In this interview, we talk to Mr. Eric Osiakwan, managing partner at Chanzo Capital to discuss the venture capital landscape in Africa. Torching a light on opportunities, challenges and the future of this space.
Hi Eric, good to have you today. Please introduce yourself to our audience and tell us what you do.
So, I am Eric Osiakwan, managing partner at Chanzo Capital. Chanzo Capital is an Africa focused VC firm domiciled in Mauritius and we have offices in Accra, Nairobi & Johannesburg. We’re focused on early stage Africa tech ventures hence our name “Chanzo” which is a Swahili word for early stage, so we mainly back companies in their early stage.
We have two strategies, one is the startup strategy and the other the scale up strategy. The startup strategy is pre-series A and the scale up strategy is post series A.
We strongly believe in providing three things to entrepreneurs; capital, capacity & community. We believe entrepreneurs in Africa need more than capital. So, those are the three things that we provide. We are a little bit hands on when we invest in companies. We primarily focus on what we call the “KINGS countries (Kenya, Ivory Coast, Nigeria, Ghana and South Africa).” So our fund is called the “KINGS fund”.
We believe these are the countries leading the digital economy. So, in the first KINGS Startup fund we invested in a total of 16 companies whose current net asset value is roughly $50M. This was from 2015 – 2020 and now we are on fund two of the startup strategy as well as fundraising for fund one of the scale up strategy – an estimated $100M fund with $10M already committed from a leading global institutional Limited Partner.
That’s amazing, tell us more about your mandate at Chanzo Capital and your primary focus sectors.
So, our mandate is to really back the next generation of African entrepreneurs. We believe there is a new generation of African entrepreneurs building amazing applications that sit on the mobile and web network in Africa that are solving essentially critical problems or pain points or bottlenecks as well as reducing friction in the market place. We look for those entrepreneurs and provide them what we call the 3Cs of success, capital, capacity & community. In other words, we do not only write a cheque but also build capacity of the entrepreneurs because some of the entrepreneurs are doing it for the first time and they need some capacity building.
We also recommend them to the business networks within the countries that we operate in, because, we have tremendous experience building successful companies in these markets and so we have deep relationships which we bring to our entrepreneurs but we allow them to run the business. We normally take non-executive roles but we are a bit more active than a passive board because we believe the provision of capital is not the ultimate solver of all the problems faced by African entrepreneurs. One will tell you that but the reality is money doesn’t solve all the problems. We try to introduce on a case by case basis a mix of the things an entrepreneur needs. So, our capital side is the funds, our capacity part is done partly through our virtual accelerator, which is the Africa Virtual Accelerator and finally for our community part, we do it through our annual Angel fair Africa event. The annual Angel Africa fair event is one where we select 10 entrepreneurs and we bring about 40 to 50 investors. We then go into a city, we select a country in Africa every year. This allows us to spotlight a country and we bring entrepreneurs and investors together. Essentially for a week, the entrepreneurs go through a bootcamp to make them ready to pitch to the investors after they have participated in our one month Africa Virtual Accelerator. This is our 9th year of doing this event and we have realized about $23 million dollars’ worth of investment. This year it will be held in Mauritius and this is the first time we are going into the Indian ocean. So those are the 3 key elements on how we execute our mandate
Chanzo Capital currently operates in 5 African countries i.e. Kenya, Ivory Coast, Nigeria, Ghana and South Africa. Why these particular countries & what are your future prospective countries you plan to focus on and why?
So, that’s a good question. Africa is a big continent, 54 countries, 55 now and we couldn’t start with all the 55 countries, right. So the thesis was which countries are leading the digital economy and that became the core focus. I wrote a book on the KINGS of Africa’s digital economy.
These countries are leading the digital economy on the continent and that’s what we are focusing on. And for the second part of the question, this was in 2013, I wrote that book in 2016 and today there are more countries leading the digital economy for example Egypt. Egypt was not in the KINGS countries but right now it is one of the leading tech hubs and investment ready destinations as per data on investment numbers in the VC space. Another country that is coming up very strong is Senegal where Wave became a unicorn recently. Tanzania is another country. We have taken the Angel Fair Africa event to Mozambique for example because Mozambique became very active. So there’s a lot more countries that are now being part of the digital economy. So I think it’s time for me to coin another term…hahaha…for those countries
Startup financing is still a challenge in Africa but most African startups aren’t investment ready as well. In your opinion, how can startups position themselves to be investment ready?
That’s a big question. We can actually do a whole interview on that…hahahaha…..because I actually give a class on this as part of our capacity building module on how to raise money and the reason we do that class, especially for me is that I came to realize within my short term of practice two things. One, there’s an information asymmetry between entrepreneurs and investors. The entrepreneurs don’t understand how investors think and the information they require and investors don’t understand what entrepreneurs go through and what they need. So, there’s an information asymmetry. So that’s one. The second is that the two networks don’t collide in Africa. For example if you are an entrepreneur and you are a great entrepreneur, the circles in which you run, your friends are not investors. So your friends’ network doesn’t interface with the investor network, right?
I am an investor and my network doesn’t interface with entrepreneurs and therefore there is a gap. So those are the main two problems, the information asymmetry and the gap between the two networks not talking to each other. And that actually in my view is the core of the problem. So what we are trying to do in our capacity building part is trying to resolve the information asymmetry – through our virtual accelerator and through the workshops that we do. So that entrepreneurs can understand what the investors look for and the investors can also understand what the entrepreneurs are dealing with and then through our Angel Fair Africa event we solve the network gap.
But these are not problems that will be solved overnight, it will take time. I remember when we started our Angel Fair Africa event in 2013, people thought no one was going to show up but we had about 120 people show up in South Africa and 3 deals happened on the spot. Then I knew we had hit the core. And we have been doing this over the years and we have enabled $23 million dollars’ worth of investment through these events that we have done. So I think the formula we have adopted as a firm is helping solving the problem but it’s going to take time
One of the most challenging issues for African startups is their inability to raise money at idea stage unlike startups in Europe and America who are funded even at idea stage. Why are African startups not only required to have an MVP but also must have generated revenue or some traction? Why do the rules change for African startups and how is Chanzo Capital changing this narrative?
That’s another good question. Just to give a background on it before I answer the question. Generally when there’s a lack of something, scarcity breeds elements that are not the norm. There isn’t enough supply of capital to feed the demand that entrepreneurs have. In other words there’s more entrepreneurs looking for capital than there is providers of capital. So that creates another asymmetry and that means the guys who have the capital start to create some rules to minimize their exposure i.e. if there were more providers of capital than entrepreneurs, the entrepreneurs would then have the leverage.
The leverage is scud in the investors space because there isn’t a lot of us. I’ll give you an example, I get more than one hundred emails and we would only invest in 2 or 3, annually. That’s a huge asymmetry. So in a manner of speaking that creates certain ground rules. If I am going to invest in 3 companies, I’ll lift the level of my criteria, right? So, you don’t only need to have an idea but I want to see a minimum viable product as well and I want to see traction. So if two entrepreneurs came up to me, one has a great idea that could become a billion dollar company.
But he just has an idea and there’s a second one that comes to me and says, hey, Eric I had this great idea and I have a product and I have some customers as well. I will mostly likely invest in the one that has the traction and has some customers because as a matter of fact as much as the first guy’s idea is great, it is much more risky. So in other words this is a problem with a maturing market and as the market matures this problem will go away because you will now have more supply of capital and those kind of additional requirements will kind of level up to other markets. As I said, as Chanzo capital in the beginning, we literally invested in new ideas and in fund two, we have done the same thing, except there were one or two companies that already had a product and some had traction but even then it wasn’t a requirement.
What are some of the challenges you face as a VC firm?
You know the biggest challenge that we face is, two things, we believe that there’s more capital needed in the marketplace. Speaking from our perspective we believe the more VC funds we have in the market the better for the eco-system because, this is not one of those things where the fewer the merrier, rather the more the merrier. So we need more VC funds. The second is that we as a firm need to be able to build or grow our internal capacity. For example for our first fund, we did 12 companies and for our second fund we would not do more than 12.
Because we as a firm don’t have the capacity to manage more than 12 companies. Beyond 12 then we are stretched because of how our model works. We have to aim to build internal capacity to be able to deliver and execute the model right. So we can’t just invest in more people or more companies because we must have the internal capacity to be able to deliver on the model. So the biggest challenge is finding the right resources, building internal capacity so that we are in a position to execute on the mandate
In your opinion, what role can African diaspora play in solving the startup financing gap in Africa?
A huge role. If you look at Asia especially India and China, in the tech space, one of the biggest things was their returning diaspora. A lot of those Indians that studied in the US started going back to India and some of them that worked in the most successful companies and made a lot of money – took it back to India. And that made a huge difference in India and China. And I think Africa is experiencing that phase now. Actually, it is one of the four major trends that will catalyze Africa’s dominance of the 21st century – the returning diaspora and also the Africans who were born in the diaspora like African Americans who are now reconnecting to their roots and want come back.
Stevie Wonder wants to return to Ghana, even Jack Dorsey says he wants to live in Ghana – he came to Ghana, he loved it and wants to come stay. So these people come with their resources and their networks and that creates a spotlight – a mega trend. The second mega trend I talked about, is Africa’s huge population. So all this entrepreneurship we are seeing today, it’s the young people building them which wasn’t the case before. I mean when we were in school the main aim wasn’t to start a company.
It was to finish school and go outside and start to hustle. But now you find young guys who believe in themselves and say they want to start their businesses in Africa – that is another mega trend. And the third mega trend is the emerging middle class in Africa. So the middle class is about 34 to 40% and that middle class spends between 2 to 20 US dollars according to the Africa Development Bank, that middle class will grow to 60% by 2060 and their spending power is going to be bigger.
So African is going to have this emerging middle class which consumes technology. So as these entrepreneurs build these technology companies, there’s a middle class that will consume their technology. And the forth mega trend is the common market, the Africa Intercontinental Free Trade Area (AfCFTA). We have a common market that is reducing the barriers to trade among ourselves. So companies expanding to Rwanda will find it much more easier, companies expanding from Nigeria to Ghana will find it much more easier as well and the like.
What sectors in Africa are the future of the continent in your Opinion?
Well, so, if you take the digitization of Africa agenda what you see is the application of technology. So even with all this fancy technologies like Artificial Intelligence (AI), Virtual Reality (VR), Machine Learning, blockchain and others. But in Africa what we need is the application of these technologies to solve problems and that’s where the future lies. For example, since mobile money is predominate in Africa as the main means of electronic payment, imagine connecting that to blockchain to create a peer-to-peer payment system – huge potential.
Any last remarks to our audience and how they can connect with you or reach out to you.
But to conclude, I wanna tell entrepreneurs not to give up. You know the main difference between success and failure is giving up. If you have an idea and you believe in it enough then stick to it, don’t give up and it would eventually work out.
Ken is a Quantitative Trader with experience in investments, quantitative finance, financial modelling and algorithmic trading in Global Investable Markets (GIM). He enjoys using Bayesian Statistics, Time Series and Machine Learning in developing Robust consistent Alphas in Equities Market, FX, ETPs and Derivatives instruments. He enjoys deep dives in understanding High Frequency Trading infrastructures and improving how the African financial markets work. He holds a Bachelor's in Actuarial Science from Strathmore Institute of Mathematical Sciences : An Executive Program in Algorithmic Trading (EPAT) certificate in Algo Trading from QuantInsti : A current MSc student in Financial Engineering at World Quant University.