The fixed internet sector in the African continent needs more investment to expand connectivity to low-income populations. But there are significant hurdles, such as insufficient investment allocated towards efforts to expand connectivity and inadequate awareness about the sector — which can leave investors hesitant to make the leap forward in providing funds.

The United States government and Microsoft recently made sizable pledges to help foster investment in connectivity in Africa. During the U.S.-Africa Leaders Summit in December, President Joe Biden announced the launch of a new Digital Transformation with Africa initiative that will “expand digital access and literacy and strengthen digital enabling environments across the continent.” It aims to invest over $350 million and facilitate more than $450 million in financing. Microsoft also announced it is expanding its Airband Initiative to bring internet access to 100 million Africans by the end of 2025.

Even with these commitments, there is a lot of work ahead for ISPs and investors alike. Connectivity experts from across the continent gathered virtually to discuss the needed changes in ensuring funding flows to the sector and to educate people about the market’s potential. They also talked about how the sector can make the most out of these recent commitments. The conversation was hosted by E3 Capital, an early stage investor, in partnership with the United States Agency for International Development, and FMO, the Dutch entrepreneurial development bank.

“There's quite a way to go still in convincing and attracting more investors in the connectivity space,” said Diane Yakovlev, associate at E3 Capital. “We'll keep on walking in that direction — trying to advocate and catalyze more investments in the connectivity sector.”

Affordable fixed internet that people can access from their homes can change lives, the experts said, allowing people to advance their skills by becoming digital citizens. It’s also a safety issue. Aubrey Botha, founder of ICE Media Holdings, a company focused on internet service provision for digitally marginalized communities in South Africa, said that after his company launched a digital version of their magazine they worked with the government to provide public hotspots to ensure people could access it. But they started noticing that opportunistic crime was happening in these areas of hotspots – as people stationed themselves in one spot to access the internet. Since then, they’ve been working to scale up home internet access.

Broadband also has the potential to usher in the fourth industrial revolution on the continent – one in which African companies and citizens have the chance to truly benefit from innovations and the digital economy, Aubrey said. Previous iterations of industrial revolutions were based on dependency and exploitation.

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The Right Financing.

Funds must be patient when investing in fixed internet on the African continent, experts said, as well as accommodating for shocks and changes in the market. Diane commented that although many ISPs manage to finance a pilot program, many struggle to find capital once they try to scale.

“It’s expensive to raise capital on the African continent. Even with development finance institutions, there’s an interest rate of about 15%”, said Farouk Ramji, Chief Executive Officer at Mawingu, a rural internet service provider, or ISP, in Kenya. “ Improved debt structures, favorable interest rates and three to five year moratoriums on repayments are the kinds of change that could be transformative for the space. “That's really going to enable us to deploy the capital, and give it some time — as it does take time in our business — to see it grow,” he said.

There also aren’t a lot of venture capital or private equity funds specializing in investing in the connectivity sector. That causes problems, because the funds might not understand the infrastructure, for example, Farouk said. Gregory Eid, chief executive officer of TeleData ICT, a Ghanaian ISP, said he doesn’t think venture capital funding is the most appropriate solution for the fixed connectivity sector, given the timeframe needed to exit, as well as the returns that must be generated for investors.

An ISP should examine its value chain and decide where to partner, Aubrey said. He said his company is fortunate it is based in the Southern African Development Community because there are existing brands like DFA that sell open access wholesale fiber to the tower. This access makes connectivity affordable.

There are no tailormade funding models for ISPs, Aubrey said. He advises focusing on the progression of citizens' use of digital services and their needs for affordable data when forecasting revenue.  “It's going to be up to us as ISPs to really look at the digital citizen in breaking down what revenue opportunities exist” Aubrey said. “Look at the digital citizen, build the value around the digital citizen, and sell that value as a total — versus selling the available household's spend as the total.” “For us, it's looking at broadband as the foundation of unlocking the digital economy,” he added. With that, lies the importance of research and development. Ensuring there is smart technology will keep the digital citizen engaged.

It's important to look at the appropriate technologies and business models for the client, with a focus on enabling the client in the way they are used to living, said Frank McCosker, director of consultancy firm Global Good Net Works and advisor to many ISPs looking to raise funding.

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Preparing to Fundraise

Cornelius Greyling, chief executive officer at VulaCoin, a crypto token that allows subscribers to buy internet access, mentioned he believes a lot of small ISPs often start to raise money before they’ve ensured their business model is clear and finances are in order. “From the business side of things, ISPs need to make an effort to ensure their business is investable before they start to raise.”  That includes strengthening the company’s structures, such as its capitalization tables, having healthy levels of debt, and strong growth figures.

Because there are not a lot of brand name investors in the connectivity space, it's important to choose a fund that understands the sector, he said. “Do your research before you approach venture capital firms when you raise money. Make sure you don't go down the road with a fund in which you don't fulfill part of their mandate,” Cornelius said. If that fund does not understand the infrastructure around connectivity it can be a challenge to work with, as well as ensuring the fund provides the right mix of debt and equity.

Cornelius also mentioned that some companies raise the wrong amount of funding — either too little, or too much. Too little is a problem because the company will soon need to raise another round of capital, but it hasn’t yet seen growth on that initial capital.  It’s crucial to “know what your ask is and what you want to raise it for,” Cornelius said.

“The point about too little, too much is very, very important — and I've seen people fall into both of those traps,” Frank said.

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Technical Guidance

Fundraising is time-consuming for management, the experts said. “The amount of time and personal sacrifice is tremendous. When investors come in and ask for additional information, which is, of course, what they need to do to complete their due diligence, it can take weeks or months for that information to be put together and presented,” Gregory said. His ISP recently acquired a revolving loan facility from Kiva, an impact fund.

“Since the time we started to raise funds, we had to change our plan three times because of what was happening on the ground or in the market,” Gregory said. “Every time we changed the model a little bit, we had to go through the entire business plan all over again.”

A company might have a five-year plan and forecast returns on investment, but often things suddenly change as a result of the nascent nature of this market, he said. If investors are serious about investing in connectivity, they should provide technical support to help ISPs navigate this uncertainty. He said he was fortunate to work with a financial advisory firm when raising, but these services can be prohibitively expensive for some.

Investors should work to ensure money is available for market surveys and research, Gregory said, which can be invested early in the company to ensure a strong plan is in place. The company must have a solid understanding of the context of the country within which they operate, including the economic conditions, the players, and available infrastructure.

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Competing for Wallet Share

Fixed broadband is a different product to mobile internet, as uncapped internet is used differently. For example, it allows video streaming which is not affordable for many due to mobile data fees. The difference in the nature of the product, however, is not the sole area of competition, Cornelius said. VulaCoin conducted research in townships in South Africa which found competition on internet services is based on wallet share. In lower-income markets, decisions on where money earned is allocated are made on a daily basis. Their research found that the South African citizen spends between 100 Rand ($5.90) and 180 Rand ($10.80 ) per month on mobile data.

“That's crazy. If you think about total income that's quite a large percentage after you've taken off food, travel and all the other necessities. There's no money left to spend on whatever else they might choose,” Cornelius said. This large portion of income towards mobile data stands in competition with fixed broadband providers.

This is a concern for investors. When targeting lower income markets, investors want to know whether fixed broadband providers can compete with telecommunication companies, Gregory said. Among the most frequently asked question investors ask is whether mobile networks are a major threat to the fixed internet business, Farouk said. It is essential that investors better understand the cost of data and how fixed internet can be offered at a reasonable price. In Kenya, for example, Mawingu users use about 300 gigabytes a month in data, costing about $25. That is equivalent to purchasing 4G bundles from mobile network operators, which costs about $600 a month. Farouk said he doesn’t think these mobile network operators can lower their rates enough to be competitive with fixed internet.

“MNOs represent a significant barrier for ISPs to raise capital because they are much bigger brands and are already funded. They are also heavily invested in these cutting edge tech technologies. Why would an investor come and invest in an ISP at high risk?” Gregory said. He posits that one solution is for fixed broadband providers to make the argument that they are working to provide fixed internet to low-income communities, which can also unlock funding. “If you have a traditional model of delivering internet to businesses, or more affluent households, however, then you may struggle to secure impact or concessional funding,” he said.

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Ensuring Impact

On the innovative financing side, development finance institutions look at impact. While the commercial sustainability of an ISP is important — how far the company can reach and its impact is key, Farouk said.

Giving internet for free — zero rate internet — is not sustainable, of course, Farouk said. Mawingu is working to develop a sustainable impact model, and have recently rolled out to vocational training institutes to which they sell bandwidth at cost. “If you connect the classrooms, you change the way students learn, you also change the way teachers deliver the classroom materials. There is a huge evolution here,” Farouk said.  Impact is brought into the equation when schools are connected as opposed to simply providing it to homes, Farouk said, which opens up a different element of fundraising. “The skills and capacity building is absolutely vital,” Frank said.

Focusing on women adds another layer of social impact, because women tend to have greater impact in their communities when given the same resources as men, Gregory adds. While to those in the sector, it's clear why providing someone with connectivity who didn’t have it before improves their lives, it's also important to measure the impact in order to set expectations and targets, Gregory said.

There are also non-governmental organizations that want the same outcomes — communities with connectivity. They become natural partners, Gregory said. “We bring the connectivity and they bring in their services — we figure out how to do things together,” he said.

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Maximising the U.S. Pledges

In light of the announcements from the U.S. government and Microsoft, Frank asked the webinar participants how their companies can best take advantage of these new efforts. He also said one concern is whether there are enough players in the connectivity space on the African continent and enough investment-ready projects.

African connectivity companies should start by establishing relationships with U.S.-based companies, Gregory said, as well as other trusted technology providers and those that promote sound cybersecurity. “The U.S. will invest this money but will also want to do it to encourage business collaborations,” Gregory said, as these companies present opportunities to leverage private sector innovation and resources. “If you already have something going on with Microsoft, Amazon, Google or any of those tech companies — that’s great. If not, start those conversations.”

Frank also encouraged companies to partner with content providers, such as Netflix and Amazon. “The cloud business is changing the mobile network operator’s business. The consumer is talking and their demands are really what's driving the growth — and that's video content.” Frank said.

Farouk said there’s a need for feasibility studies to expand the successes that have already occurred in respective country markets. The U.S. government and Microsoft should also work with existing last mile providers who have already “learned the hard lessons and figured this out,” he said.

When considering lofty goals, such as connecting 100 million people to the internet across Africa, it’s important to examine the underlying infrastructure, Cornelius said. When compared to services such as providing people with running water, sewage, or electricity, which require large infrastructure projects, internet access is not given as much weight. “You actually need to tackle this problem as seriously as you tackle these other problems,” Cornelius said. “That's actually the only way to give everybody access to the internet at a reasonable price.”

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Enabling Affordable Financing

In summary, the experts said they face significant hurdles, such as inadequate general awareness about the sector and therefore not enough funds specialising in connectivity. They called for financiers to provide patient finance, as well as noted that growing their businesses are dependent on improved debt structures, favourable interest rates and initial moratoriums on repayments.

But ISPs must also become more prepared before seeking financing — ensuring their business model is clear, finances are in order and they research the fund before approaching it. They must also ensure they know the right amount to ask for.

Fundraising is time-consuming for ISP management, so investors should provide technical support and help finance market surveys and research. They said that in many ways, mobile service providers are in competition with fixed service providers, so its key investors know the cost of fixed internet is more reasonable than mobile.

ISPs should focus on impact, such as targeting women with connectivity, which could also open new fundraising doors for them. ISPs should also look at the digital citizen in breaking down what revenue opportunities exist.

And in light of the major announcements from the U.S. government and Microsoft, establishing relationships with U.S.-based companies and understanding how the U.S., other government partners, and private sector actors are investing in infrastructure that enables security, supplier diversity, and the use of trusted vendors, could open doors for a company into accessing these investments.

“Focus on the customer; make sure the investor is ready; find the right amount of money — not too much, nor too little; focus on feasibility; and make sure that we enable affordable financing for all,” Frank said in closing.

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