Across Africa, a stark divide separates the connected from the unconnected. Limited internet access and prohibitive prices are substantial barriers that hinder the continent's economic potential, leaving millions stranded in the digital age. Recognizing this critical issue, E3 Capital’s panel ‘Where the Hell is the Money for Connectivity Start Ups’ at the Africa Tech Summit in Nairobi, brought together diverse stakeholders working to bridge the digital divide. Their focus - catalyze the funding to power connectivity companies across the continent.
Hurdles to Financing Connectivity
Early-stage tech investment in Africa continues to favour sectors like fin-tech that have historically attracted the most capital. Connectivity is yet to emerge as a prominent area for investment. In exploring this, Paras Patel, Managing Partner at E3 Capital questioned 'Why does connectivity seem to lack investor interest despite its pivotal role in facilitating digital transformation across various industries?'
One view is that connectivity, remains an under-invested area due to critical infrastructure hurdles, as pointed out by Marieke Roestenberg, Manager, Private Equity Ventures, FMO: 'We need not just ISPs, but the very foundations that enable them to function – power, efficient last-mile solutions, and even widespread mobile phone access itself.'
Affordability often proves another challenge; Zizile Ndziba, Investment Principal, AIIM, highlighted that, 'Even in areas with network coverage, pricing acts as a major barrier, keeping people offline.' Adding to this complexity, Zizile brought up the investor perspective on currency volatility. ' Connectivity is a domestically consumed service and the customer will pay in local currency” she explained, 'but most investors are deploying capital and measuring returns in hard currencies. While revenue might grow, its dollar value could decline.' Notably, South Africa benefits from large pools of domestic capital implying steeper climbs for markets with limited domestic investment.
Panelists also discussed the fragmented state of Africa's connectivity arena, characterized by numerous disconnected players. This necessitates greater collaboration between regulators, governments, investors, and companies.
Novastar Ventures' Investment Director, Abel Boreto, stressed the mismatch between typical VC timelines and the long-term nature of building last-mile ISP infrastructure. 'Bridging the gap between post-Series B internet service providers and larger private equity investors is tough, as these companies often aren't mature enough for the latter.'
Kunle Awosika, General Manager for Public Sector Africa at Microsoft, brought a different perspective from that of a technology partner in the ecosystem, 'As a platform company empowering organizations through technology, we're committed to supporting businesses that expand our platform's reach. We have supported ISPs like Mawingu [an E3 Capital portfolio company], however, direct acquisitions in Africa aren't our current focus due to due diligence and governance considerations.” The sentiment highlighting limited exit options as an issue for African ISPs.
Light at the End of the Tunnel: Financing the Future
Despite the challenges, the panel outlined promising solutions to attract much-needed investment:
Acknowledging the extended path to profitability, development financing with a social impact focus holds potential. Zizile argued, 'Private equity investors have short holding investment periods and high return expectations and that forces to look for business that have already found the right revenue mix, are profitable and their go-to-market strategies allow for sustainable profitability. Given the high social returns in the sector especially with the move to lower income customer segment, there is room for more patient capital like DFIs and governments to play a role.”
The challenge of classification also looms large. Marieke highlighted that 'This sector presents an additional challenge in the sense that it blurs the lines between venture capital and infrastructure. As a relatively capital-intensive sector, it does not entirely fit naturally in a VC allocation; yet the early-stage nature of several of the last mile connectivity players also make it a difficult fit for an infrastructure allocation. As a DFI we have tried to fund both the earlier models via investments in VC funds as well as some later stage companies via investments in sector-agnostic or infrastructure funds' This ambiguity creates hurdles, making it difficult to find the right funding model. A potential solution may emerge in the form of 'nuanced capital' – funds specifically tailored to financing ISPs, acknowledging the unique blend of infrastructure and VC elements that define these companies.
Shifting the lens to view African internet access as a consumer product unlocks new possibilities. Orli Arav, Head of Debt Funds, Cygnum Capital, stated, 'The market has underestimated Africa. We need to recategorize this as a consumer business, given it's a product for end users.' By presenting the sector as such, capital requirements can be viewed similarly to other consumer-focused investments, opening doors to untapped funding avenues.
Zizile advocated for more supportive regulatory changes That among other things encourage infrastructure sharing models as that will allow for the investment costs to be amortized across a larger user base and the reduction of some of the taxes imposed on digital service providers. The panel emphasized the need for more coordinated government policies to create a supportive environment. Marieke echoed this stating, 'We need to connect the fragmented value chain,' stressing the importance of collaboration to strengthen the sector.
Beyond finance, stakeholders require support in expanding their skillsets and management capabilities. Kunle suggested augmenting funding with advisory services to help service providers avoid pitfalls experienced by others.
The Road Ahead: Collective Action for Digital Inclusion
The panel underscored the complex nature of internet connectivity challenges in Africa, despite its immense social and economic potential. Unlocking solutions demands a unified effort across funding, policymaking, and infrastructure spheres. Participants unanimously stressed the crucial role of collaboration between public and private players in bringing connectivity to the last mile. By working together to address the identified challenges and implement the proposed solutions, we can bridge the digital divide and empower Africa to fully embrace its digital future.