Globally, there’s a trend to hyper-focus on certain geographies or verticals when it comes time to invest in venture capital. In the nascent African technology ecosystem, this may not be the best strategy.
In episode 15 of Disrupt Africa’s “The Month in VC” Podcast series, released in partnership Atlantica Ventures & Goodwell Investments we spoke with investors about the pros and cons of focusing on a particular sector, geographic area, or other factors when it comes VC plays.
Investors can choose to focus on geography, verticals, stages, or themes, such as financial inclusion. The decision is usually based on how they can add value. However, there are challenges with a niche focus on emerging markets like Africa.
Wim Van der Beek, founder and managing partner of Goodwell Investments, advises that funds that choose to focus on a particular sector should be more general.
“If your sector focus is very specific, you can focus on multiple geographies. If you only focus on one geography, then you are able to focus more generically,” he said.
“If you are a focused investor, but narrow your focus too much, both in terms of geography, sector, and type businesses, I think that’s a risk to our type of investment.” You must have a focus. But if you are hyper-focused on a particular type of business or geography, your ability to add value as an investor will be limited.
Let’s start with geography. Justin Stanford is the co-founding general partnership of 4Di Capital. This early-stage technology venture fund manager is based in Cape Town. He believes that 4Di and other firms had entered the market with a geographic focus. His company, however, had a more relaxed approach.
He said: “We found that the borders are blurring and that almost all companies operating in Africa have multiple companies in different countries, and are sometimes spread across the entire continent.” “It is so hard to pin down that today that we don’t try any more .”
What about different verticals then? Van der Beek says that there is a new generation of fund managers with a clear sector focus, and they tend to be successful at identifying and working with fast growing businesses in areas such as healthcare and education.
“A lot of financial services, mobility, and logistics businesses have begun to broaden their scope of operations.” I’ve noticed that certain funders are becoming more focused, but I’ve also observed that other funders are expanding their scope. They see that the boundaries between sectors have been eroding.
Hyper-focus is then made more difficult by the blurring of boundaries among different geographies and sectors. The nascency in Africa’s tech eco-systems has also made it difficult to focus. Stanford claims that the startup ecosystem has developed to the point that firms can now choose to focus on one vertical. However, he believes it is still difficult to do this if you’re Africa-focused.
“The market is still not broad or deep enough. So, if I think of the larger VCs who focus on fintech, for example, they are also investing in emerging markets.” They are not limited to Africa. “You’re limiting yourself if you choose Africa and only one vertical,” said he.
Stanford says that even firms that restrict themselves to a single vertical do so in the broadest sense possible, and that only later-stage funds have the luxury to be able to hyperfocus.
“You could say fintech, insurtech, or any adjacent vertical. It actually broadens it quite a bit.” He said that having specialists, a focus and specialist skills is important.
“But if you are like us, in the early stages of development, you need to be a little broader.” You can become more specialized as you progress.
Some investors focus on the stage of a business.
“That’s a thing we’ve learned from more developed markets.” Van der Beek said that you’ll have different investors for pre-seed, series A, series B, and Series C …”.
If you look at the landscape, there is a lot of concentration in the early stages. There is a lot more concentration in the early stages of development.
This also means that many companies who have raised capital in Series A are struggling to raise funds at Series B and C because the funds are simply not available.
“A lot of international capital has gone into these routes in the past year; there is not enough.” Van der Beek said that many firms that specialize in the early stages of a company’s development are struggling to assist their portfolio companies to raise capital for the next round.
“There are not enough funders to help raise funds, and the funding crunch you see on the market today is also informed by a concentration of many of these firms on specific grounds.”