Co-investment Funds to the Rescue; Addressing the Valley of Death

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Whether you believe in it or not the Valley of Death (VoD) is real! If you are still wondering about its whereabouts, talk to any seasoned entrepreneur. The VoD refers to that phase of a company where it is too early to attract any / huge appetite from early stage investors and it’s also not generating enough cash from its operations to choose not to look for investors. The solution for most startups in terms of how to navigate this stage is usually to rely on funding from ‘the three Fs’, family, friends and fanatics (feel free to use your own label for the last ‘f’), angel investors in some instances grants.  African entrepreneurial ecosystems while rich with opportunities probably have some of the deepest and longest VoDs, a lot of work is going into how to reduce the fears elicited by these valleys, not to mention the casualties they record. One of the actors keen on addressing the challenge of VoDs is the Government. As would be expected, different Countries are at different stages in this journey; some have started while others are still getting their act together.

Recently, the South African government initiated a co-investment fund that is meant to address the problem posed by these VoDs and improve number of the Companies that make it to the other end alive. The Initiative is being championed by the  Technology Innovation Agency (TIA) whose goal is to bridge the innovation chasm between research and development. The body focuses on education institutions, science councils, public entities, private sector and commercialization. TIA will adopt a one-to-one matching such that for every Rand invested by an angel investor or syndicate of angels, the agency will also invest a Rand as loan up to a maximum loan of R 500,000 (USD 35,000). The loan will be done through a royalty financial instrument (repayable by taking a percentage of the revenues of the company over a period) that is currently priced at an IRR of 20%. The loan plus accrued interest is repayable should the start-up have enough money (definition not clear) to repay TIA and should it fail, it has no obligation to pay the loan.

To ensure that the fund has maximum impact, it will channel funds to entrepreneurs who suffer the highest casualties as they scale the VoD. Priority will be given to entrepreneur applicants who are either black or women. Further for efficient fund allocation and to catalyze local capital all applications will require joint investment committee approval from both TIA and an Angel Investor or Angel Group.

Co-Investment funds can play a critical role in catalyzing local capital and addressing the VoD challenge faced by indigenous entrepreneurs. Corporates, DFis, Governments and other actors should consider them as a means of addressing systemic challenges in most African Silicon Savannas. The intervention by South Africa’s Government looks to be a good starting point for players interested in experimenting with this model. Other interventions working under the same principles and with notable traction include Catalyst a cross-stakeholder initiative that aims to increase the pool of capital available to promising African growth-stage entrepreneurs, as well as support the startup ecosystem including hubs and angel networks. As with everything the proof of the pudding is in the eating, the co-investment model offers a different approach to address the VoD challenges, more initiatives need to be launched to better design the model for the African Continent.

Written by Adelaide Njoki and Stephen Gugu

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