En­trepreneur­ship funds in Africa: Distin­guish­ing the good from the bad

Mail & Guardian - - Enterprise Developmen­t - Aubrey Hruby

En­trepreneur­s have a piv­otal role to play in Africa’s unem­ploy­ment cri­sis. To­day over a third of the con­ti­nent’s young work­force (those aged 15-35) are un­em­ployed. Another third are in vul­ner­a­ble em­ploy­ment. By 2035, Africa will con­trib­ute more people to the work­force each year than the rest of the world com­bined. By 2050 it will be home to 1.25-bil­lion people of work­ing age.

To ab­sorb these new en­trants, Africa needs to create over 18 mil­lion new jobs each year. Govern­ments need to put in place poli­cies that drive eco­nomic growth and com­pet­i­tive­ness. These in turn, will en­able the growth of small, medium and mi­cro en­ter­prises (SMMES). This is im­por­tant be­cause they cur­rently play a sig­nif­i­cant role in low-in­come coun­tries, rep­re­sent­ing nearly 80% of jobs. They are also re­spon­si­ble for 90% of new ones cre­ated each year.

The challenge for coun­tries is how to sup­port the growth of SMMES. Var­i­ous African govern­ments have ex­per­i­mented with ways to help ad­dress the Us$140-bil­lion fund­ing gap for star­tups and SMMES. For ex­am­ple, one ap­proach has been to set up en­trepreneur­ship funds.

Based on my ex­pe­ri­ence of watch­ing their per­for­mance over the past 18 years, I would is­sue some words of cau­tion. Some en­trepreneur­ship sup­port mod­els work bet­ter than oth­ers. How they are set up — and par­tic­u­larly the gov­er­nance struc­tures put in place to man­age them — is key to their success or fail­ure.

Fund­ing gap

Ac­cess to fi­nanc­ing is con­sis­tently listed as the big­gest ob­sta­cle to busi­ness for SMMES in African coun­tries. They of­ten face dou­ble digit in­ter­est rates from lo­cal banks, and ven­ture capital pen­e­tra­tion is still ex­tremely low. Top end 2018 es­ti­mates put it at about $725-mil­lion for the whole con­ti­nent.

To tackle the prob­lem, African coun­tries con­tinue to start new en­trepreneur­ship funds. In July 2017 Ghana launched the Na­tional En­trepreneur­ship and In­no­va­tion Plan. The aim is to pro­vide in­te­grated na­tional sup­port for start-ups and small busi­nesses.

Al­most a year later, Rwanda se­cured a $30-mil­lion loan from the African Devel­op­ment Bank for the es­tab­lish­ment of the Rwan­dan In­no­va­tion Fund. This will fo­cus on in­vest­ments in tech-en­abled SMMES.

As new funds are started, African coun­tries must look to the suc­cesses and fail­ures of both global and re­gional funds to repli­cate best prac­tices and avoid com­mon pit­falls. African govern­ments should repli­cate mod­els sim­i­lar to Small En­ter­prise As­sis­tance Funds and the USAID backed en­ter­prise funds. Both in­clude ro­bust in­vest­ment se­lec­tion cri­te­ria for funds.

In do­ing so, African govern­ment-backed en­trepreneur­ship funds would op­er­ate as a fund-of-funds — where a fund in­vests in another pri­vate eq­uity or ven­ture fund rather than di­rectly in busi­nesses them­selves — as do many devel­op­ment fi­nance in­sti­tu­tions glob­ally such as the UK’S CDC or FMO of the Nether­lands.

The what and the how

The fund of funds struc­ture cre­ates an arm’s length re­la­tion­ship be­tween the govern­ment agency that houses the en­trepreneur­ship fund and the busi­nesses that even­tu­ally re­ceive in­vest­ment. In be­tween sits a pro­fes­sional fund man­ager that earns the ma­jor­ity of its in­come from mak­ing good in­vest­ments, grow­ing com­pa­nies and ex­it­ing them af­ter a pe­riod of five to seven years. In this way, there are nat­u­ral dis­in­cen­tives for cor­rup­tion and mar­ket-based se­lec­tion cri­te­ria for the en­trepreneur­s who re­ceive in­vest­ment.

How the fund man­agers are se­lected also mat­ters. To en­sure true in­vest­ment in­de­pen­dence from the govern­ment, fund man­agers and board mem­bers must be cho­sen in a transparen­t and com­pet­i­tive process. And once se­lected, rep­re­sen­ta­tives of the govern­ment en­trepreneur­ship fund agency can sit on the in­vest­ment committee for over­sight pur­poses but should re­spect the fund man­agers’ in­de­pen­dent de­ci­sion-mak­ing.

There are ex­am­ples of funds be­ing set up with­out the nec­es­sary in­de­pen­dent, ac­count­able fund man­agers. One is the Youwin pro­gram in Nige­ria. Cre­ated in 2016, it was set up to help youth en­trepreneur­s grow busi­nesses, but se­nior civil ser­vants handed out awards to friends and rel­a­tives.

Govern­ment-sup­ported fund man­agers can also catal­yse ad­di­tional in­vest­ment. By op­er­at­ing in mar­kets and sec­tors of­ten ig­nored by tra­di­tional pri­vate eq­uity funds, small en­ter­prise as­sis­tance funds have mo­bilised ad­di­tional capital for in­vest­ment-starved com­pa­nies. African govern­ment-backed en­trepreneur­ship funds could do the same by par­tic­i­pat­ing in blended fi­nance deals with devel­op­ment fi­nance in­sti­tu­tions, so­cial-im­pact in­vest­ment funds, lo­cal banks and other mar­ket play­ers to back grow­ing firms.

Mea­sur­ing success

While not ac­tively man­ag­ing the funds’ port­fo­lio in­vest­ments, govern­ments have a key role to play in guid­ing the funds pri­or­i­ties. Pri­or­i­ties may vary by coun­try and given Africa’s grow­ing rates of unem­ploy­ment, funds should pri­ori­tise job cre­ation by eval­u­at­ing in­vest­ment on key per­for­mance in­di­ca­tors. These would in­clude the num­ber of jobs cre­ated per dol­lar in­vested, in­di­rect jobs cre­ated per dol­lar in­vested, and av­er­age salary of job. In ad­di­tion to job cre­ation, govern­ments can di­rect funds to fo­cus on spe­cific sec­tors ei­ther in need of in­creased capital or high-growth ar­eas in lo­cal economies.

Beyond es­tab­lish­ing in­vest­ment cri­te­ria, govern­ment-backed funds should pri­ori­tise rig­or­ous mea­sure­ment of in­vest­ment re­sults and long-term data track­ing to in­form fu­ture in­vest­ment de­ci­sions. The UK Bri­tish Bank re­gional growth fund found the cost per job cre­ated var­ied con­sid­er­ably by pro­ject from £4 000 to over £200 000. It con­cluded that a bet­ter al­lo­ca­tion of funds could have led to thou­sands more jobs cre­ated for the same re­sources.

Data-driven in­vest­ments not only lead to bet­ter re­sults, but fur­ther cur­tail is­sues around po­ten­tial mis­man­age­ment of funds.

Tack­ling Africa’s job cre­ation challenge re­quires in­no­va­tive think­ing and ini­tia­tives that sup­port pri­vate sec­tor-led growth. Look­ing to the model of small en­ter­prise as­sis­tance funds, African govern­ments can spur lo­cal ecosys­tems and drive new pri­vate capital to re­gions to­day seen as un­friendly or too risky to out­side in­vestors.

Prop­erly struc­tured in­vest­ments to­day could yield much larger div­i­dends to­mor­row.

Audrey Hruby is a Se­nior Fel­low at the Africa Cen­ter at Ge­orge­town Univer­sity This piece orig­i­nally ap­peared in

The Con­ver­sa­tion

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