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The Emerging Shift from Charity to Capital Investment in Africa

The global economic recession isn’t going away any time soon. It will likely be worse than 2008 with the Euro debt hanging over us, the U.S. slow recovery, and China’s growth also slowing (but still strong). There is no magic bullet for what is ailing the world and the pain will be felt for a long time.

However, just because there are economic crises doesn’t mean there isn’t money and resources available to invest in Africa.

There are many people and organizations sitting on cash and resources looking for solid opportunities in which to invest. I think of a recent story by the Associated Press on Ajay Piramal, an Indian billionaire, who is sitting on cash from sales of his pharmaceutical firm because he cannot find good investments in India. His issue was transparency in large transactions, which is a wake-up call for anyone looking for an investor. Transparency is important.

Another issue is identifying these opportunities and connecting investors to good investments. In the case of African SMEs, the Missing Middle Initiative of the World Economic Forum (WEF), and originally spearheaded by the South African Chamber of Commerce in America (SACCI), demonstrated that there were many SME institutions, but still funding of SMEs was a gap in the ecosystem.

Many more organizations are rising to fill this void. Funding and capacity organizations, like GroFin, provide both funding and technical capacity support to SMEs. Standard Bank has developed innovative solutions targeting the SME market recently and found growing success. Nexii has created an exchange board called iX for impact investment in sustainable social enterprises whether for-profit or non-profit. And there is even the first seed investment fund for tech entrepreneurs in Africa launching in 2012 called the Savannah Seed Investment Fund.

Some of these platforms, like iX and Savannah Seed Investment Fund, can be used by investors to identify good investment opportunities with transparency. iX works like a stock exchange (with many other types of offerings) so individuals even with small budgets can easily purchase stocks in an enterprise. Another platform is VC4Africa, which connects entrepreneurs and investors focused on opportunities in Africa.

This space will continue to evolve aggressively over the next 10 years, so this should stimulate growth of capital investment into African enterprises at all levels. However, there is still a huge pool of funds allocated elsewhere both in formal and informal structures – charity. This is where the conversation gets a little sensitive for some in the audience.

The Emerging Shift from Charity to Capital Investment in AfricaThe debate over trade versus aid has reached new levels. I can say I am definitely for this movement. However, it is not to say that some charity and aid work is not highly beneficial. There are thousands of great NGOs doing necessary work and impactful work, so we don’t want to take away from that work.

On the other hand, there is a lot of traditional models of charity that haven’t been revamped in decades, asking us to help with the same problems. I am going to personalize this now, so that you don’t think I am just an outside observer.

I grew up in a very giving family. My parents still give more than almost anyone I know, both in their personal time and resources.

When I was in my twenties and early 30s like many Americans, I saw the commercials on TV for poor children around the world and I sent monthly donations to assist the children and got progress reports. This is a "good" thing to do.

However, when I began doing research on Africa and subsequently moved to South Africa, I began to realize that this was not the "right" thing to do. Each year funds are sent to help children but creating economically sustainable communities is not a priority, so the communities become dependent instead of interdependent, or independent, and able to help others. Many of these children can end up on the streets when they become adults because there is not enough gainful employment or academic opportunities for them.

When I came to South Africa, this is the very scenario I was hoping to correct. I started working with a group of homeless teenage boys in Sandton, South Africa. They used to live and camp out next to the McDonald’s in Sandton in the lot that was replaced by a large office complex at the corner across from Investec.

They obviously needed clothing, food, and housing, but I wasn’t naďve enough to think that doing just that would solve their problems. In fact, I had to find another solution as it was difficult in winter to find space for older teenage boys in the local shelters. I got so frustrated because, even with my connections, I couldn’t seem to find something temporary with the goal of getting them in school and working.

Then, one day a friend from church suggested having the boys make custom cards to earn income. At first, I wasn’t too excited about the idea but after a few professionals said they liked the cards I figured there was enough of a market at least to support my small group of teens, which now included a few young girls.

It ran well as long as I was fully involved. The teens were required to come to school two to three days a week. We held it at the Sandton Public Library thanks to the generosity of the Head Branch Librarian and I was the teacher, seeing as my Master’s degree is in education and I had some experience working with at-risk youth. If they came to school, they were allowed to work and earn money.

In two weeks, several of my boys got off the street, paying for their own place, food, clothes, and transport. I then knew this was the "right" direction. Out of this experience, I still work on developing for-profit ventures that are both economically sustainable and address social issues because through this process we can break poverty and dependency.

But I can thankfully say that I am not the only one. People who have been working in development are getting tired of seeing the same problems. In an interview with Richard Schroeder, President of First Step in Sierra Leone, he shared that he had worked in microfinance for 15 years and didn’t feel it adequately addressed poverty. Instead, he and his team developed the first special economic zone in Sierra Leone which is bringing local jobs, economic opportunity to communities across Sierra Leone, and a platform that Sierra Leone can use to attract foreign businesses and investors. And First Step happens to be a for-profit subsidiary of World Hope International (WHI), a Christian humanitarian agency. They have successfully synergized the strengths and mandate of a non-profit with a for-profit venture that can stimulate economic sustainability throughout Sierra Leone and for WHI as well.

On another front, many non-profit organizations are feeling the economic pinch not only because of the economic crisis but also competition. Everywhere you look, a new non-profit needing support is coming to tap the same pool of resources already out there.

Also, givers are looking more strategically at their giving. This is where the wave of capital investment will come from. As traditional givers decide to become investors, the capital investment pool for Africa, and other emerging regions, will grow dramatically and quickly.

Imagine trillions of dollars flowing to capital investment from this resource pool. It can be scary for NGOs not on the right side of the equation, but promising for everyone else.

By Lauri Elliott, Source: Afribiz

Importing Food from Africa to the USA

Before doing business in a foreign country, it is critical that you know all that you can about the market. This valuable bit of information will undoubtedly save you time, money, and energy. Selva Pillay, with GLX Delivery Solutions, found this out the hard way when he moved from South Africa to the United States and brought with him spectacular arts and crafts to sell in the American market, "I felt that I could bring products here and market them to the US market. I was very confident at that time. I felt that whatever we brought to the US would be a success. Not knowing this market, not knowing what they need, (and) how it works, was a huge setback for me."

Importing Food from Africa to the USAAfter experimenting with arts and crafts, Pillay decided that he would form his business around importing and selling foods from Africa. This time, before he shipped any food to the United States, he did research to find out what kinds of items would be well received. After Pillay decided what he wanted to sell, he targeted the vegan/vegetarian market in California, where he is based.

Pillay says that he was urged by some to go straight to Trader Joes, Whole Foods, and other large national chains. Instead, he started contacting mom and pop stores to carry his products. This was a tactical move that he made in order to build up a reputation and credibility for his products before entering larger markets. Once his products became popular, he was able to branch out to some of the larger local grocery stores like Farmer Joe’s and Andronico’s in San Francisco.

"I started working with the medium and larger sized chain stores," Pillay explains. "Then, I started focusing on the very large independents, like Rainbow Grocery in San Francisco. [The trade is] a very close knit family. They know each other and they know their competitors. Once they realize that the competition has the product, they want to carry it as well. Using that method, I was able to get into bigger areas where I had people like Costco and Whole Foods looking at the product."

Aside from finding someone to carry your product, there are numerous other obstacles that you will face when importing foods, or other goods, to the United States. These issues can range from freight costs and clearing customs to dealing with the FDA and getting their approval. Pillay says that this initial stress can pay off in the long run though, "The work is really mindboggling in the initial stages, but what you must understand is the US has a fantastic system of doing things correctly the first time and then replicating the process. If you are prepared to invest in those hardships, in the first instance, once you reach the stage where your product becomes known in this marketplace and it’s a regular selling product, it becomes a business that runs on its own. The challenge is that you have do it correctly initially."

And finally, Pillay says, "It’s about 80% research and 20% selling your product in the market. It’s easy to sell product here because the market’s always engaged in new products… they’re always looking at new opportunities… The struggle is for you to understand that it (your product) has to stand apart from the competition. They’re not looking for mediocre, they’re looking for the best of the best."

Source image by Calliope, Source: Afribiz

The Rise of New Wealth in Africa

As I completed this article, the Economist wrote a story retracting its "hopeless" tag on Africa and said it is the "hopeful" continent. The article also shared that Oprah Winfrey (worth $3 billion) is no longer the richest person of African descent, but Aliko Dangote (worth $13.8 billion) of Nigeria is. How things have changed. I think this is a perfect introduction to this piece.

In 2011, ten of the richest Africans have a combined worth of approximately $47 billion. While this represents stores of wealth and not annual income, it is still staggering that only a few people have wealth greater than annual revenue generated in many countries in the world. There isn’t a problem that individuals have accumulated such wealth, actually. It’s a good sign that Africa is on the move.

In fact, it is not only a few Africans on the continent who are becoming wealthier. The African middle class (including lower middle and high middle) numbered about 313 million, or 34.3% of Africa’s population, in 2010, according to the African Development Bank (AfDB). This represents almost three times the number of people that were considered middle class in 1980.

The challenge still remains that the economic growth that fueled economies globally in the last decade was by and large unequal – the rich getting richer and the poor getting poorer (or going nowhere). This unfortunately is also the case in many parts of Africa.

While there are many reasons for this, some are rooted in the weaknesses in the current free market/capitalist economic models. I have suggested before that free market/capitalist economic models need to evolve to provide economic opportunity for all. Current models still too often allow a few to control markets and opportunities. However, redistribution of, or state-dominated, wealth is not the answer, creation of new wealth is.

So, where does all this new wealth come from? First, I want to return to other pieces that I did in this series, "Emerging Shifts in Africa." The increased world population and increased consumption will make commodities – mineral, metal, and agriculture – extremely valuable. Because Africa has an abundance of natural resources, proper strategy and implementation should make sure that Africa develops much more of this wealth. While Africa, because of both internal and external influences, has not lived up to its potential, better overall governance, more savvy leadership, more vocal and active citizens, etc. are increasingly directing Africa to the right course. However, the next ten years will be volatile not just for Africa, but for the world.

Next we can look to two key population segments in Africa that have heretofore been marginalized – youth and indigenous nations. African youth is one of the fastest growing population segments and represents a huge consumer market. Second, indigenous nations sit on a lot of the arable land for agriculture and from which minerals are extracted (this varies from country to country). Businesses will eventually seek out the opportunities represented by these groups, and like natural resources, if the human capital is developed, the wealth will follow.

Also, technology and innovation will have a lot to do with it. As ICT infrastructure continues to grow on the continent, people will be able to tap into more knowledge, connections, and resources to improve their livelihoods. To catalyze this potential, researchers, like Lucienne Abrahams and Mark Burke of the University of Witwatersrand in South Africa, are informing government policy by urging government to support the potential in "home" economies.

The ICT sector will bring new wealth to more people in the industry as we have seen in Western markets, but more importantly ICT is one of the enablers for creating and collaborating on new innovations. It still sticks out in my mind how through crowdsourcing with the public, a Canadian company discovered minerals worth several hundred million on land they already owned.

Then, there are intangible assets, including intellectual property. Intangible assets are the fastest growing asset class. Companies actually account for intangible assets in their book value. On the S&P 500, the intangible value of companies as a percentage of market capitalization has doubled every ten years while tangible book value decreased (based on 2005 data).

Africa has not been sufficiently represented in building wealth from intangible assets as Western markets. Unfortunately, most countries are not well-diversified within primary sectors like mining and agriculture, much less secondary (e.g., manufacturing), tertiary (e.g., services), and quaternary (e.g., intellectual) sectors.

There is a lot of innovation in mobile and web platforms emerging across the continent. However, South Africa is the leading country on the continent for secondary, tertiary, and quaternary sectors. All of these sectors beyond primary are diversified. Recent examples include a new affordable and modularized defense airplane called the AHRLAC; solar-powered, containerized, connected school by Samsung; and a portable waste plant.

More broadly, Africans are excellent at what is called "work-around" innovations. They solve problems with what they have access to and what they can afford. One of our clients in Africa purchased a used incubator from the United States for about $20,000, which is beyond what most small-scale African farmers can afford. A Kenyan farmer developed an affordable small incubator for the small-scale farmer market. This innovation will help small-scale farmers increase the production of eggs and chickens to serve local markets, which have sufficient demand, and thereby increasing their incomes. As more of these "work-around" innovations become commercialized, there will be an increase in wealth as well.

Also, Africans already hold a lot of intangible assets, even intellectual property, in their indigenous knowledge and heritage. What has been difficult is protecting it and understanding the value it brings to others outside of African communities, so as not to be exploited and be able to develop the value into a commercialized product.

The sources of new wealth already mentioned are logical observations, leading to a new future in Africa if the continent stays on track. But there are other sources of new wealth – a change in what is considered most valuable and the ability to trade in concepts – that will re-map the entire globe . They will shape the "New Africa" more than any other source of wealth.

An example of a change in what is considered valuable is the carbon market. The issues of climate change are dominating global discussions and governance, resulting in the development of the concept of carbon offsets – those who create too many carbons pay those who offset the carbon gases.

Africans manage a good portion of the natural resources that support the environment in which all people live. As we speak, projects involving African communities in sustainable development, like re-forestation, bring new revenue into those communities. People who have been pitied and recipients of aid now have the power to create a foundation for a sustainable future and become architects of their own destinies.

There are also traces of trading in concepts. The world is in a transitional state from transacting in physical assets to intangible assets – social capital, concepts, knowledge, and others. We see platforms like Innovation Exchange on which people get paid by major companies for the best innovative idea and social currency, but it is a very fragmented landscape. In order for this to explode, the value in ideas must be as easy to quantify and exchange as cash.

Imagine anyone in Africa, or anywhere, who has an innovative idea that someone finds of value can get paid in a transactional currency. This is a transformation of the principle of bartering, which is only a shadow of what this could be.

I have been pondering this problem for a long time. As an entrepreneur myself, there is always the continual struggle to get sufficient capital to establish and grow a new venture, which is our core business. Having gone through the creation of several brands, we have developed a process for transforming ideas into tangible, profitable ventures. Yet, we have hundreds of ideas that are useful solutions for different markets that we cannot develop because of capacity tied to the amount of resources we have available. In this new paradigm, we would be paid for these ideas, increasing our wealth and providing additional capital to the ventures we want to develop.

Some consider this a little far-fetched, so I haven’t written about it until this time. Everything changed when I read, "Opportunism: How to Change the World – One Idea at a Time," by Shraga Biran. For the first time, I see a framework that could be executed from a policy and structural level, which means that implementation can follow. He says of this emerging economic paradigm, "value of an opportunity is so great that it must be understood as a positive asset – not a means to create wealth but a form of wealth in itself."

When we are speaking of an economy based on ideas, however, it is not about vague or broad ideas for the most part. It is focused around an opportunity. Opportunity is something that someone sees that others have overlooked and make it something of value. In business and to me, this represents a sustainable business model which provides value to a market and for which they are willing to pay. It is putting pieces together so that the sum of the pieces is greater than the individual pieces (and something that can be leveraged to do more).

To a great degree, this type of economy cannot exist until many people in a society see themselves as creators instead of just workers. According to Biran, "…a creator uses his human capital: the accumulation of individual intelligence, education, expertise, and imagination to discover or create wealth. This person cannot be replaced, but can be assisted by new knowledge industries."

While not at full thrust, the shift is beginning to occur with African youth. In a small study of African international students in the United States, many whose parents became successful professionals but still with moderate means, express their desire to become entrepreneurs and go back to Africa to make a difference. They want to develop wealth for themselves and for others.

And finally, if this is the seed of the African youth generation, this means they will be able to multiple the wealth on the continent in infinite ways that could never have been conceived before this generation. Biran summarizes how this can be done very well, "The shift from physical to intellectual property as a growing component in the economy also creates an almost infinite source of dynamism, because – unlike natural resources such as fossil fuels, newly opened prairie, or even the grains of sand that are processed into silicon chips – the human intellect never runs out."

What does all of this have to do with business in Africa? If firms do not capture these waves of change, they will find themselves left behind on the continent.

By Lauri Elliott, Source: Afribiz


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