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A Saturday at the Wharton Africa Business Forum

30 November, 2010 | No comments | Category: Africa, Current Affairs, i.mmigration

by Tse

Setting out on my very first trip to the illustrious city of Philly on a Saturday morning, I had very few ideas about what I will find at the Wharton Africa Business forum.  I imagined it to be a gathering of motivated young Africans and, as someone at the forum put it, Afri-philes gathered to talk about African business. Many great events held in the U.S. focusing on Africa are organized and frequented by people from all walks of life and this demonstrates a heightened level of interest by all in African affairs. But as an African, there is also a special feeling of validation I got from taking part in events like the African Social Enterprise Forum with a large younger African presence, so I was looking forward to WABF. For me personally, there was also the opportunity to hear more about the spreading perception that businesses (read: social enterprises) can work two targets into their bottom lines: profit and social good from an African perspective. As a young professional with a 9-5 job and thus a routine, I also realize the importance of pushing myself by exposing myself to material that challenges me personally, mentally and career-wise. So I was up at 5am and at ‘em driving as the horizon broke into dawn on my right, excited but mostly unaware of the content and great people I would encounter.

WABF did not disappoint on a lot of fronts. There were upwards of 400 professionally attired young graduate students, alumni and business reps filling the meeting rooms leaving little standing space & buzzing the hallway and lobby areas with energetic conversations in between sessions. The attendees, a majority of them African, were highly engaged with the forum and their fellow attendees. I’ll concede a good number of them were business-heads, ivy leaguers, male and Nigerian; Nigerians are everywhere, eh? (said in half-jest because I think I was the only Ethiopian and one of a few Africans from the Horn of Africa present) That said, in spite of any skewed attendance stats, I found most attendees to be open and happy to strike up a conversation and create a connection. Continuing with the lighthearted, the forum featured some great West African food and topped off in classic African fashion with some good African boogie music at a swanky gala and after party in the middle of downtown Philly.

On a more serious note, WABF was probably one of the most professional African events I have seen organized by young people. The conference mostly ran on time and aside from a couple of moderators being a tad loose about directing conversation and one unexciting keynote (I attended one of three keynotes by African business leaders) WABF was a very impressive event. There were almost too many choices for attendees of all business interests happening simultaneously.  The agenda touched on a well balanced number of topics: from private equity, real estate, banking, funding for small and medium enterprises to the growing telecom sector, social enterprise, agribusiness and a conversation about natural resources and even about diaspora moving back to Africa. I was especially impressed by two of the panels I attended: one on Social Enterprise and another on Small and Medium Enterprises (SMEs). Attendees had a focus and eagerness to engage with the people, the forum and the great panelists. The forum also delivered that special opportunity I had hoped for: to meet other Africans motivated to make an impact back home – it feels so good to be reminded how others hold these same aspirations. But even more so, it was inspiring to witness a kind of focus and ready-for-business attitude toward Africa amongst fellow young Africans. It made me feel hopeful about the potential of the continent.

After talking to a couple of people that did not attend the event, I realized that there are probably a good number of people that were not at WABF interested in hearing about some of the discussion at the forum. So I decided to share some content from the two sessions I have relatively better notes from. I was sad to miss the private equity panel so if anyone attended that and can share more information please get in touch with me!

A friendly forewarning: what follows below is an in depth and lengthy write-up of the discussion at the two panels. I hope it is of some use to you and thanks for reading. Until next time…Peaces!

Panel 1: The Next Generation Providing Reources for Africa’s Small and Medium Enterprises (SMEs)

Preface: Most recent dialogue in the international development sector points out the pitfalls of Dead Aid, and the distortion that charity and ‘free stuff’ introduce to an economy and a political system. International development practitioners comment that real development is achieved by building sturdy economies that enable strong smaller and medium enterprises that create jobs and improve livelihoods while increasing the cash flow in the economy.

What are the sources of funds for Small and Middle Enterprises in Africa?’.

J. Skyler Fernandes, COO of the South African Chamber of Commerce in America says that access to financing for Small and Medium Enterprises is different from private equity funding sources. This “missing middle” funding source while scarce, exists in between private equity and bank loans in the form of ‘quasi-equity’. Andreas Zeller, Managing Partner of Open Capital Advisors says that fundraising for SMEs can be challenging because investors understand that it is more difficult to provide a small investment especially for a small startup.  However, he emphasizes, SMEs exist in the space where such investments would bring the most impact for innovation and social value creation.

How do SMEs go about attaining capital?

Nashon Omondi, CEO of Hospitality Systems Consultants in Kenya prefaced his comments by elaborating that talent and technical capital are the most challenging to locate in Africa. When it comes to SMEs, he says, there is a need to talk beyond monetary capital and discuss these ‘soft capital’ types. Hospitality Systems works with local banks to fundraise through loans. This is effective for them because they begin by developing a relationship with one of the smaller banks over time; the smaller banks tend to be more recipient to working with SMEs. With the changing role of the banking industry in Africa from a system where banks were needed to finance government activities to providing funding for the private sector, banks are starting to be more aggressive about seeking companies they can finance through loans, in many cases this is starting to include SMEs. If capital is a primary constraining issue for a startup, there are many low-cost models from emerging markets like India that can be applied to businesses in Africa. SMEs would benefit from help learning about such low-cost models.

Funding management companies like International Finance Corporation aim to find investors that want to cap their investment amount says Eme Essien, Manager of SME Initiatives in Africa for IFC. IFC finds that funding SMEs is much more appealing to investors who are passionate about hitting the triple bottom line. When it comes to making funding decisions and selecting SME partners, IFC and many other funders look at whether SMEs have the right sponsors, the right people and if they are trustworthy.

How do SMEs scale?

The panelists agreed that an SME has to make an internal decision about whether scaling is in their goals and if it makes sense. One of the mechanisms in which this process is simplified for SMEs is by providing them with a standardized set of tools or by focusing on helping SMEs that aim to integrate into a supply chain. SMEs typically benefit from funding management agencies when they can accept specific types of training such as how to become better suppliers within a supply chain, or how to partner with bigger corporations.

Making good deals with investors has a lot to do with having good timing, says Eme. A lot of SMEs do not know how to assess when and where capital is effective or they fail to understand what risk capital entails and how funding structures work. This type of knowledgebase can be provided to SMES through agencies like the IFC and Open Capital Advisors through strategic guidance. J. Skyler noted that this is one of the aspects that demonstrate a great need for the best talent from abroad and local schools to contribute to SMEs in Africa.

A lot of times SME’s do not know all their financing options and need quality intermediaries to make the right introductions and bring them into the right networks. Once SMEs are made aware of the spectrum of sources from the non-traditional, Angle capital, to the traditional, bank loans, they can make informed decisions about what funding type they will pursue.  Strategic partners like those represented on this panel enable SMEs to make the right connections and pursue compatible strategies for their goals enabling SMEs to develop proprietary relationships.

There are many types of funding structures ranging from banks to private equity. For SMEs, quasi-equity funding structures are the most common. These types of funds are also appealing because there are many ways to customize them to best suit the needs of the company. For instance, SMEs, rather than giving private equity or control equity in the form of votes can enter a type of structure that would allow them to share a percentage of the revenue. A lot of these quasi-equity structures are loan type products but also provide profit sharing options. There are some complaints that such structures are extremely complicated and that they can be expensive. A lot of times complaints about the complication of these structures has to do with complications in documentation processes rather than the funding structure itself. Funding managers need to improve how they articulate the different funding structures to SMEs.

In Africa, there is a lot of opportunity for a new emerging asset class; says J. Skyler, a great need to develop more “missing middle” funds. On the other hand, this is also the type of funding that has seen an 80% growth in recent years. The types of emerging and non-traditional financing options include receivable financing, asset back financing and supplier financinge. J. Skyler. says, the good news is that these types of funding sources are growing and there are some myth-busting SMEs emerging out of Africa that are becoming effective global competitors even against businesses in hubs like Silicon Valley.

The term SME can be misleading when it comes to the nature of companies where the owners conduct ‘lifestyle businesses’ with no interest and skills to scale the company. To draw a differentiation between SMEs and ‘lifestyle businesses’ there should be a new term for ‘SGBs’ = Small and Growing Business, says J. Skyler. It is to be noted, that some financing corporations like IFC have a mandate to be in the ‘lifestyle businesses’ space.

Nashon says that when it comes to growing businesses; the problem lies in that many people are doing ‘easy business’ which they see other people around them doing like hairdressers or pastry shops; people are not innovating. It would be possible to grow the number of innovative businesses in Africa if the skills and technical support are present. Andreas agrees that lack of talent is one of the biggest problems for SMEs in Africa. Nashon also discussed that there is a scarcity of funders that are interested in funding Africa’s largest sector: agriculture. Other kinds of scarcity in the SME space in Africa include a lack of identification systems and credit bureaus to serve as a checking and validation mechanism of businesses.

How can one get involved in SMEs?

Andreas recommends looking up the SMEs that were just funded by small venture capitals, where new companies are emerging and go work for them. There is a tremendous amount of space for businesses in ICT and other sectors and a lot of need for talent.

When it comes to investing, Nashon suggests getting involved in Education. In parts of Africa while primary school enrollment may be high, students are dropping out of school along the way due to the limited number of spaces available in universities; this presents an opportunity for private academic institutions to provide educational facilities for these students. Other sectors with a lot of opportunities include agriculture and real estate.

Nashon also mentions that is worthwhile to consider getting involved by starting businesses because many at WABF have the talent and capacity to build and grow the kinds of businesses they may be interested in funding.  Eme pust it this way; ‘Africa needs to have the best talent running businesses rather than have a lot of people running money’.

Panel 2: African Social Enterprises: Sustainable Business Models that address the needs of the masses

Preface: Social Enterprises are enterprises with two bottom lines: creating social value and thus working for the common good and also generating revenue.

How do your enterprises scale?

Femi opened the panel by describing how their business model aims to grow the enterprise through franchising. The e-commerce business is cloud-based and scaling is a matter of meeting a high demand for e-commerce in the African market. Due to this high demand, current partners across Africa have reached out to SlimTrader to become partners; SlimTrader allows this kind of partnership for no extra charge, through this mechanism, SlimTrader now has a presence in Southern and East Africa.

BRAC, Santhosh explained is a 38 year old NGO that has become synonymous with ‘scale’ in the NGO sector. It is the largest NGO in the world. BRAC’s strategies incorporate disseminating standardized and simple models across their constituencies. BRAC also believes in being physically present at the sites while minimizing their costs when they set up shop at various sites.

Alla says that EGG-Energy outsources its services through distributors and brings in scaling partners. The primary issues they face with scaling revolves around access to capital and most recently; internal theft.

Indego Africa on the other hand focuses on standardizing but they also ask themselves whether scaling is necessary for their organization. Matthew says, a lot of times, scaling is necessary to get sufficient return on investment for a social enterprise, however, by running training services in business and entrepreneurship for the women that are their producers, Indego enables the women to replicate Indego’s structure and build SMEs of their own. As Indego continues to empower the women to become effective and independent profit entrepreneurs, Indego may not need to scale but can continue its services as a mixed revenue enterprise.

How does your enterprise account for social impact?

Femi says that social impact can come with filling a demand. For SlimTrader the feasibility of the business and its profitability was a number 1 priority at the onset. When your company saves significant amounts of money for clients and provides a great service and convenience it has social impact; it contributes toward better livelihoods.

The traditional measure of social impact used by the world bank has to do with how many people earning less than $1 USD a day an enterprise is serving. Many social enterprises use more creative ways to measure social impact. Many times, the role of social impact in an enterprise’s mission differs. For BRAC, for instance, social impact comes first as a part of the mission since it is an NGO, however, Santhosh says they practice a lot of discipline and act like a business so that the enterprise is sustainable in the long term.

EGG-energy began as a business structured for profit, says Alla. EGG-energy wanted to use their business perspective to get an effective feedback loop about what aspect of the product is working for clients and what is not, a for-profit schema also enables the enterprise to to ramp up. EGG-energy does track impact beyond financial output; including the number of job created and the number of people that got energy that did not have it before.

Both SlimTrader and EGG-Energy state that the provision of technology to a population in itself can have positive social impact given technology brings cheaper and more convenient options that increase the standard of living of the clients.

SlimTrader functions by providing services previously missing in a commercial experience. By providing an SMS based transaction option, it increases efficiency for companies. In a cash-based economy such seamless virtual transactions cut down on costs associated with cash transactions such as guards, ticket sales trucks, etc. SlimTrader works to make informal mechanisms of transport like putting packages in the belly of trucks cross-country more formalized and thus more efficient.

Where does your enterprise get capital?

SlimTrader, Femi says, works with stakeholders that have significant sums of money stored with a willingness to invest. EGG-Energy, on the other hand, got it’s initial funding from competition prizes and loans from financiers interested in social enterprises, like the Angle Network. While scarce, there are also some grant opportunities that profit entities can pursue, says Alla.

Matthew explained that Indego functions with a mixed revenue structure of sales revenue and fundraisers. They can then turn around and themselves support SMEs by preparing the women for microcredit loans.

BRAC has been able to attain a lot of capital making it easier for them to get into new markets. Catherine Casey of Acumen Fund says that there is a spectrum of capital available from more social impact based through to more commercial sources. Enterprises usually move on to more commercial capital at a later stage in their growth. Many enterprises aim to work with a hybrid funding structure to allow all sorts of capital to flow in.

Silicon Valley and Massachusetts tend to be the main investors in technology, but as Femi described he got his seed funding from his own personal contacts first. After all, for the most part people give to people, not to ideas. There is a huge scarcity of African investors that understand the problem and the proposed solution. Most panelists agree that finding local investors is extremely important for a social enterprise. In any case, first investors usually tend to be ‘Afri-philes’. Femi says that social investors have a lot of preconditions and would like to see a lot of outcomes, particularly in serving a poor population. But in reality, it could be an extremely expensive venture to market to poor people. On the other hand, venture capitalists simply ask for how the business is profitable.

Q & A

Are NGOs that give things for free competitors of Social Enterprises?

Catherine says that for most of the social enterprises Acumen Fund invests in compete with NGOs because anything introduced into the market distorts it. Santhosh says that the presence or absence of competition will depend on the sector and the presence of subsidiary-based enterprises that introduce distortions to the market. Some markets like those for mosquito nets are distorted due to the availability of free nets, but a market like agriculture doesn’t work against a lot of competition because there are no distorting subsidies in the Agriculture sector.

For technology enterprises like EGG-energy and SlimTrader, there is a lot of demand because there is currently no free technology in Africa. Indego, on the other hand, runs across a changing historical issue of clients being used to receiving things for free, like microcredit classes; in this case the competition is against the legacy of NGOs and their effect on the market and human behavior.


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