Steven Grin has been angel investing in Africa since 2013, and now he is significantly scaling up his interests through his VC firm Lateral Capital.
Grin spent the first half of his career back home in the United States (US) developing real estate, energy and infrastructure projects, but the last decade has been focused on frontier markets.
He lived in Guyana for four years, where he helped the government develop a low carbon development strategy, and then raised US$250 million on the back of that strategy to invest and prove that economic growth and climate conservation were mutually reinforcing.
After starting angel investing in Africa, Lateral Capital was born after Grin met business partner Rob Eloff in 2015. The company focuses on tech-enabled businesses that are profitably solving pain points across financial services, healthcare, education, renewable energy and housing through its US$50 million Lateral Africa Opportunities Fund.
Grin told Disrupt Africa the Guyana experience was transformational for him.
“Guyana, like most frontier markets, is comprised of high-growth businesses that need relatively small investments ranging from US$250,000 to US$10 million, not buyout-oriented private equity dollars,” he said.
“That is the secret truth; but unfortunately the capital markets and models of capital intermediation that we have developed are not designed to go after these attractive, but small, opportunities. When I began angel investing off my own balance sheet the idea was to validate this thesis in Africa and find a fund model that could scale but most importantly be fit for the markets it was trying to solve for.”
The last four years have been about derisking a model to go after early-stage opportunities in Africa, and Lateral Capital made more than 10 direct and indirect investments over that period of time.
“My partner Rob and I have rolled four of our investments into the fund and we have been fortunate to receive backing from a number of leading US and European family offices. Most recently we received an investment from Capria, the Bill Gates backed fund of funds focused on building world class emerging market fund managers,” Grin said.
“Our portfolio has seen a significant uptick in valuation and our investments have led to an additional US$10 million in follow-on funding for our portfolio companies. Last summer we were able to structure our first exit through a secondaries sale.”
2018 will be all about team building and portfolio development. Lateral Capital is in late stage diligence on a number of further investments, and has plans to launch offices in Nairobi office and Lagos.
“We are a mission-driven firm and want to invest in visionary companies trying to profitably solve significant pain points across the continent. Our view of the world is that the core pillars of a vibrant economy require investment in human capital, financial services and the built environment. Therefore we are keenly focused on investing in technology enabled businesses in financial services, education, healthcare and energy,” said Grin.
“We have been quite active in Kenya and Nigeria but are also seeing a number of exciting opportunities in Ivory Coast, Rwanda and Uganda. We are quite excited by the prospects of Ethiopia but until the ICT sector sees a loosening of regulations we are probably too early there.
He said Africa was a young, but dynamic market.
“The quality of teams and business models being developed, while unique to the Africa opportunity and challenge, are no less as remarkable as opportunities we see coming out of Silicon Valley,” said Grin.
“In particular, my team and I continue to be impressed by the quality of founders we are meeting. An exceptional mix of raw talent, engineering acumen, experience and hustle. The other dynamic is that while you often hear young founders in the First World talk about how their tech or app is changing world, in Africa founders are solving real day-to-day problems and are less focused on conjecture.”
As an example, he cites portfolio company Koko Networks, a smart commerce platform for urban African consumers whose first product is solving for the pernicious problem of cooking fuel.
“Cooking fuel is not exactly a First World problem, but then you quickly realise that it is a US$20 billion dollar market opportunity that also happens to be a leading driver of deforestation and deaths due to indoor air pollution,” said Grin.
“Our research also showed us that cooking fuel is the second largest non-discretionary spend category for the average urban household. A real difficult problem but technology and the advent of mobile money has helped Koko develop a platform to solve last mile logistics and deliver a meaningful savings to the average household.”
African startups lack access to capital, but Grin believes they make up for that with resourcefulness.
“If anything, the typical Silicon Valley founder can learn a lot from an African entrepreneur about what it means to run a startup under the “lean” approach,” he said.
“We are excited by the unique focus of the typical African founder on achieving positive unit economics quickly.”
However, he said more often than not founders lack financial acumen.
“We are sometimes shocked by cap tables where founders have given up 30 per cent of their business, early, for nominal dollars,” Grin said.
Policy support for startups is largely non-existent in Africa, he said.
“If you put this in context, SMEs are the lifeblood of any developed economy, responsible for greater than 50 per cent of employment and GDP. In Africa, while they make up 95 per cent of all firms, their impact on GDP and employment has not kept pace with their peers in developed economies,” said Grin.
“Policymakers and DFIs can do more here between a mixture of simplified regulatory burden, improved incentives for traditional and non-traditional lenders to lend down-market, improving judicial regimes and ownership/IP rights. Policymakers are oftentimes playing catch-up with technology firms, in the case of Africa where policies may be non-existent there is an opportunity to develop an enabling environment that is unique to the startup ecosystem and that can pull in best in class talent and technology.”
He believes Africa is, unfortunately, still a very niche sector, with investments in the continent’s startups still “miniscule” relative to global capital pools.
“Considering that Africa comprises approximately 15 per cent of the global population, but only receives 0.1 per cent of global capital, we think that this dislocation is also a huge opportunity, especially in light of demographics and consumer growth on the continent,” said Grin. “Of course we are biased, we are putting our funds behind this thesis, but we also are contrarian and believe the greatest risk-reward path is found in looking for secrets where no one else is yet looking.”