2 Thinking Models to Characterize French-Speaking Investors from West Africa(2021)
The way you think determines the result you get.
In an African context marked by an increase in fundraising in Africa, the African Francophone zone has a slow evolution on the African and global entrepreneurship ecosystem. Despite a recent $200 million fundraising by Wave, the Francophone zone is struggling to find investors who are willing to bet on startups.
In the 2020 report from Partech, an investment platform for digital and technology companies, they state:
“The African technology ecosystem continues to accelerate with 359 rounds of funding (+44% YoY) for a total funding of $1.43 billion (-29% YoY).”
No French-speaking country from West Africa. (or at least not enough activity)
Another statistic:
No French-speaking country from West Africa.
There is clearly a problem with the francophone ecosystem.
In the rest of this article, I will focus only on the mindset aspect. Other specialists can develop other more technical aspects.
After 5 years of experimentation and meetings, I finally understood the problem.
In reality, the problem is more in the mentality than anything else. Unfortunately, some people don’t realize this, even the most experienced French-speaking investors.
Investing is a risk/reward “game”.
There are 4 possible cases:
Low risk/low potential reward
High risk/low potential reward
Low risk/high potential reward
High risk /high potential reward
In the rest of the article, I will expand on each aspect to highlight its characteristics.
This is the problem:
The French system teaches us:
- Making noise means you are working.
- Having a degree means you are competent.
- You shouldn’t take too many risks when the parameters are not very clear and when it’s impossible to make projections.
- You need work experience to have an impact in the world.
- Those with more experience are always right.
- Investment is just for the rich.
Whether it’s politicians, some investors, and businessmen, they have developed models where they say:
The main thing is to make noise, if we have 100 million CFA ($180,385) to distribute/invest, let’s have the maximum number of people who will benefit.
Not practical. Not pragmatic.
This is what I illustrated in the previous image:
In year 1, we have the maximum number of people involved.
And since there is usually no follow-up and not enough funding, in the years that follow, the same people end up disappearing from the investors’ radar. Their impact is nil. Why is that? Because the basic strategy (for both investors and entrepreneurs) is generally not effective.
Those who invest, have money but do not know what it means to invest.
Let’s go back to the risk/reward factors.
Low risk/low potential reward: this is the type of investment that does not generate high added value, usually because the market is saturated.
Low risk/high potential reward: This is the type of investment to watch out for. When the risk is presented as low, but the reward as high, there is usually a gap that the person is not saying. This is what you need to find out, by asking the right questions.
High risk/low reward potential: to create wealth, this is not the first type of investment institutional investors should aim for. Usually, people talk about Risk management, but Risk/Reward management is what is needed in this step for example.
High risk/High potential reward: typically the startup model. A startup is a type of company whose business model is repeatable, scalable, and profitable. As we all know, French West African banks do not invest in startups.
Who are those who invest in the French-speaking area:
- Governmental public funds
- Business angels
- The VCs
Governmental public funds:
Have the funds but not the agility that most companies/startups require. In the case of investing in startups that work on a week-to-week schedule(those who know what they are doing), fundraising procedures can take months. Another problem is the strategy of resource allocation: from the outside, everything makes it look like the strategy is to minimize the risks only: “We have invested X amount in 100 companies/startups”. The problem is not in the quantity, but more in the quality of these investments. The budget allocation is weak, the recipients are abundant.
I don’t know where this funding model came from, but it is not the most efficient and pragmatic.
Business angels :
They should be the ones ready to invest in startups in the seed phase. But it seems like we have risk-averse billionaires. They prefer to invest in low risk/low reward and low added value businesses: real states, agriculture…
VCs:
Things are changing slowly from a VC perspective in regard to African startups. But still, they are in a dynamic of minimizing risks too. Paul Graham, the famous co-founder of Y Combinator, said: “How do you make the most of it when projections are impossible? You invest in a lot of startups”. What does it mean to “invest in a lot of startups”: To have a large budget allocation so that maximum startups can scale quickly. You will say: yes, but you need money to do that? I’ll explain later.
What are the possible solutions for Francophone investors?
Hypothesis 1:
Invest in few startups, already in a growth phase, so that they grow faster.
Hypothesis 2:
Invest in a lot of startups, put the necessary resources into them to beat the valley of death.
Where to start:
Peter Thiel says in his book “Zero to One”:
“The mistake is to expect that company returns will be normally distributed. i.e., bad companies will fail, mediocre companies will remain stable, and good companies will return 2x or even 4x.
Assuming this wishy-washy model, investors build a diversified portfolio and hope that the winners will offset the losers.
But this “spray and pray” approach usually produces an entire portfolio of flops and no success. This is because company returns do not follow a normal distribution overall. Instead, they follow a power law: a small handful of companies radically outperform all other radically better-performing companies. If you focus on diversification rather than the dogged pursuit of the few companies that radically outperform all others in search of the few that can become extremely valuable, you will miss out on those rare companies.”
What does this mean for rare companies?
- Good idea.
- A passionate team, able to execute.
- Good timing.
In concrete terms, how can this be implemented?
As the previous picture illustrates, at the base, you need a very careful selection of companies/startups on which the investor bets the maximum. You will say: but is this in contradiction with what Paul Graham said? No. Paul Graham has a much more advanced ecosystem. Thus, the African context is not the American context. Progress must be much slower here given the economic, social, and political context.
Locating few high-potential startups and maximizing investment is the solution for Francophone Africa.
Over the years, these champions will have to scale their company to expand, recruit and develop. If there are exits (IPOs or acquisitions), these funds can be reinvested in the ecosystem, and allow other startups to benefit from business angels’ investments.
But for this model to exist, a primordial question must be answered: How to recognize a rare company?
Through practice and the search for people with experience in high-risk, high-potential investments. This is what Africa needs: high risk, high potential companies because we have a lot of challenges and a lot of unemployed youth to absorb.
Is it simple? No. The government agencies will have to do most of the work. They have to subsidize research and innovation. The United States, China, and France are doing it and the results are palpable. Afterward, the private sector will take over.
You’ll need to reverse the A and test the V to get started.
Then, gradually, broaden the base.
This requires a new mindset, new motivations, and new methodologies.
The investment style that will be able to boost African companies/startups is the one that will be “irrationally passionate and patient”:
- Identifying talent
- Give them something to live for
- Give them something to build on
- Allow them to fail
- Allow them to retry
- Give them the autonomy to build their company/startup as they wish
- Trust them in all circumstances.
The sad reality in Africa
No one can innovate by being hungry.
No one can innovate without peace of mind.
In developed countries, it is very rare to find an entrepreneur who is starting but who is worried about feeding himself, literally. Because the environment is built in such a way that certain primary needs are almost guaranteed.
In Africa, the reality is different.
At a certain age, you have to be able to feed yourself and your family.
This is the reason why brain drain is recurrent.
Do investors take this into account? I don’t think so.
This is the sad reality.
I met a lot of brilliant scientists, technicians, engineers, very talented who told me:
“You know, when I was your age, I was doing so many amazing things, I had so many ideas, but in the end, I gave it all up. Because at some point, I had to take care of my kids, my parents, and I couldn’t afford to innovate anymore without a return on investment.”
Until the mindset changes, you will have to try to live, and as an entrepreneur, you will have to find other sources of additional income.
If you want to discuss, I’m on Twitter and Instagram. Don’t forget to like, share and comment.
