Finding Investment Gems

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As the final part of an exclusive three part guest post series written for Disrupt Africa reflecting on a year reviewing pitches, David B. McGinty, Team Leader of the Human Development Innovation Fund (HDIF) in Tanzania, looks at how investors find investible businesses in challenging markets.

In 2014, HDIF short-listed 45 out of 1,353 applicants to submit business plans. Of the 45, the HDIF team had met or pre-identified as high potential applicants over 80 per cent of the applicants before concept notes were submitted. Essentially, HDIF’s staff and network were within one degree of separation of great, fundable organizations that matched HDIF’s investment strategy.

Once concept notes are submitted to HDIF an independent, competitive process is applied that serves to remove potential bias. With bias removed, how could the team be so close to good ideas? Alternatively, how do investors (including those that do not use independent processes) find great ideas and entrepreneurs in Africa without talking to every aspiring entrepreneur in the world?

Investors benefit from active connectors

HDIF has a large cohort of Dutch partners and collaborators of investees—including In2Care, Simgas, Susteq, ICS, SNV, University of Twente, PharmAccess, and Akvo. HDIF neither intentionally targeted The Netherlands or Dutch organizations nor began the funding process with an abnormally large network in The Netherlands. What the team found in The Netherlands is a small but growing network of social entrepreneurs who were made aware of HDIF and actively connected one another to the opportunities. By tapping into an active connector in a network of like-minded entrepreneurs an investor discovers clusters of high potential partners.

Additionally, depending on the target investments and specific markets, investors tap contacts within more traditional support organizations such as SME bankers and trade associations for tips on emerging enterprises. In markets where universities are commercializing research or at least linking research with entrepreneurs (serving at the forefront of innovation, like Stanford University), professors and other university players are key sources of investment opportunities.

Investors explore collaboratives

Investors publicly and privately go to where entrepreneurs are cooking up new businesses. Accelerators and incubators are an obvious network for investors. Community managers have walked hand-in-hand with large communities of startups and know the character of the people. Co-working or collaboration spaces are where idea and startups take shape outside of the laboratory or university. If an entrepreneur is in one of these spots, she should ensure community managers love the business and know the pitch so that hers is the first name they speak when an investor peeks around the corner.

Success attracts investors

Bet on the fact that investors talk to other investors and that a third-party validation can attract investments. Plenty of research exists on crowding in and crowd mentality, and startups can take advantage of the reality.

Business Plan Competitions

Last week my new buddy Ashifi GoGo was talking about his early days “riding the business plan competition circuit” before the successful launch of Sproxil, which has an innovative mobile product authentication technology. Ashifi honed the Sproxil model and pitch by repeatedly pitching, while also building investor awareness about the business.

In fact, I’m writing this series of articles as a reflection on sitting on numerous business plan and investment panels, and I’ve seen several pitches several times. Investors get to know who is sticking with an idea and how the idea and entrepreneur have improved through various competitions. Brand awareness can be developed and tenacity proven with investors through competitions.

Award Winners

Ubongo Kids won the mobile entertainment PIVOT East 2014 award. In early 2015, Ubongo’s founder, Nisha Ligon, pitched and won a $75,000 award at the Eduprenereurs Venture Forum. Other investors were watching and in February 2015 HDIF made an investment.

Also in 2014, Shule Direct’s founder, Faraja Nylandu, won the Reach for Change / Tigo GameChanger’s competition—which is when HDIF became keenly aware of Shule Direct.

Others’ Investments

Investors themselves are networks. For an investor, other investors and investment platforms are a wealth of value and information. From VC4Africa to Intellecap’s I3N to the ABAN to Ashoka, investors are looking for places where startups have been sifted and sorted to separate the pretenders from the players.

About once a month Tanzania’s impact investors meet for Happy Hour. Within the bounds of confidentiality, they share investment ideas and those ideas do not stay within the bounds of their individual focus areas. For example, HDIF does not fund renewable energy but ideas that come through HDIF on that sector are passed along to other investors. As another example, last year HDIF vetted TENA, a recycling business based in Arusha. Although the HDIF Investment Committee did not approve funding TENA, HDIF has made numerous connections to other potential investors matching and plans to continue doing so for other cool entrepreneurs irrespective of HDIF’s investments.

Investors listen

Even when a fund is not actively looking for investments, investors are listening. Finding and vetting entrepreneurs is expensive and time consuming. Investors are anxious to find a “diamond in the rough” before others. If an investor is looking for businesses working in a sector, rest assured that the investors are researching the value chains and talking to research, industry, and consumer players related to the market. Similar to ensuring that community managers of accelerators, incubators, and co-working spaces love an idea and know the pitch, finding a few key market players to serve as ambassadors or evangelists of a new enterprise can help find more friendly investor ears.

Going for open calls

Finally, of course, investors may open a call for applications for new investments. If supported by appropriate outreach, an open call for proposals can surface great investments outside of close networks and typical players. An entrepreneur’s chances of success are greatly improved by tapping into one or more of the ways mentioned above to grab an investor’s attention before an open call, but even in the absence of prior connections new ventures should keep on strategically submitting ideas and learning from each application.

Finally, simple encouragement

If you are an entrepreneur looking for funding, stay on the circuit. Listen and learn from each application and pitch. Think beyond money to find investors that match your needs for non-financial support. Ask for feedback. Network with connectors like market-oriented professors, banks, and consultants. And, find out where target investors hang out because they are listening all the time. If you are in Dar es Salaam, that means I’ll see you at Shooters Grill or Slow Leopard around Happy Hour. But, if you pitch me after work hours, you are buying the beer!

Finally, thank you for tuning in to these reflections across the three parts of the series. May your equity grow and impact exceed expectations.

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Key players from Africa's startup and investment ecosystem post on issues close to their heart for Disrupt Africa.

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