SME financing: Here’s to the little guys and early-stagers

At first you thought it was a bit of wishful thinking, whispers and murmurs among friends and commentators. You wanted to believe it, but it seemed a little difficult given what you’d seen of the continent. Was Africa really improving so fast?

Then came the oddly positive press from the Economist, the FT, even the oft-pessimistic New York Times—each waxing bullish on Africa. Next, society’s arch-skeptics – management consultants – started putting out their studies: “Lions on the Move”, and “Africa Attractiveness Survey”.

These expressions of boundless Afro-optimism became exciting annual events. And as time has gone on, investors have also gotten more and more excited about the Africa opportunity. In the last six years, of all emerging market regions, Sub-Saharan Africa has risen to the number 1 spot in Attractiveness for Private Equity investment, according to the Emerging Markets Private Equity Association.

But behind this excitement lies a dirty little secret. This is not quite the African transformation we’d hoped for. The biggest boost to the creation of a stable African middle class lies in the proliferation of SME employers. SMEs create jobs and jobs mean the growth of the middle class. However, SMEs are not the darlings of investment managers.

This is clear upon reading EY’s Africa Private Equity Roundup. “Deal sizes remain relatively small,” it says. “The average size of transactions in 2013 was US$60m.”

But US$60m is a mind-blowing amount of money for all but a miniscule number of African entrepreneurs.

It seems like a funny problem to have, nonetheless, it’s one we can understand. There are only so many hours in a day, and a fund with US$300m under management can only credibly manage 5 or 6 portfolio companies. So, each investment needs to be large.

And this is where the angel investors, venture capitalists, incubators, and accelerators come in. For so long, this cast of characters, fashioning itself ostensibly after North America’s Silicon Valley, has focused almost exclusively on tech and mobile plays. A quick sampling shows that about 90% of the roughly 40 we identified are exclusively tech/mobile/web focused. The other 10% fall loosely in the co-working space category with only 2 fiercely identifying as supporting startups and early-stage companies in any and all industries.

This is why organizations like ALN Ventures are so important to the development of the next phase of Africa’s ascendance. Not only are we well-positioned to drive the creation and acceleration of the companies that will grow to accept US$60m in the coming years, our openness to startups in all industries ensures accelerated visibility and growth for even the ‘not-so-hot’ sectors so vital to any emerging economy.

So, the next time you get all giddy with excitement over some new publication heralding the dawn of Africa’s ascendance, ask yourself if you’re ready to be one of the many entrepreneurs whose SMEs will fuel that story. If the answer is yes, then we’d love to talk to you. Find us online and follow us at @ALNVentures.

Here’s to US$60m transactions!

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