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Enthusiasm and business acumen not enough for African Entrepreneurs

By Mohamed Osman and Abdelkarim A Hassan

Africa’s image as portrayed in the media is usually that of conflict and hunger; however, that image is rapidly changing and is quickly becoming a thing of the past. We are currently witnessing a time when Africa is filled with excitement, anticipation, and hope for a better tomorrow as opposed to the pain and despair of yesterday. Even the mindset of leaving the continent in search of better opportunities has transformed into that of staying and capitalizing on the current economic boom of the last 15 years.

The African diaspora which was to blame for much of the brain drain of the past century is now returning and investing in new businesses. According to a recent study by the UNDP, in 2014, 26 % of Africans created businesses, compared with 7.4 % in Europe and 13.4 % in the US.Africa economy These entrepreneurs do not lack enthusiasm and business acumen; however, it may not be enough to keep their ventures alive. Unlike young companies in the West, African businesses do not have ready access to loans and support. These entrepreneurs need various kinds of support to improve their business environment, enable job creation, and stimulate investment. Business in the Region is booming across all sectors from Information Technology and Telecommunications to Alternative Energy.

Today Africa is home to the worlds’ fastest growing economies, with a growing middle class whom are young and educated. The International Monetary Fund is predicting gross domestic product growth of between 2 and 6 percent or more for most of its countries in 2015, lifting millions of consumers into the mid-income category.

According to Dr. Bokrezion, Market Entry Strategist at Africa Business Jumpstart, “We follow media outlets featuring amazing opportunities in Africa and highlighting amazing returns on investment (ROI) reaching well above the global average. At around 15-25% ROI – sometimes even more than 30% – as compared to a global average of around 5-10%, Africa seems to be the place to put your money in”. In fact, Forbes states that according to the 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB) in the US, “the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.”

So Africa is a little like a full pot of honey, and a lot of bees are flying around it, but they are not quite sure where to land. You don’t want to get stuck in sweet promises, right? The media at large is highlighting opportunities, but you hear little about how to go about your investment plans, whom to contact, and how you can ensure your contacts are reliable.

Recently joining in on the action have been angel investors whom focus on investing in African Small and Medium Enterprises (SME) to facilitate the creation of profitable and sustainable businesses. To learn more on the role of angel investors in Africa and East Africa in particular, we recently interviewed Matthew Davis, the co-founder of RENEW LLC, which has recently been featured in the Washington Post and Forbes, for its entrepreneurship, particularly the work that RENEW and other organizations and entrepreneurs are carrying out in Africa to support SMEs.

Washington DC Entrepreneurs Matt and Maure
Matt and Laura, photo- courtesy of Washington Post

Responding to a question we posed on the investment network organization, RENEW LLC; Matthew stated, “RENEW is an investment adviser that manages and serves the Impact Angel Network (IAN) – the largest U.S.-based angel network for Africa. We started RENEW because we believe it is better to focus on opportunities in developing nations rather than on the problems. We believe it is better to invest than to just provide handouts. We find promising businesses, invest in them, and grow them into world-class companies. We do this because we believe that many growing businesses together create prosperous nations.”
Although Africa is ripe for business opportunities, there still remains certain barriers to market entry. Various reports including the World Bank’s report on the ease of doing business often cite the high cost of doing business in developing countries. In the aforementioned report most African countries were portrayed as being risky and the high costs of doing business were often mentioned due to complex administrative procedures and bureaucratic regulations coupled with inefficient and weak judicial institutions. Vetting of the businesses could also be quite cumbersome, due to the lack of reliable data on credit history and business track records.

Addressing these challenges based on his past experience in Africa and Ethiopia in particular, Mathew stated ” We invest in ethical and visionary leaders who have a proven track record of successfully growing companies. We like businesses that make sense in the context of their industry and their country. For example, coffee, teff, livestock and fast moving consumer goods are sectors that make sense to invest in, in Ethiopia. We will consider start-ups on rare occasions, but they must be started by entrepreneurs who have already been successful in other ventures. The most important criteria is the entrepreneur, because investing is similar to getting married – you have to really believe in the person. RENEW and the IAN are private equity investors, so we are investing in companies that normally already exist in exchange for an equity position in those companies. So, the incentives we look at are generally at the company level.”

Africa Econ growthMatthew continued to say” My philosophy is that everyone can do better – and this mindset is what creates successful people, companies and countries. I also made a choice to invest in Ethiopia and I am a guest in this country. So, if I don’t like it, then I can leave. But I like it very much and plan to invest here for many years. I believe things are getting better every day!

On the aspect of growth prospects of SMEs in Africa, Matthew said ” the growth prospects depend on the entrepreneur. I think business owners need to really ask whether they are ready to enter the world market and compete with international companies. If so, they may need to learn new behaviors, adopt new customs and implement strategies that are different from their traditional ways. But, entrepreneurs are generally open to change and are driven to succeed; I think the prospects for SMEs in Africa are just as good as SMEs in Silicon Valley. I like the people, the food, and the many opportunities.”

Africa is in its natural progression to develop and move forward in pursuit of its true socio economic potential and likely will do so through this renewed entrepreneurial spirit.

Mohamed Osman

Abdelkarim A Hassan

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3 Responses to “Enthusiasm and business acumen not enough for African Entrepreneurs”

  1. Bulhan Warsame

    I think food security and adequate infrastructure such as roads, airports, and ports are a must before a country strives to achieve higher level development. This means investment in agricultural products and infrastructure building must be prioritized. Since infrastructure is the government’s responsibility, it may need to seek low interest long term loans from international institutions and from wealthier friendly countries. Also,
    developing a skilled labor force is critical for any economy, both developing and developed. Adequate post-secondary two year technical colleges may cover this demand. And lastly, Africans need to develop their financial systems. As the article points out, currently African entrepreneurs’ ability to expand their businesses is constrained by lack of access to capital. As a result, financial markets must be established that lend money to entrepreneurs with good business plans. The question is where would the money come from? This needs the public to trust the financial system so that savers can deposit their money in the banks. Central banks must also create a system which guarantees that depositors would not lose their money in the event of institutional bankruptcy. However, financial institutions must be strictly observed and monitored to ensure that they are financially healthy. The last thing any country needs is run on the banks, as happened in Greece recently.

    I don’t think few Western investors here and there would not make a tangible difference for African countries. Therefore, locals must find a way to create functioning local financial markets that would lend entrepreneurs the capital they need to create new businesses or expand existing ones.

  2. Ahmed Baasto

    Few nations have ever benefited from Western investment. Look at Latin America, America’s backyard. For so long, it has been subjected to interventions that have always served the interests of US based businesses. In Guatemala, for example, there was a Jew who immigrated to the United States from Belarus in 1892. He eventually ended up “owning” 70% of all arable land in Guatemala which he used to grow bananas and other fruits which was exported to the US. When one Guatemalan leader had tried to distribute land fairly to the country’s peasants, the Jew had convinced the CIA to intervene on his behalf and get rid of the leader. He had organized a large number of mercenaries from the US who toppled the leader which had eventually led to the long running Guatemalan civil war. I believe Western investment is a curse for most countries as they don’t like anyone to really develop. What we need, however, is to emulate Asian nations that have made huge development strides since the 1960s. Back then, most of Africa’s per capita, including Somalia’s, was much higher in today’s dollars than most Asian countries. In fact, Africans were much better off back then than they are now. So we lost a huge ground relative to the so-called Asian Tigers. In addition to having good governance in place, we need to eradicate corruption and emulate Asians. These days China has become a good source of development loans for Africa. So a good starting point is developing our infrastructure and small manufacturing plants that help meet our local needs. I agree with Bulhan’s suggestions for the establishment of local financial systems (possible joint ventures with foreign investors) that could meet the capital needs of African businesses.

  3. Dhacarbe Abdul

    I think Africa should follow Asian foot steps rather than a Western dictated styles. As said before me there is no example of developing country that succeeded in copying western promoted development style. Examples of achievements are Malaysia, India and China and none of them followed classic western dictated development path.
    Africa needs rule of law, security, food security and local manufacturing foundation from small technical schools.
    I remember in the late 80s when then Somali government tried to promote small entrepreneurial money lending programs and the banks were emptied with fraud( Somalis use to call “CASAYN=which translates MAKING RED=Emptying of banks).
    What a lot of Somalis know but choose to hide/ignore is that a good number of well to do business people at the time got rich just by looting the banks.
    My point is, without rule of law and strong not corrupted justice system, Africa is doomed to fail.

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