After VC, CVC?

As Africa’s VC Game Burgeons, Its CVC Investments Are Due For Inflection

By  |  November 17, 2021

In 1914, Pierre Samuel du Pont, the president of the chemical and plastic maker known as DuPont, laid some money on a 6-year-old private automobile outfit known as General Motors.

It turned out that the American entrepreneur and businessman made just about the right bet, as the investee’s stocks multiplied sevenfold on the heels of the demand for automobiles surging seven-fold during World War I. 

Shortly after the War, Du Pont’s plastic-making company and General Motors established a stronger connection. It isn’t clear how much du Pont put in at first, but his company’s board of directors were motivated to invest an additional USD 25 Mn to accelerate the further development of General Motors—whose growth partly culminated in an increase in more demand for DuPont’s merchandise; paints, plastics, and artificial leather. 

About 10 years ago, GM debuted for the second time on the New York Stock Exchange to have the largest IPO in American history, at the time.

With the results came the emergence of profitable corporate venture investments, and companies like 3M and Alcoa soon followed suit to pioneer what was the world’s first major era of CVC activity. 

In fact, du Pont’s company went on to create the largest corporate venture initiative, one which led to a push for diversification among many other corporations.

While the first wave was meant to cater to antitrust enforcement after the Great Depression, the second wave in corporate-anchored investments was necessitated by a FOMO (fear of missing out) on leveraging the power of tech.

CVC’s third wave in the investment market was buoyed by the emergence of the internet and the “dot com” implosion. From 1995 to 2001, many big corporations finally registered that internal venture innovations had many unchallengeable limitations and started considering CVC as means through which they can outsource R&D investments and latch themselves onto some innovation capital. The fourth and final wave, however—from 2002 till further notice—was catalyzed by limited venture success.

Though CVC was adversely affected by the worldwide financial crises of the early 2000s, there was a resurgence afterwards due to the rise of social media as well as the expansion of the tech industry. 

Today, the world’s private venture capital market is breaking records to serve a never-ending emergence of ground-breaking, problem-solving, and presumably scalable startups—with as much as USD 160 Bn injected by investors in Q1 2021, marking a 78 percent year-on-year increase. Meanwhile, global corporate-venture-capital-backed fundraising reached a USD 79 Bn touchpoint in the first half of 2021. 

In Africa, VC-led fundraising—the major source of capital for startups—is reaching new levels. Yearly stats are on their way but the forecasts point to the possibility of the young landscape raising a record of well over USD 2 Bn. 

On the private equity block, activities are also set for what has the makings of an all-time high. However, when it comes to corporate venture capital, major developments are scarce and the investment culture is often deemed—or misunderstood to be—unfit for the local context. 

“Corporate venture capital investments are quite rare in Africa, and a major part of the challenge is the sheer access to capital itself. The high-level answer is “not enough” as most corporate venture funds created today for the continent focus on the core businesses of the companies providing them, rather than venturing. Also, returns are pretty good for African corporations, so businesses often do not feel the need to diversify,” Heman Singh, CEO of Future Advisory told WeeTracker on Africa Tomorrow.

According to Singh, there is an abundance of incremental innovation going on right now and the pandemic exists as a major driver for these developments. “The situation enabled corporates to realize what has been lacking and were forced to spend money on sustaining their businesses. What was important suddenly became urgent”.

In essence, African corporations see the novel pandemic as a rare opportunity to innovatively pivot or acquire tech-driven startups to do so. 

Most importantly, CVC is re-emerging as a new form of backing innovation-driven startups, and founders are becoming increasingly aware of the new opportunity.

At this point, the African venture space is attracting huge global interest, especially as more startups from the region join the unicorn club this year. It’s only expected that corporations rise to the occasion to further fill the early-stage funding gap that undoubtedly still exists regardless. 

There are only a few African corporations that have put the continent on the global CVC map, and not many multimillion-dollar startups count local corporates as their top backers. Naspers, Africa’s most valuable privately-held company, which established a ~USD 100 Mn investment vehicle in 2019, is one of the major CVC activists in the region. 

Today, Naspers Foundry has about half a dozen South African tech startups in its portfolio, including journey-planning platform WhereIsMyTransport, Naked Insurance, Ctrl Technologies—both of which are insurtechs—and Aerobotics, a Series B-stage AI-driven agritech

Still, inside the South African market, financial institutions such as Standard Bank and Nedbank have rolled out VC arms in the past decade. On its part, Standard Bank—Africa’s largest bank—has made 15 investments, backing companies like TradeSafe, HelloChoice, Payments24, KudiGo, and Nomanini. 

Even today, Ozow, an SA payments company, announced a Series B fundraiser of a whopping 48 Mn in a round led by Chinese internet giant Tencent to scale its business. This mirrors how ventures like Flutterwave, Paystack, and Interswitch secured interest from international corporations like Visa and MasterCard. 

Long story short; African startups are basking in the interest of global corporations, yet the mainstream companies on the homefront are not so eager to place such bets. As such, South Africa has the most active CVC market in Africa; eCommerce JUMIA once raised money from SA’s MTN Group—Africa’s leading telecoms company. 

Corporate venture capital is a critical source of funding for Africa’s next big startups since despite the said growth, the continent accounts for only 1 percent of the global VC industry.

With the market dominated by South African and international players, core African corporates are more than welcome to increasingly collaborate with—or simply acquire—local startups. This is even more critical innovation-wise, as the early-stage venture space grows sporadically. 

Featured Image: Yale Insights

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