During my graduate studies at the Massachusetts Institute of Technology (MIT), I investigated the determinants of venture capital investments across Africa. It became evident that scholars spent a great deal of time focusing on the role of country level factors. However, a substantial body of literature has argued that the role of networks is a determinant in shaping economic outcomes. Nevertheless, the impact of interpersonal relationships on funding outcomes in Africa has received insufficient attention. Leaning into this idea, I explored the social capital of African start-up founders and how it signals abilities, norms and values. I advanced a novel elite network theory of VC investments. My work has led me to believe, with great confidence, that in order to build a sustainable future for Africa there needs to be a rebalancing of investment flows.
Methodology
I adopted a multimethod approach to empirically examine my theory. I conducted semi-structured interviews to explore the role that different networks play in shaping investment outcomes for stakeholders like VCs, African entrepreneurs and African students at elite universities. I also interviewed researchers and ecosystem builders to probe their beliefs about the drivers of investment concentration and to identify control variables.
Additionally, I collected statistical evidence about African enrollees at elite US universities. To study their post-education start-up funding outcomes, I gathered a unique dataset from “Africa The Big Deal”, a monthly-updated database that lists all reported funding deals that have exceeded $100,000 secured by start-ups in Africa since 2019. I extracted the complete results for US-funded deals and created a dataset. After excluding all non-top 20 American schools, I was left with 180 deals to investigate.
I compared those deals with the broader dataset to determine whether founders who had graduated from elite schools fared better than the rest. Finally, I also collected data on total venture deal flow in Africa since 2017 from Partech, an investment platform. Equipped with this methodological framework, the findings of my research revealed several key insights.
Key learnings
My exercise suggests that since VCs primarily make investment decisions based on familiarity (existing networks), they have strong biases in favor of well-networked African countries as investment destinations. In Africa, four countries that are commonly referred to as “the big four” exemplify this reality: Nigeria, Kenya, South Africa and Egypt. Together, they account for the lion’s share of VC investments going to the continent.
I found that the big four countries’ student population at elite universities is also overrepresented relative to other African countries, accounting for 60% in the top 20 of US News and World Report. The imbalance is even more pronounced when factoring in Ghana, the 5th largest recipient of VC flows and the 5th most represented African country at elite US universities. The Harambean Alliance embodies this reality. The “big four” and Ghana account for 64% of the Alliance, further indicating a strong concentration of opportunities. It is worth noting that while Egypt is a top recipient of investments, it only accounts for 0.57% of Alliance members. This may be due to Egypt’s closer ties with Middle Eastern professional networks.
In light of all the above, we can begin to see the institutionalization of an uneven playing field. Recognizing these patterns, it becomes crucial to explore how we can challenge and evolve beyond the current status quo.
Breaking the status quo
Unlike other corners of the finance world where decision making is primarily informed by an evidence-based approach, the VC world is largely predicated on social capital. It manifests as a form of network capitalism with positive reinforcing feedback loops. Those with the best networks can capture an outsized share of the benefits. Therefore, one might ask: how can other countries drive more investments and unlock their potential? Following my elite network theory of VC investments, I argue that by spreading knowledge more broadly and embedding themselves in new ecosystems Harambeans can redefine existing networks and unlock the pan-African potential.
Understanding the entrenched nature of network capitalism in VC funding leads us to a deeper examination of how elite networks specifically drive these investment decisions.
Elite networks drive VC investments
Money follows familiar faces, not geography. Population, market size and ease of doing business are factors that play a role in shaping the perception that investors form before investing. But people invest in other people first and foremost. I contend that in the realm of VC, credentialed founders (founders with ties to elite professional or academic institutions) drive investments. My research showed that attending an elite university for instance, is a determining factor when it comes to funding outcomes. The mechanic is straightforward: the better the social capital and resulting access, the higher the probability of funding (a proxy for success). The Harambean Alliance exemplifies the value of such network effects. In fact, numerous members attribute their access to investors and key resources to their membership in the Alliance. For example, Aeko Ongodia H’22 is a Ugandan founder who successfully tapped fellow Alliance members for seed capital for his start-up, Xeno. But beyond the critical funding piece, these network effects create something else: a shared set of principles. What if they could be exported by members and diffused elsewhere on the continent?
The diffusion of norms and values
Asymmetrical access to resources creates uneven access to opportunity, which in turn creates path dependency. That is a tendency to have probable outcomes (i.e. nationality of members) due to structural properties. For example, as stated before, 64% of Harambeaans hail from Nigeria, South Africa, Kenya and Ghana. Positive feedback loops undoubtedly reinforced this dominance. Presumably, information about key deadlines, tips for writing a competitive application or procuring strong recommendations flow more abundantly in these “well-networked” countries. As a result, the network of partners, advisers and investors that the Alliance has formed over the years naturally orbits around them. This diffuses best practices and norms, which standardizes and improves the practice of entrepreneurship. It also entrenches competitive advantages. Acknowledging these existing disparities in opportunity and access becomes imperative to consider strategies for creating more inclusivity.
Building more bridges
For Africa to unlock its potential efficiently, growth needs to be more equitable across the continent. Individuals need to lead the charge. This is particularly true for nationals from non-networked countries who ought to carve their space in the spotlight.
At places such as Harvard, MIT and Upenn I saw evidence of this. Nationals from non-network countries are enhancing the connectivity between their international networks and their home countries. They are doing that by increasingly starting ventures, chairing university clubs, speaking at conferences and actively regaining control of the narrative about their countries.
To materialize the mission of building Africa’s future, Alliance members ought to actively expand their continental sphere of influence. Linking with these individuals might be one effective way to do that. Ultimately, there needs to be a recognition that while access to resources may be concentrated currently, talent and potential is widely distributed. As a hub for visionaries, the Alliance must endeavor to lead this leap beyond the big four. In fact, some pathways laid out for expanding connectivity already find practical illustrations from within the Alliance.
Leading by doing
In the digital realm, the Harambean Lab seeks to expand access to business insights from Alliance members through thematic content drawn from real-world experiences. The solution fosters greater interaction and helps diffuse knowledge, particularly to those with less access to elite networks.
In Namibia, the alliance is teaming up with First National Bank (FNB) to propel the local start-up ecosystem. The hope is that virtual knowledge transfer sessions, access to the Harambean Lab and interaction with members will spark an appetite for collaboration and geographic expansion.
In Zambia, Bright Chinyundu H’21 from Broadpay turned a local SME into a full-blown tech business with pan-African aspirations after he roomed with Andrew Airelogbhegbe H’20 at the Bretton Woods retreat. The pair plotted a Nigerian expansion for Bright’s startup before joining forces to “divide and conquer” the continent. Under a new unified strategy Bright will handle Southern Africa while Andrew will tackle the West.
In Uganda, Aeko Ongodia H’22 followed a similar path. While he knew his local ecosystem was a great place to test and refine, he realized African expansion had to happen in order to scale. He set his sights on Nigeria. While the process of moving beyond one’s national borders is complex, his affiliation to the Alliance opened the necessary doors. Setting up shop internationally became a matter of presenting his idea to the right member during the occasional event in a key hub like Lagos or at a Global Summit.
On a continental scale, Iyin Aboyeji H’10 is literally pushing boundaries. After successfully contributing to scaling Flutterwave and Andela beyond Nigeria, he has moved to the investment side with his Future Africa Fund. The Fund’s declared ambition is to be “the first investor in bold and visionary leaders building global businesses that solve Africa’s biggest challenges”.
While these anecdotes provide a glimpse into the mechanics of reshaping the entrepreneurial landscape in several African countries, the Francophone regions present a unique case study in challenging existing paradigms.
The Francophone opportunity
For years, investors shunned places like Senegal, Morocco, Ivory Coast or the Democratic Republic of Congo. However, new dynamics are emerging to challenge the status quo. Most notably, ambitious individuals in these markets are progressively leveraging networks and knowledge transfers to emulate successful models and cultivate local champions with potential for continental reach. This provides new opportunities for collaboration. The Alliance is uniquely poised to catalyze this process by broadening its geographic reach.
Dare to look beyond
What would Africa look like in the near future if investors deployed more of their capital outside of the “big four”? What would happen if there were more Bright Chinyundus from Zambia and Aeko Ongodias from Uganda? What if they consistently had access to the Iyin Aboyejis of the world for funding? At the very least the opportunity pool would be expanded. Furthermore, as demonstrated by the experience of some Alliance members, this would stimulate marginal ecosystems, bring them into the spotlight and create better signaling for investors. It would also create more competition and a race to excellence across the continent. Recent success stories like Wave in Senegal who crossed the billion dollar valuation mark and InstaDeep in Tunisia who was acquired by BioNTech for half a billion dollars are testament to the possibilities.
Parting thoughts
By virtue of the quality of its members and the combined $2 billion they have raised, the Harambe Entrepreneur Alliance is an elite network. While its members derive potential from their intrinsic abilities, the powerful networks they are embedded in can compound opportunities not only for themselves but also for their countries and the continent. It might be tempting to process this idea through the prism of a burden placed on the shoulders of African innovators, the likes of which their global counterparts are not expected to carry. But it need not be viewed that way. From my perspective, this sense of mission is one critical competitive advantage they can leverage. To that extent, my challenge to our members is to seek to operate within a pan-African framework, one that goes beyond the big four. It is only through this prism that we can truly give credence to and operationalize our common goal of “building Africa’s future”. This unity of purpose among innovators and visionaries might be the single greatest non-state sanctioned force for development on the continent. Let’s channel it in the right way.