Sean Ndiho Obedih is a venture partner at a global commodity trading company, CAMSCORP, that trades commodities, provides advisory services and funds new ventures.
When it comes to attracting international capital, there a few fundamental things that African entrepreneurs can do to increase their chances of securing the funding that they require to grow their companies.
It is only a matter of time before we start to see breakout companies becoming pan-African titans
While borrowing money from local lenders is still a viable option, it usually comes with a high interest rate that it could be the fastest way to bankruptcy. Often international capital is the best way to go.
It is only a matter of time before we start to see breakout companies becoming pan-African titans and following in the footsteps of the Dangote Group or Naspers.
Here’s an insider’s view of what we see on a daily basis that most companies seeking international investment don’t do well enough. If we could improve these issues there will be more capital flowing into corporate Africa.
If we look at the venture capital and private equity landscapes, the future is indeed bright but we still have a long way to go.
Here are the five keys to unlocking international capital.
The way you structure the company also ultimately decides the types of deals that you can attract. Most African companies are still family-run enterprises. As a result they can lack clear accounting practices.
International investors want to align themselves with competent managers
There are many good, stable and fast-growing companies that defy this narrative however there is still room for improvement.
An international investor will have to carry out a detailed due diligence of the company before they invest. Most companies fall at the due diligence hurdle because every penny has to be accounted for in order to come up with a clear valuation of the company.
Strong management is always the key because international investors want to align themselves with competent managers who can easily navigate their landscape.
International investors want to enter certain markets by acquiring a leading brand in that country/region, a clear example of this is of when Wal-Mart Stores Inc spent US$2.4 billion on a stake in South Africa’s Massmart.
There are very few pan-African brands and there lies the opportunity for savvy entrepreneurs who can develop strong local brands.
A good example is the House of Tara in Nigeria which has become a household brand providing skin-toned makeup products that can rival many international brands.
Knowing how to position your brand in your sector is what shows international investors that there are great opportunities for scaling the company and realise a healthy return on their investments. We see that many entrepreneurs overlook this issue yet it is very important to investors.
If you can show that by attracting international capital your business will grow tenfold then it becomes an easier proposition for any investor to take a bet on you.
This was clearly evident with the deal that Abraaj did when it acquired Fan Milk in 2013 which had operations in Nigeria, Ivory Coast and Ghana.
All investors want to realise a return on their investment, so the best way to get their attention – and keep it – is to show them a company that has clear growth potential both in terms of size and impact.
Quantifying the size of your local, regional and international market is a great way of showing potential investors how far the company can go compared to where it is in its present form.
Most African capital markets don’t offer initial public offerings as exit opportunities so investors have to realise their exits through a trade sale or strategic acquisition.
According to the Africa Venture Capital Association the average hold period for private equity firms in 2015 was 6.1 years, compared to five years in 2014.
If you are looking to attract an investor you should also give them an indication of how they are likely to exit when the company has a liquidity event.
And always remember to align your story and company with what international investors know and trust.