Alternative finance in the form of angel investors is providing important seed money to jumpstart agripreneurs and push them to profitability.
Seven out of ten Africans are involved in agriculture, and investments in this sector are estimated to be two or three times more effective at reducing poverty than investing in other sectors. African farmers are generally poorly integrated into value chains, lack access to technical expertise and markets, and have little access to capital. Among these are many would-be agripreneurs and micro-, small and medium enterprises (MSMEs) – they are too big to get micro-loans, yet too small to access credit or capital from financial institutions. According to the World Bank, 22 million of the 40 million MSMEs across all sectors in Africa are unserved or underserved. Thus, investing in MSMEs, including the ‘missing middle’ as SMEs are often referred to, is crucial to boosting agricultural productivity and generating employment opportunities.
Filling the finance gap
A range of newer, creative financing options are emerging in Africa to fill the financing gap for early-stage enterprises that are getting off the ground, but despite these new opportunities, take-off can be bumpy.
Kigali Farms is a start-up agricultural enterprise that launched a mushroom industry in Rwanda to provide farming families with a highly nutritious food and a new source of income. The business has become the largest supplier of oyster mushroom substrate in Rwanda, and the largest supplier of fresh mushrooms as a result of their buy-back commitment to the farmers who purchase their substrate. Agripreneur, Laurent Demuynck, who launched the farm in 2010, found that local banks were not keen to finance agricultural enterprises and that interest rates were upward of 16%. Eventually, Demuynck received a €200,000 grant from DEG, which finances and supports private sector enterprises in developing countries to promote sustainable economic growth and societal impact. This financing unlocked the door to several other grants and social/impact investments. “Without this seed money, I would not have been able to reach more than 1,700 small farmers, provide employment, or continue to grow the business,” he emphasises.
Agripreneur Claudia Castellanos ran into similar difficulties in Swaziland. After working with a social business that provided local artisans with market access for their crafts, she sought to replicate that business model in the agricultural sector. In 2010, using their own savings, she and her husband launched Black Mamba, a start-up which produces chillis and chutneys sourced from local ingredients. In 2014, they secured a loan from a bank in Swaziland that helps cover operating expenses. They did not have much collateral to offer the bank, only a well-structured business plan, but this convinced the bank to loan them the money at the prime rate (the standard interest rate that banks charge creditworthy customers) plus 4% for the loan. Castellanos says, “Larger, regular businesses pay only prime +1% and some get loans as good as prime -2%. The small guys pay more.” However, they plan to pay off the loan by April 2018. “It was so excruciatingly expensive and almost killed us," she adds.
In 2014, Black Mamba also received a €25,000 grant from the World Bank’s marketing investment fund, which the business used to get their processing plant an FSSC 22000 Food Safety System Certification. Based on ISO standards, FSSC 22000, which is fully recognised by the multi-stakeholder Global Food Safety Initiative, has unlocked markets for them worldwide. The company also used the funds to buy equipment such as cold storage and a freezing room. Breaking even in 2016, Black Mamba is now on the path to profitability (see box).
Both Kigali Farms and Black Mamba exemplify the challenges that start-ups face in attracting capital or credit in order to grow their businesses. Often, they have to resort to a form of blended capital, creatively drawing from a range of institutions and new financing mechanisms. The media platform, Devex notes, “With a blended capital approach, entrepreneurs can combine grants and investments, filling the gap that exists between philanthropy and public funding and traditional investment.” Nevertheless, writing grants, applying for loans, or following complex reporting procedures is often beyond the capacity of would-be entrepreneurs.
Profile of an angel investor
Enter the angel investor. Also known simply as ‘angels’, these are affluent individuals who invest early in new enterprises in exchange for equity ownership once the business is more established. While angels can be part of a blended capital approach, they usually invest in their own right. Because angels leverage their own financial resources, they typically provide more favourable and flexible financing than most banks and formal financial institutions. Furthermore, they can bypass the onerous application and reporting requirements of formal and blended capital that can thwart undercapitalised agri-enterprises.
According to Sheena Raikundalia of IntelleCap, a company that builds and scales social enterprises to attract investors, “African angels tend to be successful business people who want to give back. They want to go from ad hoc charitable giving to investing in enterprises that can scale and grow and have a beneficial impact on society.”
Idris Bello, a self-described ‘afropreneur’, is an angel investor, as well as co-founder of The Wennovation Hub (see Spore, Channelling investments into agribusiness). According to Bello, angels in Africa are nothing new, but they have generally invested in real estate, oil, mining and similar less-risky enterprises. However, in the last couple of years, there has been more interest in ‘impact’ or ‘social’ investments in enterprises that include sustainable agriculture, clean energy and affordable basic services such as education and health.
Bello has made a few agricultural investments including one in Rashak, a Nigerian palm kernel oil processing enterprise, in 2016. “Besides investing capital for new equipment and generators, we infuse technology and provide management expertise to help the business scale,” he says. Rashak works with a cohort of 25 small farmers and buys products directly from them to cut out the middleman. The farmers are organised into a cooperative and given access to other benefits such as credit. This is a small to mid-scale business,” he notes. “We don't want to scale too fast.” The company not only provides employment but is helping farmers with post-harvest storage since oil palm is a seasonal crop and farmers, instead of being at the mercy of low prices at the end of the harvest season, can have an assured income year-round. Rashak’s next step will be to provide other benefits for the farming families involved, such as education and farm extension.
Overcoming the visibility challenge
Bello states that, “There is a visibility challenge on several levels when it comes to investing for impact.” Through Rashak and other social investments he, and other angels, will need to demonstrate that a financial return, as well as social impact, is possible. “Potential angels need to be moved from an ‘either-or’ mindset before they will invest,” he says whilst adding that, “The best way to do this is to show them results – that you can invest for financial returns and also have social impact.”
Angel investors also need to know where to look for potential enterprises that they can invest in. Raikundalia, who is based in Eastern Africa, stresses that enterprises must first be ‘investment ready’ to be presented to possible investors. Her team works with selected enterprises and showcases eight to ten of them to their network of potential angel investors several times a year.
Similar financing forums and platforms are springing up throughout Africa, playing a crucial role in bringing angel investors together with entrepreneurs who need capital to build and scale their enterprises. In 2012, Bello and some partners, found the Lagos Angels Network (LAN) with technical support from infoDev. LAN has attracted a younger generation of Lagos residents willing to invest money in and mentor entrepreneurs and their start-up enterprises. The network now has more than 40 members and has also led to the creation of the Africa Business Angels Network, which supports early stage investor networks and wants to get more investors “excited about the opportunities in Africa”.
Investing in women entrepreneurs
Seeking not just to transform agriculture but also to empower women in Africa, Victus Global Capita Ltd. (VGC) was founded in 2016 by two African-born women, Bo Masole and Zee De Gersigny. VGC seeks to ease the difficulties African women entrepreneurs face in accessing capital by investing in women-led or 50% or more women-owned businesses.
Masole who has extensive experience in agri-processing and food manufacturing was surprised to discover that “Many African countries are large net importers of food and there is very little value addition to food produced on the African continent. There is lack of technical know-how and market access. Not only can we bring technical expertise, but we have connections with local and regional markets and MoUs with many retailers.” Leveraging this expertise, VGC seeks to transform agriculture by focusing on food processing. “There are three pillars to growing the SMEs,” Masole notes. “One is market linkages, the second is capacity building and the third is finance. You can't just throw money at the SME – it's not sustainable without the other two. If anything, you have to figure out the other two pieces before you come in with the finance.”
While VGC focuses on women owned agro-enterprises, Masole also emphasises that, “You need to understand the entire supply chain so that it can deliver – you have to look at what's going on with the farmers and smallholders.” As part of their strategy, VGC looks at the farmers who supply the agro-enterprises and key metrics such as their average input, cost, farm sizes and livelihood measures to be able to measure social impacts.
Gersigny has set up many funds in Africa that traditionally tend to invest in listed equity, credit, and real estate, such as shopping centres or office buildings. “With Victus we hope to build a €40 million investment fund within the next 2 years that will invest as little as €20,000 and up to €8 million in an enterprise,” she states. The fund will be 80% institutional investors, mostly from South Africa, and the remaining 20% will comprise of high net worth individuals, or angel investors, and families. The risk-to-reward ratio for investing in SMEs is high, so coupling equity financing and technical expertise with a firm foundation of institutional investors may also encourage wary angel investors to dip their toes in impact investing.
In a similar vein, Bello proposes that bringing in experienced angel investors from more developed countries will encourage African angels to invest for impact. He noted that Facebook founder, Mark Zuckerberg’s surprise visit to Lagos in 2016 and investment in Nigerian tech start-up Andela, through the Chan Zuckerberg Foundation, created “a bit of a buzz” among Nigerian investors and brought credence to investing in start-ups. Raikundalia agrees, noting that in Eastern Africa, “Expat investors are a big part of angel investing.” The Somali AgriFood Fund, for example, has unlocked capital from the global Somali diaspora totalling over €800,000 (see Spore, Agriculture – a promising market for the diaspora). Local co-investors are also attractive to outside investors because they know the local customs and can open doors.
While new angel investor networks are cropping up throughout Africa, this form of investment alone is not going to solve the capital and credit gap for MSMEs. However, angels are beginning to serve start-ups and the ‘missing middle’ by helping to get enterprises off the ground and, once established, enable them to access finance from standard or blended capital sources. By providing equity financing coupled with three crucial ingredients – mentoring, management, and a commitment to social impact – angel investors are demonstrating new pathways to transform agriculture in Africa.