Afrigather In February, Partech, the worldwide VC agency that has backed firms like TradeDepot and Wave, absolutely closed ‘Partech II,’ an over $300 million (€280 million) Africa-focused fund—the biggest on the continent. It was a pleasant flip of occasions for the VC agency that originally focused elevating about $282 million (€230 million), and for a continent that noticed VC funding decline by 46% in 2023.
Partech Africa II attracted vital curiosity from particular person and worldwide institutional companions, akin to household workplaces and growth finance establishments (DFIs). That is partly attributed to Partech’s regional expertise, as evidenced by the $500 million acquisition of a portfolio firm, Sendwave, and the attainment of unicorn standing by Wave, one other portfolio firm.
The VC fund is led by basic companions Tidjane Dème and Cyril Collon, who, earlier than becoming a member of Partech, operated a number of companies in Africa. They joined the VC agency in 2016—three years earlier than its first Africa-focused VC fund, Partech Africa I, closed at $143 million.
Partech Africa II invests throughout varied sectors, with present holdings in e-commerce, healthcare, and actual property. The earlier fund invested in 17 firms throughout seed to Collection C phases.
Partech II will priortise Collection A and B rounds, with funding sizes starting from $1 million to $15 million per startup. The brand new fund has already made three investments in Revio, a South African cost startup, an undisclosed e-commerce platform in Senegal, and an undisclosed actual property startup in Egypt.
TechCabal sat down with Tidjane Dème, one of many basic companions. He described the agency’s funding method in Africa, what Partech seeks in founders and the companies they again, and the way the fund is deliberately working in direction of exits.
TC: Earlier than the Africa-focused fund, Partech Africa Fund I, was closed, the worldwide VC fund made two investments in Africa: Yoco (a South African fintech) and TradeDepot (a Nigerian retail expertise startup). Why was it essential to create a separate fund for African Funding?
TD: Africa wanted native funding; that’s what we needed the fund to be.
Earlier than becoming a member of Partech, Cyril and I labored extensively in Africa in positions that gave us a novel perspective on the emergence of a youthful era who, as an alternative of looking for jobs, had been beginning firms to sort out elementary issues in local weather, power, well being, and extra.
Nonetheless, they persistently complained in regards to the lack of entry to capital wanted to validate and scale their improvements. Founders want a particular form of capital: ‘sensible capital’. Native banks are incapable of offering it, however enterprise capitalists can. On the time, nonetheless, the native VC panorama was fairly nascent, and international VCs weren’t outfitted to handle this market as a result of their funds weren’t devoted to Africa.
The opposite necessary level for us was that this funding wanted to be primarily based on business returns, and never [charitable] influence. That was the problem that impressed our first Africa-focused VC fund. It’s also why we began sharing these numbers within the type of annual experiences.
Our speculation has been totally validated over time. The numbers confirmed that this ecosystem was rising quicker than any ecosystem on the earth. It grew 10x within the final eight years, and a few returns have began materialising for some traders. At present, it’s a no-brainer for any world investor; you’ll be able to make investments profitably in African startups.
You talked about sensible capital. Are you able to elaborate on what makes enterprise capital sensible?
TD: There are two elementary qualities of VC capital, which are a necessity to drive startups all over the place, together with in Africa.
The primary is the willingness to take early-stage dangers. When investing in seed firms anyplace on the earth, enterprise capital is sensible sufficient to know that roughly 80% will fail. This isn’t as a result of they’re unhealthy concepts; it’s as a result of they’re so early-stage that inherent uncertainty exists. Enterprise capital is sensible capital as a result of it recognises that by selecting the correct 20% that succeed, they will make up for all of the losses.
The second sensible facet of VC is the best way it invests in early-stage startups. The standard founder is of their mid-twenties, and the startup is perhaps their first job. If profitable, the startup will develop from this small group to lots of within the subsequent 5 years. The founders will transition from “that is my first job,” to main a group of lots of or operating a posh, multi-million greenback firm. It is a journey of immense studying and development for the complete group. They want skilled advisors, experience, fashions, and frameworks to information their considering and constructing – all of which VC brings to the desk. That is what sensible capital means.
There was a number of speak about how enterprise capital, contemplating its growth-at-all-cost method, will not be appropriate for constructing in Africa, the place the enterprise atmosphere is riddled with regulatory uncertainty and financial hardship. What do you consider this?
TD: Enterprise capital funding can solely work if the fund can count on a 10x return on the few (20%) that succeed. This must occur inside a brief timeframe (5-7 years). For this to work, the businesses have to develop very quick. Nonetheless, some firms don’t develop as quick, regardless of being nice companies. Such companies won’t do nicely with simply enterprise capital. They want different kinds of traders, akin to conventional non-public fairness, angel traders, household workplaces, and extra.
Even for fast-growing startups, enterprise capital can’t cowl all their wants all through their journey. Why ought to an organization give away a part of their fairness to boost funding for a short-term want? In such circumstances, what startups want is enterprise debt. Not like conventional financial institution loans, enterprise debt doesn’t require vital present property. As an alternative, it’s secured by the bought tools and the projected money circulate return.
Sadly, entry to enterprise debt and reasonably priced working capital suppliers stays restricted in Africa. Nonetheless, the African market remains to be younger. Because it matures, we are able to count on a wider vary of funding choices to emerge, assuaging the present over-reliance on enterprise capital for wants that might be higher served by different devices.
Past restricted entry to working capital, what non-financial hurdles do African startups encounter at completely different phases (seed, development, and so on.)?
TD: There are quite a few challenges dealing with African startups, and I perceive this firsthand – I’ve been there and failed too. The primary one which involves thoughts is infrastructure: Africa’s lack of established help programs creates operational friction.
Think about launching an e-commerce platform within the US, even 20 years in the past. Prospects have already got web entry, dependable cost programs, established supply providers like UPS, and a sturdy warehousing trade – every part it’s worthwhile to hit the bottom operating.
Now, evaluate that to launching an e-commerce firm focusing on mom-and-pop shops in Lagos. Reaching them on-line won’t be an choice. As an alternative, chances are you’ll have to go door-to-door to onboard them on the app and practice them on its use.
Moreover, to make sure day by day stock orders from these merchants, the startup may have to handle its logistics resulting from unreliable present supply networks, and that is very capital-intensive.
The infrastructure downside is each an issue and a possibility. There’s a downside as a result of startups need to construct on this infrastructure to perform. However it is usually a possibility as a result of many startups remedy the issue of entry to infrastructure. For instance, cellular cash firms throughout Africa exist as a result of individuals in Africa don’t have entry to financial institution accounts.
There are additionally regulatory issues. Startups typically face a number of administrative problem with regulators.
Given all these challenges, how does Partech resolve which firms will survive lengthy sufficient to scale and ship outsized returns to the fund?
TD: At Partech, we leverage a novel framework to judge potential investments: the 4 Ms. The primary M is administration. Profitable startups require robust administration groups that may navigate challenges, discover options, and execute their imaginative and prescient. This evaluation is arguably probably the most essential but probably the most difficult, as there’s no one-size-fits-all method to evaluating it.
The second M stands for Market. We search for firms addressing a big, established market with vital development potential. In any case, VC success hinges on our portfolio firms scaling quickly. Take Commerce Depot in Nigeria, our first funding, as an illustration. They’re tackling inefficiencies within the huge Quick-Transferring Client Items (FMCG) sector, a market producing lots of of billions of {dollars} yearly. Fixing these inefficiencies creates a possibility for vital development.
The third M is Mannequin. Are you able to construct a enterprise, not only a product? Whereas profitability won’t be rapid, a transparent path to eventual profitability is crucial. This includes scrutinising the expertise, advertising and marketing, operational, and total enterprise fashions, notably within the early phases when a lot stays undefined. The issue of doing VC is in having the ability to make these selections on little or no knowledge.
The final M is momentum. Should you imagine that this firm goes to develop very quick within the subsequent few years, we count on the corporate to exhibit robust development trajectories. Momentum tells us that they’re doing one thing proper. As an example, a Collection An organization may want a consumer base rising 10-20% month-over-month. This momentum is essential to attain the exponential development wanted to compensate for inevitable funding losses.
However there’s a caveat: even probably the most complete framework can’t assure success. Generally, regardless of a compelling mannequin and powerful execution, unexpected market forces can derail an organization. It is a actuality that each founders and traders should acknowledge.
Whereas each startup has potential, what preliminary indicators may recommend an organization wouldn’t be a robust match on your fund’s long-term targets?
TD: Seed-stage traders will inform you that one of many greatest causes startups fail is group breakdown. Current group dysfunction is a pink flag.
As well as, younger groups typically encounter issues they haven’t confronted earlier than. The shortcoming of a founder to hear and be taught from these round them is a significant pink flag for me. A coachable founder who actively seeks steering is way extra more likely to succeed.
One other worrisome issue is out-of-whack unit economics. Early-stage startups can obtain fast development by throwing cash at advertising and marketing, however this may masks an unsustainable enterprise mannequin. Excessive buyer acquisition prices coupled with fast buyer churn – which means you’re dropping prospects quicker than you’re buying them – and low buyer lifetime worth all level to unhealthy unit economics, which is a significant pink flag.
We additionally look out for firms struggling to draw or retain prime expertise. Excessive worker turnover suggests issues throughout the organisation.
One other indicator that an organization won’t be a very good match for funding is whether it is skirting laws. Avoiding laws isn’t a viable long-term technique.
Nonetheless, it’s necessary to acknowledge that even with cautious analysis, errors are inevitable. You’ll encounter firms that you just decline funding in, solely to see them turn out to be big successes. Conversely, you’ll put money into some startups that in the end fail. Accepting this fallibility is essential within the enterprise capital world. You must be at peace with each successes and missed alternatives.
Have you ever turned down any firms that went on to achieve success?
TD: Buyers preserve a psychological file of firms they remorse lacking out on – the “Had I Recognized” portfolio. Paystack is a straightforward instance for me. Once they had been first elevating capital, we at Partech merely didn’t have the funds but, as we had been nonetheless fundraising ourselves.
There are additionally promising firms I’ve declined to put money into that I’m following carefully, hoping to see them succeed. Whereas I can’t disclose their names at this level, conserving a watchful eye on such firms is a typical observe amongst traders.
You spoke briefly about unit economics. There are a number of sectors which have remained loss-making for years as they should proceed subsidising the price of their providers. A preferred instance is the meals supply startups. What’s your opinion about such firms?
TD: As I discussed earlier, Africa’s underdeveloped infrastructure creates extra prices for companies, making it notably difficult for supply firms to construct and switch worthwhile. For instance, for a meals supply firm, key unit economics metrics embrace buyer acquisition price and gross margin per supply. The essential query is: can this gross margin be constructive, and the way lengthy will it take to recoup buyer acquisition prices?
The hope is that as these firms scale, they will obtain efficiencies that push their unfavorable gross margins into constructive territory, in the end protecting the price of buyer acquisition. Many gamers are innovating in attention-grabbing methods to sort out this problem, however a definitive resolution stays elusive.
E-commerce presents one other attention-grabbing case. Whereas the eventual dominance of on-line commerce in Africa is simple, as an investor in Africa in the present day, it’s difficult to examine oneself supporting an organization for the possibly 15 years it would take to attain full maturity.
You should imagine that you’ll help this firm for some time, and hand it over to a different investor who will fund it for the subsequent leg of the journey, and so forth till it reaches the place it must be.
I don’t see the expansion stage traders in Africa that may take these capital-intensive startups to the subsequent stage. So [the unit economics of some of these sectors] will probably be an issue for founders and traders for some time till we determine it out.
What you may have described feels like a relay race. Are there any sectors which have a shorter journey forward of them? Does Partech place bets on these sectors?
TD: We’ve positioned bets throughout all of those sectors. However for those who take a look at the entire VC trade in Africa, principally half of the cash has been invested in fintech. It is because fintech is the one sector the place we’ve seen firms go from seed to exit reliably. Although it’s only in just a few markets: Nigeria, Egypt, and South Africa.
Nonetheless, we imagine alternatives exist past fintech. For instance, our portfolio firm, Reliance Well being, in Nigeria, tackles healthcare entry via insurance coverage. It’s one of many few worthwhile medical insurance suppliers in Africa, and it’s increasing regionally. Related firms exist, however they solely serve a small portion of the huge, underserved healthcare market throughout the continent.
In Silicon Valley, VC funding typically focuses solely on extremely scalable software program options. However the African startup panorama calls for a distinct method—a profitable mixture of expertise and on-the-ground operations.
Even seemingly easy fintech options require constructing agent networks to bridge the hole between cash-based actuality and the digital world. All these firms have to actively onboard customers, which requires operational legwork.
Any firm in any sector that successfully combines expertise and operations has the potential to turn out to be a champion.
Contemplating how lengthy and tenuous the journey to an exit is, how does Partech take into consideration returning vital multiples of revenue to its traders?
TD: We’re presently increasing our group with a portfolio development supervisor devoted to serving to our firms develop clear exit methods. This proactive method is crucial as a result of, not like the US market, the place established giants like Google or Fb may make opportunistic acquisitions, constructing a profitable exit in Africa requires intentionality.
Firms are usually acquired by entities which have tracked their progress for a number of years, recognising the worth they’ve constructed. This implies for those who envision an exit in three to 5 years, it’s worthwhile to begin constructing relationships with potential acquirers in the present day.
At Partech, we’re lucky to have a community of potential strategic patrons amongst our traders, together with massive companies like telecommunications teams, retail giants, and industrial teams. These present relationships permit us to have ongoing conversations with potential acquirers, gaining insights into what makes firms engaging long-term. We then share these insights with our portfolio firms.
Bridging the hole between VC and personal fairness can be essential, as they’re potential acquirers of our mature and worthwhile portfolio firms.
Additionally, we’re very cautious about valuations. Firms with inflated valuations in 2021 wrestle to boost funds now. Overvaluation can tamper with the capitalisation desk and trigger conflicts with traders. We prevented this by being disciplined in our investments and inspiring the identical in our portfolio firms. We’re proud to share that none of our portfolio firms are having a tough time elevating follow-up investments.
Editor’s word: This interview has been edited for size and readability.
