30,247.83 posted on Monday.
Similarly, the market capitalisation, which opened at N10.367 trillion, appreciated by N72 billion or 0.70 percent to close at N10.439 trillion.
Forte Oil led the gainers’ table, growing by N4 to close at N194 per share.
Unilever came second with a gain of N1.80 to close at N37.81, while PZ Industries appreciated by N1.45 to close at N29 per share.
GTBank garnered N1.39 to close at N24.45 and Guinness Nigeria increased by 98k to close at N131 per share. On the other hand, Mobil topped the losers’ chart, dropping by N5.97 to close at N150.01 per share.
Total trailed with a loss of N5 to close at N155, while Conoil fell by N3.98 kobo to close at N36.87 kobo. Lafarge Africa lost N1.85 to close at N101.24 and Flour Mills declined by 95k to close at N29.48 per share.
The Athens Stock Exchange (ASE) plunged 22.86 per cent this morning, after it resumed trading for the first time in five weeks.
The country’s banks – Piraeus Bank, National Bank, Alpha Bank, and Eurobank – were the biggest losers, each suffering heavy losses of around 30 per cent. Banks make up about 20 per cent of the Greek index.
The exchange had been shut down on June 26, ahead of the government’s imposed capital controls to stop the possibility of capital flight from the country.
Market mavens had been expecting the sell-off with, Takis Zamanis, chief trader at Beta Securities, yesterday saying “the possibility of seeing even a single share rise in tomorrow’s session is almost zero”.
It comes as Greek Prime Minister Alexis Tsipras agreed to begin negotiations on a new €86bn (£61bn) bailout deal.
Talks on the deal will continue tomorrow, with a view to wrapping up an agreement before 20 August, when €3.2bn is due to be paid to the European Central Bank.