Bulls n Bears Entrepreneurship Zone :: Entrepreneurship funds in Africa: distinguishing the good from the bad

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Entrepreneurs have a pivotal role to play in Africa’s unemployment crisis.
Today over a third of the continent’s young workforce (those aged 15-35) are
unemployed. Another third are in vulnerable employment. By 2035, Africa will
contribute more people to the workforce each year than the rest of the world
combined. By 2050 it will be home to 1.25 billion people working aged.

To absorb these new entrants, Africa needs to create over 18 million new
jobs each year. Governments need to put in place policies that drive
economic growth and competitiveness. These in turn, will enable the growth
of small and medium-sized enterprises (SMEs). This is important because they
currently play a significant role in low-income countries, representing
nearly 80% of jobs. They are also responsible for 90% of new ones created
each year.

The challenge for countries is how to support the growth of SMEs. Various
African governments have experimented with ways to help address the US$140
billion funding gap for startups and SMEs. For example, one approach has
been to set up entrepreneurship funds.

Based on my experience of watching their performance over the past 18
years, I would issue some words of caution. Some entrepreneurship support
models work better than others. And how they are set up – particularly the
governance structures put in place to manage them – is key to their success,
or failure.

Funding gap

Access to financing is consistently listed as the biggest obstacle to
business for SMEs in African countries. They often face double-digit
interest rates from local banks. And venture capital penetration is still
extremely low. Top end 2018 estimates put it at about $725 million for the
whole continent.

To tackle the problem, African countries continue to start new
entrepreneurship funds. In July 2017 Ghana launched the National
Entrepreneurship and Innovation Plan. The aim is to provide integrated
national support for start-ups and small businesses.

Almost a year later, Rwanda secured a $30 million loan from the African
Development Bank for the establishment of the Rwandan Innovation Fund. This
will focus on investments in tech-enabled SMEs.

As new funds are started, African countries must look to the successes and
failures of both global and regional funds to replicate best practices and
avoid common pitfalls. African governments should explore replicating models
similar to Small Enterprise Assistance Funds and the USAID backed enterprise
funds. Both include robust investment selection criteria for funds.

In doing so, African government-backed entrepreneurship funds would operate
as fund-of-funds – where a fund invests in another private equity or venture
fund rather than directly in businesses themselves – as do many development
finance institutions globally such as the UK’s CDC or FMO of the
Netherlands.

The what and the how

The fund of funds (FoF) structure creates an arm’s length relationship
between the government agency that houses the entrepreneurship fund and the
businesses that eventually receive investment. In between, sits a
professional fund manager that earns the majority of its income from making
good investments, growing companies and exiting them after a period of five
to seven years. In this way, there are natural disincentives for corruption
and market-based selection criteria for the entrepreneurs who receive
investment.

How the fund managers are selected also matters. To ensure true investment
independence from the government, fund managers and board members must be
chosen in a transparent and competitive process. And once selected,
representatives of the government entrepreneurship fund agency can sit on
the investment committee for oversight purposes but should respect the fund
managers’ independent decision-making.

There are examples of funds being set up without the necessary independent,
accountable fund managers. One is the YouWin programme in Nigeria. Created
in 2016, it was set up to help youth entrepreneurs grow businesses. But
senior civil servants handed out awards to friends and relatives.

The government supported fund managers through the FoF model can also
catalyse additional investment. By operating in markets and sectors often
ignored by traditional private equity funds, small enterprise assistance
funds and enterprise funds have mobilised additional capital for
investment-starved companies. African government-backed entrepreneurship
funds could do the same by participating in blended finance deals with
development finance institutions, social-impact investment funds, local
banks and other market players to back growing firms.

Measuring success

While not actively managing the funds’ portfolio investments, governments
have a key role to play in guiding the funds’ priorities. Priorities may
vary by country and given Africa’s growing rates of unemployment, funds
should prioritise job creation by evaluating investment on key performance
indicators. These would include the number of jobs created per dollar
invested, indirect jobs created per dollar invested, and average salary of
job. In addition to job creation, governments can direct funds to focus on
specific sectors either in need of increased capital or high-growth areas in
local economies.

Beyond establishing investment criteria, government-backed funds should
prioritise rigorous measurement of investment results and long-term data
tracking to inform future investment decisions. The UK British Bank regional
growth fund found the cost per job created varied considerably by project
from £4,000 to over £200,000. It concluded that a better allocation of funds
could have led to thousands more jobs created for the same resources.

Data-driven investments can not only lead to better results, but further
curtail issues around potential mismanagement of funds.

Tackling Africa’s job creation challenge requires innovative thinking and
initiatives that support private sector-led growth. Looking to the model of
Small Enterprise Assistance Funds and enterprise funds, African governments
can spur local ecosystems and drive new private capital to regions today
seen as unfriendly or too risky to outside investors.

Properly structured investments today could yield much larger dividends
tomorrow.—Howwemadeitinafrica 

 

 

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