On February 23-24, the GSMA’s Ecosystem Accelerator team had the opportunity to participate in the 4th edition of Sankalp Africa Summit in Nairobi, Kenya. The event convened hundreds of global delegates including entrepreneurs, investors, corporations, governments and funders with the purpose of facilitating connections, collective learning and a collaborative approach to building entrepreneurial ecosystems. Here are our three main takeaways from the event.
New financing models are starting to emerge
Despite huge flows of capital to the emerging world, early stage businesses continue to face immense challenges in accessing finance. Accion Venture Lab and the GSMA Ecosystem Accelerator Innovation Fund, both participating in Sankalp, are some of the funders closing the existing market gap in low ticket (under $500K), early stage investments in emerging markets. Aside from funding raised from family and friends early stage businesses struggle to access small tickets of funding to validate business model and then scale in one or two markets.
However, new models are starting to emerge. A growing network of investors, start-ups and banks have begun to employ innovative financing models to close the funding gap in emerging markets. Fenix International, a pay-as-you-go energy company operating in East Africa, shared during the forum how they have employed a mixture of grants and convertible debt to raise capital. Due to high working capital requirements, some more mature start-ups have securitised customer receivables through off balance sheet vehicles. Another venture, Karibu Homes (a low-cost home builder) explained how they have used the services of a boutique consulting company, Open Capital Advisors, to increase the probability of raising funding from like-minded investors. These examples highlight how the start-up ecosystem is innovating in its approach to raise capital.
Emerging markets face unique challenges that call for local solutions
As raised by several entrepreneurs during the event, currency risk remains a big issue for start-ups in emerging markets. Debt is usually denominated in foreign currency, usually USD, yet customer receivables are in local currency. Hedging currency risk using existing financial instruments is cost prohibitive. Local banks, if well integrated into the ecosystems, could mitigate some of this currency risk. Yet, their appetite to participate in this market remains low mainly due to the lack of collateral and track record for start-ups and sufficient market experience in the banking industry.
Beyond funding, challenges faced by start-ups in emerging markets are often times contextual and therefore require local solutions that are in sync with realities on the ground. Navigating these challenges often requires combined efforts between multiple ecosystem players. One option we highlighted during the panel we took part it is to collaborate with mobile operators in local markets where mobile technology is already widespread.
Mobile technology again mentioned as a game changer in emerging markets
In Africa, mobile technology has increased the speed of turning data into insights. This has led to the customisation of business models to serve niche markets along with the democratisation of access to information. Over the two days, we met with several start-ups taking advantage of this effect: Farmdrive (Kenya) which uses mobile phones, alternative data, and machine learning to close the critical data gap that prevents financial institutions from lending to creditworthy smallholder farmers; Atikus (Rwanda) which expands access to capital by providing insurance and technology-based risk solutions for MSME credit lenders; and Sokowatch which uses SMS to enable shopkeepers to order and receive goods within 24 hours at no extra cost.
Mobile technology will continue to play a critical role in enabling consumers to access basic yet essential products and services, building new and efficient markets, and reducing existing inefficiencies across multiple industries such as agriculture and banking. Mobile operators in Africa are central in this enabling function. While some are already investing in mobile first start-ups (Safaricom’s Spark Venture Fund), others are opening their APIs (Orange Middle East through #303# MyStore and Etisalat Nigeria through sharing API documentation) to unlock market access for local start-ups.