As the global banking and financial services sector take stock after the collapse of Silicon Valley Bank (SVB), there are many lessons to be learned, said Maurizio Caio, founder and managing partner at Africa-focused venture capital (VC) firm TLcom Capital.
Apart from the “very basic” treasury operations lessons such as banking with multiple financial institutions (FIs) instead of just one, Caio said awareness around venture debt as an attractive financing option that doesn’t dilute equity will grow, especially in Africa where that opportunity remains untapped.
When it comes to the impact of SVB’s demise on Africa’s investment landscape, he said while there’s a higher bar now as to how capital will be allocated, the fundamental investment thesis of Africa remains the same.
“The magnitude of the opportunity [in Africa], the quality of the entrepreneurs, the fact that there are more funds that have an ability to deploy significant capital, that is all staying the same and won’t change,” Caio told PYMNTS in an interview.
What needs to stop, particularly at the VC fund level, is going into “this profitability panic,” which he said increases “the risk of creating a lot of very small, profitable but irrelevant companies that will not provide the returns that we expect.”
Instead, he said VCs need to invest in businesses that exhibit high growth potential and are generating returns, but then give them the space to use the cash generated to grow and become profitable over time.
He said aborting the growth trajectory too early will cause significant delays on the path to profitability, a trademark of international VCs, which he referred to as “tourists” who flock to Africa in their numbers, invest in a few companies and disappear when challenges arise.
“When times get tough, [foreign investors] have no patience to understand the specifics or why it’s a good idea to continue to support a company,” he explained, adding that it will take more mature VCs and local African investors who understand the landscape to meet those challenges.
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According to Caio, the magnitude of the opportunity in Africa is not lost on Africa-focused VCs like TLcom capital, which are on the ground day in day out and can attest to its immense potential.
But “if you’re sitting in New York or Palo Alto or London, it is objectively more challenging to get that feeling,” he acknowledged.
It’s the reason why, per Ciao, the onus is on Africa’s VC community, particularly the players that are more visible, to do more to raise awareness around the ability of Africa’s startups to deliver high returns. Taking on that responsibility, he added, will help boost the meager sum of $4 billion to $5 billion that is invested in Africa’s VC space each year.
“We’re not only in the business of giving out money; we also need to show the world that I’s a good idea to invest in Africa,” Caio said.
By “Africa,” however, he said it is key to focus on the key markets that offer international investors the best odds at making significant returns over the next four to five years, and in turn deepen the confidence they have in the region’s potential.
“If you fell on Africa from Mars, and then ask, ‘Where should I invest?’ It’s pretty obvious that the light coming from Nigeria, Kenya, Egypt, South Africa, is blinding,” Caio pointed out, adding that these countries should be prioritized in the short to medium term “if we want to show the world that investing in Africa is a good idea.”
However, he pointed to other emerging markets like Ethiopia, Ghana, Morocco and Senegal as ones that hold great promise for the future and should be nurtured for the time being.
“Let’s first make sure we deliver a few exits,” Caio said. “Let’s have somebody buy Flutterwave or Twiga or Andela or take them public. That is still the promise of the major markets that we’re waiting to see and, in the meantime, let’s give Ghana and Botswana a little bit more time to grow.”
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