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Why Foreign Investors Do Not Fund African Entrepreneurs

Why Foreign Investors Do Not Fund African Entrepreneurs

Being an entrepreneur is hard enough, but being an entrepreneur in Africa trying to find funding for your project is even much harder.

Despite huge opportunities with returns easily beating those in developing world, finding someone willing to inject capital into an African start-up is the biggest reason for many would be entrepreneurs failing in their ventures.

A former associate at Morgan Stanley in the US and an Africa investment and business specialist, John Causey, says in How We Made It In Africa report that a lack of financing from local investors has pushed many African entrepreneurs to try their luck on the international scene.

But investing in African startups is not always attractive to these type of investors. There are several deterrents to international investors who apart from just the high returns on investors from these businesses are also looking  for the social impact of the venture.

First, Causey says it’s very costly for an investors from outside the continent trying to understand the environment in which the business operates. Knowing the regulatory and competitive scene in the several countries on the continent takes a lot of sunk investments in hiring local people to ensure the investment is being done in a proper way.

“.. you have to hire local people, you have to hire local attorneys… it’s very expensive to get that understanding so that is a huge problem,” he said.

Even if an investor does this and goes ahead to invest in a good startup, it becomes another issue when he wants to repatriate his share of the profits. Most African countries, such as South Africa and Tanzania, have prohibitive capital flight laws and have imposed high withholding tax or sometimes limit the amount that can be wired out of the country by an individual/company in  a particular year.

Costlier Investment Exits

“If you invest from overseas, if you want to pull your money out, if you want to sell the company, you are going to be subject to exchange controls and taxes and all this red tapes,” Causey said.

South African entrepreneur, investor and multi-millionaire Mark Shuttleworth said last year it cost him less to travel to outer space than it did for him to move his money out of South Africa. He reportedly had to pay a 10 percent exit levy of more than $30 million at the time for moving his fortune out of Africa’s largest economy.

Causey says most deals done in African startups are small compared to other developed markets. Small segmented African markets do not also offer a good platform for large investments.

“Even if they (startups) say your idea is going to dominate the South African market share, [and] even if you do, you are dominating a relatively small market on the international stage,” he said.

Investing in Africa at the moment is still a confusing affair for international investors. They simply do not understand Africa and the international media has done little to help with this by broadcasting images of extreme poverty and persistent conflict for power in a number of nations on the continent.

Causey say Africa present a good future prospect story but does not give any good investment value at the present or the value has not been documents conclusively.

“The cold fact of the matter is investors are interested in Africa for the future return that can [happen],” he says in the How We Made It In Africa report. “It’s kind of all based on the McKinsey report of what may happen in the future. So if you look at a company like Nike… it’s the 136th largest US company and the revenues of Nike are the same as total US exports to the African continent.”

“So everybody is looking at this [Africa investment] for the future impact but it still hasn’t been proven that it actually works.”