This article first appeared in The East African on July 23, 2015
The visit by US President Barack Obama to the region and for the Global Entrepreneurship Summit has caused a media frenzy. The President Obama’s visit and the GES have turned global attention to East Africa’s economic and business potential. GES is an important summit East Africans should be poised to take advantage of. But what should the East African businesses be looking for from the summit and thereafter?
While seeking investments that may arise from GES, regional entrepreneurs need to do three things. First, they should seek to attract long-term patient capital; second, leverage impact investment; and finally find local partners in securing investment deals. East Africa’s economies are young and most entrepreneurs are still in their nascent stage of innovation, creating business activity that can fundamentally shift the structure and direction of the region’s economy.
However, because many entrepreneurs have new business ideas, they may not be sure how long they require for their ideas to take off, and the factors needed to direct the venture into a success that generates attractive returns.
Sadly, East African entrepreneurs function in a domestic environment that tends to be risk averse and often they find difficulty securing capital to seed their businesses. This has created a culture of credit hunger that may push some entrepreneurs to accept any type of investment without doing due diligence required to ensure the investors they get are a right fit for their businesses.
This risks the creation of a scenario where entrepreneurs attract vulture capital where investors (usually venture capitalists who fund risky and new ideas) deprive an inventor control over his or her own innovations and makes most of the money the inventor should have made from the invention. Local entrepreneurs should avoid this and do the due diligence on those from whom they seek capital.
Ideally, East African entrepreneurs should be looking for long-term patient capital where the investor is willing to make a financial investment in a business with no expectation of generating quick profit. Instead, the investor is willing to forgo an immediate return in anticipation of more substantial earnings later. This patience is crucial to give local businesses time to pilot, and get their products and models right so that they have a solid foundation on which consistent returns can be generated. Thus, entrepreneurs should look for the right investment partner rather than letting their credit hunger get the best of them and lead them into deals where they are at a disadvantage.
This leads to the next point, East African entrepreneurs should do their best, where it works, to leverage impact investment funds that seek to generate triple bottom line returns (financial, social and environmental) as this type of capital tends to be patient with an appreciation for returns beyond the financial. Thus, those whose business ideas feed directly into development and improving the lives of East Africans should look for impact investment funds in the US, a sector due to reach $1 trillion over the next few years according to JP Morgan and Rockefeller Foundation.
Finally, entrepreneurs ought to seek to partner with local companies, particularly business incubators that have a credible track record in attracting capital from the US. This is important because the incubators are experienced in working with US investors and have an understanding of the key features a business should have to attract capital; they will let entrepreneurs know whether they are ready for US investment or not. Also, local incubators can offer young and new entrepreneurs the technical support and mentorship to strengthen their business so that the business is a stronger candidate not only for investment but generating healthy returns.
If East African entrepreneurs consider the ideas above, they will be well placed to ensure that they make full use of the GES and any future investment opportunities that arise from it.
Anzetse Were is a development economist, email: email@example.com; twitter: @anzetse