Launch Africa Ventures’ approach to investing in startups

Zachariah George, managing partner at Launch Africa Ventures

Launch Africa Ventures is a pan-African venture capital fund that has backed over 100 early-stage startups in more than 20 countries across a wide range of different industries, from Kenyan retail-tech company MarketForce and Nigerian digital bank Kuda to South African data scientist marketplace Zindi.

James Torvaney speaks to Zachariah George, managing partner at Launch Africa Ventures, about the firm’s investment philosophy and why ‘fringe’ markets such as Sudan, the Democratic Republic of Congo (DRC) and Madagascar shouldn’t be ignored.

Explain Launch Africa’s investment model. What kind of businesses are you looking to invest in?

Launch Africa is a pan-African, early-stage, venture capital fund that invests in pre-Seed, Seed, and pre-Series A startups, with either B2B or B2B2C business models. We have 130 investments in our fund so far.

We generally look at companies that have gone through world-class accelerator or incubator programmes and have therefore had their business models, legal structures, and technologies vetted. These companies should also be able to utilise technology to address real-world issues and exhibit the potential to expand beyond their home market within the next 12 to 18 months.

We expect the companies that we back to be ready for a Series A round within 12 to 18 months of our investment.

How does Launch Africa do things differently to other firms investing in African startups?

We have made a concerted effort to change the narrative [of venture capital in Africa] with the speed, efficiency, and the type of funding we give.

We aim to take not more than eight weeks to make a decision on investing in an early stage company. Several other funds may take much longer – sometimes up to nine months – to make a decision, which certainly isn’t founder-friendly.

We only invest via founder-friendly instruments. As much as possible, we try to avoid “priced rounds” (a type of financing round in which the company issues new equity at a predetermined price per share) and instead use “SAFE notes” (simple agreement for future equity) or convertible notes for most of our investments. These instruments are straightforward and inexpensive from a legal standpoint.

We are also different in that we have a shorter fund-life – seven years versus the typical 10-15 year life cycle in traditional VC – and we keep liquidity (exits) as a clear focus for our investors.

Who are the investors in your fund?

We have 238 limited partners (LPs). Our LPs are almost entirely retail investors. We’ve had investors invest as little as $25,000, whereas in most other funds the minimum is typically $500,000 to $1 million to even be considered as an eligible investor. We don’t have any DFIs or large institutions investing in our current fund, as they typically have much longer decision making timeframes, stringent requirements and special terms. So our LPs are mostly angel investors, individuals, family offices and corporate VCs that are very strategic and are usually proactive when it comes to co-investing with us.

We offer our LPs the opportunity to co-invest with us at no additional cost or fees, making us a more appealing choice for founders. By choosing us as an investor, founders gain access to larger pools of investors, both as co-investors and as potential investors for future funding rounds.

LPs might choose to co-invest in 10 or more of our portfolio companies, or zero – it’s entirely up to them. But for those that are interested in co-investing, we can provide them with access to our investment memos and other information. So investing in Launch Africa as a fund gives them one bucket of return, and they also have insight into companies that they can invest into in their own capacity, using our due diligence as a key decision-making tool.

Is all of Launch Africa’s due diligence done in-house?

We have partnerships with the biggest accelerators, incubators, and venture builders on the continent, so a lot of the legal and tech due diligence can be outsourced to strategic partners. For example, if companies have been through a prominent global accelerator – such as Y Combinator, Startupbootcamp, Founders Factory, Techstars, etc. – they typically get a lot of technical support from companies like Amazon, Google and Microsoft.

But the management, financial, and operational due diligence is all done in-house.

Why aren’t there more venture capital investors following your approach?

A lot of fund managers in Africa tend to come from a private equity mindset. Most fund managers are run by private equity professionals that tend to view venture capital as an extension of private equity but with smaller cheques.

To do venture capital properly you need to really understand venture-building. You either need to be an ex-founder that has built a company, scaled it, and sold it, and know how to replicate that for multiple companies, or someone who has accelerated multiple other companies through either a venture builder, an accelerator or an incubator. Venture capital is so much closer to an accelerator than to private equity.

It’s getting better but up until now, most venture capital firm in Africa still struggle running venture capital funds the way they are done in Bangalore, Tel Aviv, Berlin or San Francisco. Factors such as exponential scaling, customer acquisition, marginal cost-benefit analyses, lifetime value to customer acquisition cost ratios, etc. – these are an entirely different set of skills to what’s taught at business school.

You have invested in a number of startups outside the traditional venture capital markets, for example in Sudan, Uganda, Cameroon, Benin and Madagascar. What is your strategy in these markets?

If you are a laggard and investing in markets, products, regions and sectors after everyone else has backed them, you will get the crumbs. If we were having this conversation seven years ago, you might be asking, “Why are you investing in Nigeria? There are no startups there!”

Of course, two thirds of our investments are in proven markets like Nigeria, South Africa, Kenya and Egypt, but we can’t ignore the rest of Africa just because they haven’t caught up to the biggest four markets. You have to be aware of what’s happening on the fringes across the continent. You can’t just be backing fintechs in Nigeria.

For example, the DRC has a population of almost 100 million people; Kinshasa has more people than Lagos. Just because they haven’t got the same tech adoption that Nigeria or Kenya have now, it doesn’t mean that they can’t get there in a few years.

These countries are not small markets. Tanzania has 60 million people, Ethiopia has 120 million. It’s just a matter of figuring out tech adoption – online learning, digital health, logistics and mobility, etc. If you are on the streets of Kinshasa or Addis Ababa, the way you consume educational content, buy groceries, move from A to B, or access healthcare, is changing. Investors who are ignoring those markets either don’t have enough intellectual curiosity or the risk appetite to look beyond safe havens. And venture capital is certainly not for safe haven investors.

Ultimately, the funds and investors that spend time doing research on future and up-and-coming markets are the ones that can make the most outsized returns.

What methods do you use to research and understand the trends and developments in these ‘fringe’ countries?

Firstly, we only invest in markets that have a clear network of universities, research centres, tech transfer offices, venture builders, accelerators, incubators and corporates that are active in the innovation sphere; so realistically it’s about 25 markets in Africa.

Secondly, we can’t do everything ourselves, so we have to work smartly. We have partnerships with almost all the leading accelerators, incubators, venture builders, co-working spaces and angel networks across the continent. We work with them not just from a deal perspective but also from an intelligence perspective – we have several dozen advisors on the ground in these countries that help us with intelligence.

It’s also worth noting that the vast majority of our companies have B2B or B2B2C business models. So a company could be in Madagascar or Benin, but if they are working with international enterprises like MTN, Vodacom, Sanlam, or Stanbic, they may be able to use these clients to break into more established markets.

How do you think rising inflation and interest rates, along with a decreasing risk appetite from many investors, will affect your initial investment strategy?

It could go both ways. Macroeconomic conditions globally aren’t that great, so it could be a situation where larger tech companies look to buy smaller tech startups to consolidate the industry, and you could argue that M&A would actually increase. You could also argue that investors will be a bit more conservative in how they deploy capital, so you might see an overall increase in capital but going to a smaller number of companies.

But remember that most venture funds in Africa had their vintages (start dates) in 2015 or 2016, or just before Covid-19, so they still have capital waiting to be deployed. And they can’t just sit on that money and not invest. That would be irresponsible. So we definitely won’t have the frequency of deploying capital like last year, but there are still good deals to be had, provided the companies’ fundamentals are good.

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