The Local Investor Dance - Lessons From South Africa And SocketWorks

"Unknowns are frightening."
"With a made up concept and a few words, the unknown becomes simple and satisfying."

So goes the introduction to this very interesting video on Critical Thinking

.http://www.youtube.com/watch?v=752V173e31o

"Here be dragons" denotes dangerous or unexplored territories, in imitation of the medieval practice of putting dragons, sea serpents and other mythological creatures in uncharted areas of maps. Mark Shuttleworth decided to name his emerging market investment company "Here Be Dragons" or HBD to poke fun at this concept now that most of the world has been charted and we did not find dragons. He also mocks the perception of the rest of the world about the emerging markets especially Africa. Mark Shuttleworth is a South African and the first African in Space.

On this issue of local participation by investors in the African tech ecosystem I remember this quote:

"The only thing necessary for the triumph of evil is for good men to do nothing." - Edmund Burke (1729-1797)

 I would have added “or say nothing”. I have never failed to speak my mind on the issue not just because it is my wish but also because I have seen both sides of the coin in this same continent. I have been part of the mistake and my own corrections alone are not enough, changing the status quo requires collective awareness and concerted effort. I also believe we are taking a medieaveal approcach of simplifying this issue by branding local investors as dragons.

I have seen many reactions on discusions about this topic from lukewarm support to outright rejection of the concept but I have seen little action. A lot of people even ask what I am doing about it? Those are fair criticisms but sadly still based on assumption. Assumptions are what got us into sh*t creek. I promise Seyi Taylor I will pay him for each time I use that term to describe our ecosystem. We are actually doing a lot about it but there is no sense of urgency about it and that is because we believe that there are other shortcuts. Those shortcuts will not make us grow and we have already been there before. There is no point repeating  past mistakes.

Why we are not moving fast enough

When it comes to growing our ecosystem from within, we can give a lot of reasons and excuses as to why things are not happening the way they should in Sub-Saharan Africa (SSA) but the fundamental fact remains that we are still behind. A lot of people see imaginary obstacles (or dragons) without even trying to encounter or overcome them. A lot of players suffer from a severe case of  “analysis paralysis”. It is system wide and all parties are to blame (mea culpa). A lot of the entropy exists mainly because the stories of mistakes made in the past are hardly ever told.

I have been on all sides of the equation as an entrepreneur (funded by family), a consultant to the IFC’s SME development program APDF (African Project Development Facility which led to huge successes like SocketWorks) and on the side of investors with family owned investment entities. I learned a lot by making costly mistakes and also from watching them being made by others. What I have learned over time is that it is important to make mistakes and learn from them. What is even more important is that we talk about those mistakes so that others can learn from them.

South Africa

I have had a long history with the “rainbow nation” and in many ways still tied to players there. There are many examples I can give of successes and failures in the startup community South Africa because I have a lot of history with the country. Elon Musk is one of the Silicon Valley entrepreneurs that I absolutely adore and he was born and spent most of his early life in South Africa. I have been in and out of there regularly each year for 2 decades.

The First time I visited Fundamo was 2008 in Cape Town, they were still using Mark Shuttleworth’s HBD offices at Durbanville. Mark Shuttleworth and Sanlam were early stage investors in the company and probably made a lot of money when Fundamo was sold to Visa last year. I also noticed that a lot of the early guys at Fundamo were ex-Sanlam and they were also working from the HBD offices.

In the 90s, I also worked with a company (now defunct) named Global Technology (Glotech) in Johannesburg and their offices at Sunninghill was home to quite a number of startups who shared the same office park as well as the same investors.

My friend Andrew Turpin (ex-Glotech) and others started House4Hack a co-working location in Pretoria last year and built a tech community around it with amazing results. Andrew and Salil (my co-founder at Swifta and also ex-Glotech) had started Cyber-Mint - a company with better ideas than Paypal and Google Wallet many years ago. The venture was awesome but however did not survive the dot-com crash as the market imploded. Similar ideas from Cybermint are what Google now seems to be adopting for its planned rumoured Google Wallet and the Wallet Card. CyberMint wanted to disrupt payments and make card associations extinct with the wallet and a reloadable card. They were far ahead of their time. Cybermint is one of many interesting startups I have been fortunate to have been engaged with in South Africa.

South Africa has a lot of problems similar to the rest of Africa and probably much more after the devastating effects of apartheid. The country definitely has better infrastructure and a very self-sufficient economy that is industrialized. It is obviously not like your average Sub-Saharan African country but there are still a lot of similarities. African countries usually have similar cultures and similar problems and South African entrepreneurs capitalized on that to scale and grow across the continent.

Local entrepreneurs solve almost all local problems in SA and they have been able to scale their solutions to other parts of Africa. We are still working with a lot of South African partners till today.  Companies like Fundamo and others have become not only African successes but global leaders. One could argue that one of the unintended consequences of apartheid was that South African entrepreneurs learned to become more innovative and they grew their own ecosystem to support themselves because they were isolated.

I mentioned in a previous post that Sub-Saharan Africa startups should look towards SA and North Africa (we also work with partners in Egypt and Morocco) for inspiration rather than Silicon Valley. We can learn a lot from South Africa's self sufficiency and how they get local investors engaged. It is definitely easier to get local investors from South Africa to be part of the local tech ecosystem in Sub-Saharan Africa instead of  Silicon Valley investors because they understand Africa better.

The biggest limitations to South African investment outside South Africa seems to be their strong exchange control laws but they have been able to successfully export their knowledge and technology. We can also learn a lot from building sustainable and viable local tech ecosystems from them.

SocketWorks

SocketWorks was probably the first company founded in SSA by a Silicon Valley entrepreneur. Dr Aloy Chife, (ex Apple, ex Enron, a true African pioneer and legend) when he came back home to Africa in the new millennium. With his SV experience he attempted to raise funds from local investors to build a world class technology company locally. SW Global is one of the first globally competitive technology companies to emerge from West Africa and penetrate the global information technology (IT) market. 

His attempts and my part in it as a consultant in the process opened my eyes to a lot of what we were doing wrong as a local tech ecosystem. While Socketworks may have been a success itself the ecosystem did not gain much benefit from the success because of certain decisions made and which I was part of.

SocketWorks knew when to look for money and where to look. They had many options including the International Finance Corporation (IFC) and a number of local investors. The IFC at that time had no knowledge of opportunities in the ICT sector in SSA and they asked us to do a market assessment as due diligence on SocketWorks' business plan.

While we were carrying out this assignment the first problem we encountered was that there was no data readily available. We were lucky that by coincidence a local company had done some research and produced a Forrester type report. That report served as a basis for us to carry out our research. Aggregating local data is still a huge opportunity and 10 years after we have done little about it, I accept the blame for that.

We did a mapping of technology resources in Nigeria based on the data available as at 2002 and came up with the model below to guide strategic engagement.

The local investors at that time actually wanted to invest in SocketWorks as a means of solving problems in their existing ventures and were located heavily in the top right quadrant. We felt however that the strategic way to go was in the other three quadrants where there was already a lot of whitespace and little competition.

The IFC backed us and invested in them. SocketWorks also took the advice from our assessment then became a runaway success. They scaled rapidly as they took over the systems and infrastructure of most Nigerian Universities. They even started scaling out of Africa and went as far as Sri Lanka with their technology. They now also run the entire Foreign Affairs and Immigration ministry's technology cloud infrastructure for the Nigerian government.

Where did we get it wrong?

SocketWorks' initial problem was funding and they already set their sights on the top right quadrant because it was actually easier to address. The only problem to the IFC as a potential investor was that it was a red ocean and they required blue oceans and whitespaces for their investment to make sense. The local investors on the other hand were still willing to invest in this great idea from Silicon Valley because the entrepreneur not only had a track record, he also had vision. The only problem was that the keenest local investors required controlling interests.

We steered Socketworks away from these people and into the hands of the IFC who acted as an impact investor. This was a grave mistake with long term consequences for the ecosystem. Socketworks needed very little in terms of investment as they had hit the mother lode but it was important to the ecosystem for other local players to have been involved. If you look at the shareholding of SocketWorks as at the time they made the IFC deal the minority stakeholders are still the drivers of technology and entrepreneurship in Nigeria today:

Ownership of Socketworks is as follows: Aloy Chife (CEO) 46%; Fola Adeola (Board member) 10%; Pius Onobhayedo 7%; Roland Ewubare (Executive Director) 13%; Tunde Sotunde (Board member) 1%; Zenith Bank 10%; and Socketworks’ employee stock option plan 13%.

 

What we should have done at that time was suggest a consortium approach where local investors partnered with the IFC to make this happen but we actively discouraged local participation because of bad experiences at that time with other local investors in companies like Econet. The IFC also had been recently burned with its foray into the banking sector partnering with local investors as well. 

Our local investors only know one way to mitigate risk and that is control. Because they lack experience with proper governance, control itself becomes a burden and prevents growth. We thought we were protecting Socketworks from that burden. It is important to note that those local investors (including family members) I was working with at that time have only had successes in enterprises where they did not have majority shareholding. Governance is better when you have more experienced and world-class investors as part of the mix.

Someone like Fola Adeola who was the founder of GTBank and seed stage shareholder in Socketworks is also one of the principal actors behind the submarine internet cable company MainOne. It is because of possible exits from companies like SocketWorks  that kept him interested in technology investing. He did not need to have controlling interests in SocketWorks or MainOne.

SocketWorks became a lone tree in the Savannah and there was no support system around it after the IFC decided to move on from APDF program. Impact investors are very dangerous in this regard as their motives and altruism can suddenly change course. It is only recently that Aloy Chife himself has decided to start investing in other smaller local ventures to help create depth in the ecosystem. Almost a decade too late.

There are many other examples I can give but the fact remains that their stories remain untold because the ecosystem is not structured to provide such narratives. The founders don’t share stories and the investors don’t talk because nobody asks the right questions. The right narratives provide a learning and feedback loop into the ecosystem and it allows it to strengthen. I can share the SocketWorks narrative because the IFC made their invesment activities public. That level of transparency is very helpful in an ecosystem.

ITWeb and others provide that same narrative for South Africa and there is also a lot of collaboration. Collaboration is almost non-existent in SSA and we also don’t know how to handle criticism or feedback well. There is little honest introspection but a lot of noise and a tendency towards inferiority complex.

Way forward

To move forward from current state I suggest 3 steps.

  1. Identification  
  2. Awareness, communication
  3. Collaboration and Validation.

 

I will provide my own perspectives as well as some of my experiences.

Identification.

Who are potential local investors or mentors for seed stage ventures and how can they be profiled?  Potential local investors usually don’t usually have titles of "Angel" or "VC" on their business cards. Any person or entity that possesses resources which could be used by a startup in their quest for growth is a potential investor and It does not always have to be money. I will skip the normal categorization based on investment stage and investor motives to say that some of these investors are already in plain sight and don’t need to be searched for. Even existing entrepreneurs with excess resources that could be shared are potential investors. It takes two to tango and openness to collaboration by all parties is essential. 

A friend I have known for decades has been a sole founder for many years and I have encouraged him to build a team so he can grow. He told me that he needed developers to work with him on building some products but he could not afford to hire them and needed funds. I told him that we would hire them and he can use them to develop his own products so they gain experience while he provides mentorship and experience for them to develop products for our other portfolio startups. This was a win-win proposition as we basically were going to be pooling resources and experience. He seemed very comfortable with this arrangement especially as it would also come with free office space. I still have not heard from him after we agreed, he seems to have become distracted. Focus is important. This is an arrangement that can work for a lot of startups.

Another friend hits me up regularly on Skype where we have regular discussions about his business and where he is going and his challenges. I look forward to those conversations and invest a lot of my time in discussing with him because I also gain knowledge and insight into the workings of the local ecosystem. I would have not seen a lot of what he tells me on the surface. Contrary to what most people believe, mentors and advisers actually gain more from interacting with startups than the entrepreneurs themselves. Engagement is important.

Last year I woke up and realized that our business model as a professional services company was that we were actually helping startups from South Africa to scale across Africa. We had built up a lot of local knowledge and contacts around Africa that could be utilized by startups solving problems scalable across the continent. We decided to startup a different type of Aceelerator named Afrinnova. Starting up Afrinnova cost us nothing as we already had the space and resources, but to scale it we needed startups to come up with ideas.  We did not want to recruit them the traditional way accelerators in Silicon Valley were used to. We decided the best way was to start by converting our garage as a co-working space where we interact with potential entrepreneurs and encourage them to form teams. We learned that from House4hack in Pretoria.

I believe what most seed stage African startups need is basically a nurturing environment and strategic alliances that can help them gain traction. Any thing more than that is superfluous. So many startups in SA and even SV started this way, I started my first business from my uncle’s guest room. If we keep encouraging models like this we will gradually create critical mass and get to the tipping point where the next stage of serious local investors will be interested.

Yes we can create an Angel List clone and map out innovation spots but until we understand and identify how we can help each other those lists will be useless clones. I have heard a lot in the media and internet about the new initiative in Nigeria termed the Lagos Angel Network but found nothing else to tell me as a potential investor their motives and how I can become a part of it. I took this up with Gbenga Sesan who is one of the founders and they responded in a way that brings me up to my next point.

Awareness and Communication

How do you scale investor participation in the ecosystem? Creating awareness, it is just as simple as that. By awareness I don’t mean press mentions or plenty of talk in the media. Potential investors should be targeted and informed. A shotgun approach serves no purpose in this case, as serious investors will not invest out of impulse. Gbenga Sesan told me yesterday that a web presence for the Lagos Angel Network will be up shortly but he also quickly linked me up with the other founders who sent me …..”a form” to provide details and pledge investment. I e-mailed them back that this was not adequate, as I would need more information.

There is a great startup in Kenya we were interested in working with and they opened up to me that they needed to raise some money to gain traction. I told them to send me a deck and one year after I am still waiting for it.  Sometimes anything at all is better than nothing. The current information we have online for Afrinnova was created in 30 minutes before I had a meeting in Silicon Valley, yet potential investors were still interested. We have used almost one year to prepare an acceptable web presence for Afrinnova and fired 3 UI teams (because I didn’t feel the message was right) but… we achieved more from content created in 30 minutes than one year of effort. The feedback based on information provided from those 30 minutes of effort made me realize that we were on the right track.

While the media can play their own role in getting the right narratives out, I believe that entrepreneurs themselves should do much more than getting people to talk about them. One of the new African gaming companies caught the interest of a local investor I know and work with and he asked me to find out more about them. I tried reaching out but all I got was a stonewall. It seemed they were more interested in getting their stories out to the press to boost their ego than provide meaningful information for guided decisions by potential investors. Someone told me that maybe they did not need local investors and I asked then why do they go for startup events? Folabi Esan calls them "Event-preneurs".

Collaboration and validation

There was and still is a stupendous amount of ignorance all around the local tech ecosystem. We don’t know when to bootstrap and when to seek for help. Even when we decide to look for help we often don’t know where to look. A lot of daylight exists between potential investors and local entrepreneurs for many reasons already over-flogged but we definitely require a lot more than introspection and awareness to solve this problem.

Before iHub, ccHub and other co-working spaces came into existence we had other models that still exist but not immediately obvious which could be applied to tech startups. Models like “Imu-Ahia” originating from Igbo traders and craftsmen involve apprenticeship and subsequent funding by a principal who employs the services of the entrepreneur for a period. I always say that the Igbo trader invented the concept of the startup accelerator. Imu-Ahia has helped the Igbo tribe to become the African ethnic group that has arguably been the most successful in business. A technology company can use the same model but it requires a level of trust between parties.

Collaboration builds on awareness and it involves a lot of back and forth communication between investors and entrepreneurs. If you don’t know what the problem is then how can you solve it? Feedback is also very essential to growth and scale. A lot of people complain about "vulture capitalists" or "greedy entrepreneurs" and make generalizations, the few that succeed locally never get heard.

I have been kicked out of a startup (Saturn) I helped to start in 2001 by these "greedy types", I should be the last person encouraging local investment but I am also honest with myself to realize that doing a business deal with people is not the same thing as setting up a venture. Folabi Esan of Adlevo who was a witness to what happened to me always used to tell me that there is a big difference between building a business and doing a deal.

Positive behavior has to be reinforced negative ones discouraged by highlighting not only the failures but also the successes. Failure is a learning process and one thing I learned from the Saturn experience was to be on the same page with your investors and co-founders at all times. It does not help when you have long term vision and they are only interested in immediate profit.

The more successes there are with a model in an ecosystem the more validation it gets but people need to start with a slow dance before they do the Tango. It takes two to dance but one must take the lead. It does not matter who takes this lead it just has to be done. Strategic fit with any potential investor is more important than the resources they bring in. You have to decide if you can remain married to the investor for a long time, it is usually not a one-night-stand. The type of dance between both parties in this case will not be is not the seductive and suggestive "Konko Below" as Oo Nwoye suggested but more of a waltz and tango. Some useful insight and advice here: “Shall We Dance? Some thoughts on approaches by VCs vs entrepreneurs to getting a deal done”

 

We are doing our best in our own little part of Africa and we encourage others to do so and share their stories. We will be very open about our adventures with Afrinnova and Open Garage and we will welcome you to come aboard for the ride. We intend to collaborate and not compete with other similar entities who have the same vision of growing our ecosystem, it is not a zero sum game. It is the same zero sum mentality that got us into sh*t creek - sorry Seyi Taylor.

I had an interesting conversation with Mbwana Alliy the Managing Partner of Savananah Fund yesterday on Twitter and he suggests we remove “need to” or “have to” from our vocabulary and Just Do It! I agree with him. We have been “doing it for over a decade and will keep talking about it.

4 responses
Rather long post.

Hopefully, my reply will be short.

1. South Africa, though in Africa, is not Africa. Same with North African countries. Very different cultures and circumstances. SA is as advanced and different from Nigeria as any EU country. So rather than travel 6 hours to Jo' Burg for "tech stuff" I'll do London for the same 6 hours. However, i agree we should take advantage of existing business relationships between out countries in the tech space.

2. Socket Works is not an "Internet Startup" secondly, their business relied more on "who you know" than the "may the best man win" way most internet startups operate.

3. Your story about SocketWorks is not finished. What happened to the schools that deployed their software?

I am stating this here: I DO NOT want SocketWorks to ever be my role model. Did they make money? Absolutely! Same with the guys that 'repairs' the Benin-Lagos road every year.

1 South Africa is Africa and you need to visit to see that the problems are the same even though the infrastructure is different.

2. SocketWorks is a "Software Startup". The definition of "Internet Startup" is a narrow one and my concern is ALL African technology start-ups and not only those based on Internet technology. If we use Internet Startups as a measure we may not have a true ecosystem till the next millennium. Socketworks at the time they started were in a greenfield as nobody else was providing those services. Even if they ran in some places like a Nigerian business Aloy was pure Silicon Valley. C-Portal their flagship product by the way was an open source based internet application which could also be run locally where there was no infrastructure.

3. What happened to those schools afterwards was that SocketWorks lost steam because they ended up in shitcreek the same way with most startups without an ecosystem.

IT is not about being your role model but being a pioneer and affecting the entire ecosystem

SocketWork's funding model was the problem and not their technology or ethics. Had they engaged more of the local players at that time they would have had a greater chance of being sustainable after the IFC turned away. They ended up making more enemies than friends. Bankers are fair-weather friends
I think I'll agree with Nwoye on points 2 and 3

2. We all know that to a large degree the nigerian economy is tied to the apron string of Government and Government affiliated agencies. Socketworks is not immune to that system.
Hence, it will be difficiult to see them as role models to emerging startups considering the 'to the doorstep approach' that internet businesses have these days.

3. I really don't understand yet why the IFC funding model is seen to be socketwork's albatross. Three yrs ago, I had the opportunity to take over a project that was previously run at some point by both Novasys and Socketworks in adamawa state, my observations are best kept to myself.
Without a doubt, 'Banks are fair weather friends' but really as business partners they have a no drama approach that just focuses straight on the goal. 80% of projects I have worked on and presently involved in are in partnership with or funded by banks.
You get burnt sometimes no doubt but be rest assured of their support and the fact that they'll lend their weight (a very huge weight at that) as long as the venture remains viable and shows promise.