Q&A with Tobi Oke, Managing Partner at V8 Capital Partners
Q1: Which number excites you in African technology investing?
The number I am most excited about is $1 billion. This is the valuation placed on the recent series-C fundraise by Flutterwave, which is backed by CRE Venture Capital, Greycroft Partners, and Green Visor Capital. This transaction, and also another deal, the recent acquisition of Paystack, is a strong indication that the tide is changing. The pace at which technology companies in Africa are accumulating value and attracting capital is exciting. This is after lagging behind their peers globally over the last decade. Africa accounts for less than 1% of the world’s technology unicorns but is roughly 4% of global gross domestic product (GDP) and 20% of the world’s population. This shows a huge gap in investments and value creation through intellectual property (IP) in Africa. The financial services sector has clearly been disrupted, globally, but I expect this disruption to spread across other industries at a strong pace. As a fund, we are looking not just at financial services but also at healthcare, education, agriculture and logistics where we see exciting disruptive changes.
Q2: What number worries you in the African technology space?
I am concerned about the number $100 billion. McKinsey & Company estimates a yearly deficit of $100 billion in infrastructure across Africa with private investors and governments investing roughly $55 billion a year. My first concern is the gap in core infrastructure, both traditional and digital, while the second is the development of digital skills. This gap is concerning and will limit the growth of technology investing. Fortunately, digital infrastructure which is core to the African technology space has been a focus of governments and private investors making up only a small percentage of total infrastructure requirements. Digital infrastructure also yields greater returns and delivers more impact, and so has rightly been prioritised. It is important to note that, technology has the potential to radically reduce the cost of traditional infrastructure. Applying technology in this regard will however require deliberate action from both government and private investors. The gap in digital skills is another area of concern, mainly because it is critical to creating and using IP. We have committed a portion of our management fees to boosting this development and believe that this gap can be bridged with focused action.
Q3: What are your 10-year technology returns expectations for Africa?
Due to the pace at which we expect our focus industries to be disrupted, and changed, we anticipate an average return of 6x to 8x of capital invested in local currency. The returns expectations in US dollars would be between 3x to 5x, after factoring in currency devaluation. We have observed that moving the fulfilment of existing goods and services online creates incredible growth opportunities. With the added advantage of more favourable pricing for IP assets in Africa, we believe returns may even surpass these expectations. Another reason to be optimistic is that the creation of online fulfilment and digital infrastructure brings with it the opportunity to layer previously unavailable products and services in Africa at a fraction of the costs, creating significant economies of scale for these technology platforms. Our current total investment portfolio made over the last three years, prior to us launching, VCP Growth LP I, is currently returning 4.2x in US dollars.
Q4: If you were an entrepreneur, what kind of company would you launch today, with an expectation for it to become a Unicorn over the next 10 years?
I would look especially at the business-to-business -to-consumer (B2B2C) space. For instance, payments processing, despite getting a lot of attention still has many opportunities for disruption. Intra-Africa payments are still very cumbersome or impossible in some cases. Creating digital payments for Africa’s massive informal markets is another opportunity amongst many. In healthcare, there are opportunities in automating drug discovery, patient care and pharmaceutical distribution. In Agriculture, there are opportunities for using technology to improve yields and creating more efficient supply chains. In education, there are massive opportunities across early-stage learning, job training and apprenticeships. There are many opportunities, but the key is having adequate domain knowledge and execution expertise to take advantage of industries ripe for disruption. Based on what we see, and the pace of growth, I would say the expected timeframe to Unicorn status is closer to five years than 10 years.
Q5: Why should LPs today back a venture capital fund as opposed to a private equity fund?
LPs should try to take a broad approach when making investments – but it is not an ‘either-or’ decision. It should be an ‘and’ decision. There are a few key factors to consider when investing in an African GP, including currency devaluation and higher operational cost due to a general infrastructural deficit. Our investment thesis solves for this by focusing on IP based businesses and leveraging deep domain expertise. As such, we are less constrained by infrastructural challenges and our businesses typically outgrow the headwinds of currency devaluation over our investment horizon. In addition, because of this high growth, our investment periods are typically shorter than those of our private equity colleagues. Finally, if we take a step back and look at the overall trends and market, we see a rapid decrease in brick and mortar opportunities, while there is a corresponding rise in technology opportunities. This means that all investors will, at some point, need the ability to invest in technology businesses.
ABOUT THE INVESTOR
V8 Capital Partners is an early-stage investment firm set up in 2016 to back technology deals, across Africa. The investor touched final close on its early-stage vehicle in 2020. V8 Capital recently closed a deal to back a series-A investment round into a Nigeria-based business services technology company focused on the healthcare space. Tobi, managing partner at V8 Capital Partners was previously director at Intel Capital Africa.
ABOUT VCA TECH TALK
Venture Capital Africa (VCA) Tech Talk is a Thought Leaders segment that draws views from leading investors in Africa’s technology space.