Do African start-ups really benefit from the foreign capital craze?

In the bustling microcosm of African tech, this was one of the highlights of late 2021. The Nigerian company MainOne, which was founded in 2010 and has become one of West Africa’s leading data storage centre managers and communication service providers, announced in December that it had been acquired by the US company Equinix (which had $6bn in revenue in 2020). The deal that was finalised in early April for $320m was widely applauded as it confirms that African-founded and -run businesses are successful and can attract a big name from Silicon Valley to the continent. Wall Street-listed Equinix has some 220 data storage facilities worldwide.

The MainOne takeover is not an isolated case. In recent years, the continent has seen the emergence of a multitude of start-ups, many of which have been wildly successful. “Technology-savvy young people have created types of businesses that we have never seen before,” Ngozi Okonjo-Iweala, head of the World Trade Organisation (WTO), recently told us. They include Flutterwave, InstaDeep and Copia Global.

The valuation of these start-ups is skyrocketing, as is foreign investors’ appetite, particularly venture capital funds from the US, Europe and even Asia. In the past year, they have attracted a record $5bn. In terms of fundraising, 2022 has got off to a very strong start for these companies as the symbolic threshold of $1bn was crossed between January and February.

However, this ongoing revolution is already raising serious questions: is Africa really benefiting from the foreign capital craze for its tech or is it simply being robbed of its nuggets?

High added value

It is true that thanks to these funds, which invest in capital to either launch or finance the growth of African start-ups, “a lot of energy is being released in a sector with very high added value”, says Cyrille Nkontchou, co-founder of the asset manager Enko Capital. The fact remains that “everything happens as if most of the value created is then exported, which is a bit of a shame”, the financier says.

Beyond tech, in many areas ranging from infrastructure to agribusiness and energy, “it is clear that the productive apparatus is often not owned by Africans”, says Bernard Ayitee, a graduate of the London School of Economics, who founded Obara Capital, the first African hedge fund, in 2018. Creating a company is a good thing, but owning (or co-owning) it, and therefore being the main beneficiary of the profits generated, is even better.

Protecting your flagships

Some countries have understood this and are putting regulations in place to better control foreign investment. Thus, recently, when US defence specialist Teledyne tried to buy Photonis, a French start-up focused on night vision, the operation eventually fell through. The French government was adamant that Bpifrance, its public investment bank – whose purpose is to finance the development of national companies – should take part in the operation by acquiring a minority stake. This would have given it a right of veto on certain operations and the company’s management.

More generally, in recent years, France has developed a legislative and regulatory arsenal that enables it to protect its flagships while maintaining a certain balance between attractiveness and control of foreign investment, particularly in sectors deemed strategic, such as defence, energy, water, transport and data hosting.

“It is not a question of developing protectionist reflexes,” says Alex Bebe Epale, a lawyer at the Paris and Cameroon bars. “But rather to have, within the framework of this type of deal, strong requirements when it comes to, for example, using local content, mandatory partnerships with local SMEs and technology transfer. One must always keep in mind the question: what does my country or region’s economy gain in the long run?”

Controlling foreign capital

This is all the more crucial as foreign capital flows to the continent are set to increase in all areas, according to experts. In January 2021, the entry into force of the African Continental Free Trade Area (AfCFTA) and the possibility of accessing a common market (still under construction) of 1.4 billion people will inevitably encourage foreign groups to go on the offensive on the continent.

Beyond supervising foreign capital, a fundamental question arises for the continent’s leaders, especially within the context of the AfCFTA’s implementation: how can we also encourage the emergence of African companies, held by African capital? The continent’s development model must “rely more on local savings than on international capital for equity financing”, says Nkontchou.

To do this, structures need to be created to secure these savings and reassure African individuals who prefer to send their savings to other continents. African pension funds can provide valuable leverage: “It’s long-term money with which you can take a bit more risk by investing in the best ideas,” he says.

Epale thinks otherwise. He believes it is also important to consider a new type of bank, one that is adapted specifically to African economies and whose “mission would be, for example, to support and finance the informal sector to help real SMEs emerge”.

Sovereign interest

Ayitee says: “At the beginning, you need a vision. Then, you need to put in place sufficiently powerful financial structures, like Lazard or Rothschild in France, to support the emergence of a core group of successful companies in sectors identified as being of sovereign interest to African states.”

These words find a particular echo within the context of the sale of Bolloré Transports & Logistics’ African activities to MSC for €5.7bn ($6.2bn), which will remain one of the biggest deals of the year on the continent. A French tycoon sold part of the logistics empire that he had built on the continent to another tycoon, a Swiss one, in front of African public authorities who watched helplessly as this operation affected a highly strategic sector of their economies. MSC apparently found itself in competition with BTL’s other potential buyers. Among the companies mentioned were French, Middle Eastern and Asian names, but no African ones!

Thus, raw material exporters – for whom transporting natural resources from their place of production to the coasts from which they are shipped to the rest of the world is vital – find themselves completely out of the picture in a matter that is being played out on their own turf.

Why, more than 60 years after their independence, have West and Central Africa’s coastal states failed to foster the emergence of local players or champions in this activity that is essential to their economies? Something to ponder.