How Rajiv Daya Is Keeping an Eye on the Long-Term Goals of Africa’s Start-Up Landscape
Rajiv Daya has long been fascinated by the role of financial sector innovation in enabling other sectors to grow in African economies. A native of South Africa, Daya began his career in management consulting in Johannesburg. He then segued into investment banking, where he spent his formative years at Goldman Sachs steeped in the world of corporate finance and merger and acquisition transactions at large corporations across the continent of Africa. A move to Nairobi brought him to the World Bank Group where he focused on financial sector innovation. This was a pivotal change that introduced him to the intertwined worlds of “public and private sector, regulators and corporate innovation” he says. “There was a huge focus on driving impact, particularly for SMEs.”
Soon after, Daya “combined that experience with the investment banking and consulting” and focused on alternative financing models for emerging markets during his MBA at Oxford University. And that’s where a new set of impact-focused questions developed. Are we approaching impact from the perspective of the intended beneficiaries or the providers of these resources? he wondered.
It makes sense now that Daya landed, post-MBA, at Founders Factory Africa, the continent’s outpost of the worldwide start-up accelerator and incubator Founders Factory. As Head of Investments, Daya has played an instrumental role building the investment team at FFA, which has given him a clear standpoint for understanding how early-stage investing in Africa, and all its glories and challenges, works.
Our founder, Eva Yazhari, recently sat down with Daya to discuss the challenges, misconceptions, and potential of the growing landscape of burgeoning business and investing in Africa. What drives Daya, he says, is the nuanced demand and supply side considerations when it comes to matching capital. “I wanted to be at the intersection of that,” he says, “helping to build a sustainable pipeline of businesses that were investable, as well as being able to influence the discussion around where that flow of capital is ultimately coming from”—in Africa and beyond.
A Conversation with Rajiv Daya
What are the top challenges of early-stage investing in Africa?
It’s a question of communication. There are blurred lines between the types of capital and the types of businesses that are receiving that capital and accessing the right sources of capital for a specific business model. Venture capital, globally, has taken on a Silicon Valley connotation and implies exponential growth (at all costs) that requires an online market; it requires businesses accessing a massive consumer base that has significant consumption power, which is just not the reality in our market. I tend to think of venture capital, as we're calling it in an African context, as early-stage private equity. I don't think we're at the Silicon Valley version of venture capital just yet.
The second is something I'm very vocal about, which is time horizon. Whether it's in a political context, whether it's in a commercial context, whether it's in a social context, we suffer—I think everyone does but especially here—from this issue of short-termism. The nature of traditional venture investing requires investments to scale very quickly. But— and you sometimes see this on the impact investing side—we're looking to demonstrate very short-term outcomes so that we can justify the allocation of capital, and this can be detrimental to long-term outcomes. You could have a series of short-term outcomes that have absolutely no long-term impact.
The final piece, in terms of challenges, is the enabling infrastructure. You can’t get around that, so when we hear people talk about perceived or actual risk on the continent, regulatory challenges, and physical infrastructure enabling tech infrastructure, those are all very real concerns. These are constraints that we have to work within. The only reason people are willing to do that is because of the monumental impact associated with successfully working around them: creating jobs and economies to support population growth so that our states can grow more inclusively and contribute more meaningfully to global advancement. Anyone who chooses to invest in Africa is investing because that outweighs the short-term constraints.
Founders Factory operates in other markets. How are those challenges perhaps different?
Our market is made up of thousands of languages, cultures, people, and regulations. Moving from where I am in South Africa to just across the border to Botswana or Zimbabwe is a fundamentally different business model in many cases, and scale is completely different. In other Founders Factory regions (such as the UK, US or Europe), you have the benefit of focusing on a particular market which is large enough to support growth from seed through to IPO. Scale here [in Africa] means you must cross borders, which means it takes more money and it takes more time. We come back to the time horizon, which makes things very difficult.
What also tends to happen is that you've got an investor expectation of scale, which is then imposed on a founder. While this can provide aspirational goal-setting on the one hand, it can also create a perverse incentive to scale into other markets for the sake of scaling.
That is problematic because, as you say, it doesn't necessarily fit the time horizon and it doesn't fit the market. But are there ways at Founders Factory Africa that you have helped to advise either companies or investors to overcome the fragmentation to scale companies across the continent?
It’s a combination of the demand side and supply side interventions. At a more macro level, some of the things that we’re involved with at FFA include working with other investors and ecosystem enablers to ensure that for a South African business to scale continentally, or a Kenyan Ugandan, Nigerian, or others, we are at least speaking the same language. That helps to ease some of the friction associated with growth. For example, contributing to startup acts that speak to each other, or ensuring alignment in company incorporation / IP / term sheets are starting to alleviate some of the regulatory hurdles and burdens that exist. Startups, themselves, are opening doors for continental growth by creating the enabling infrastructure for others to follow into new markets (and we’ve seen this in fintech, for example, with the Paystacks, Flutterwaves and Chipper Cashes of the world). Everyone talks about a continental Free Trade Area Agreement, and having a macro document or blueprint is great. However, we seek to play a more meaningful role in the ways in which we can leverage technology to implement those kinds of blueprints.
The other element is being more thoughtful about what makes practical sense, so acknowledging the fact that going from Nigeria to Ghana could be, in some cases, the equivalent of going from Nigeria to China when you talk about differences in markets and purchasing habits and those sorts of things. Part of what we're also trying to instill in businesses that we work with is having a sense of the most natural markets that your product, or service, is able to serve. Rather than saying ‘I'm going to follow a narrative that is expected in a pitch deck of going from Nigeria to Ghana and being Pan African,’ I may choose to go from Nigeria to Mexico to the Philippines because those markets are more relevant for the product or service that I'm offering. It is about being more subtle and thoughtful in the markets that make sense from a scale perspective. Founders can easily fall into this trap of feeling like they must position a business as Pan African. For us, building a startup means you can be sitting in Cape Town, or Lagos or wherever, and serve a global market, not necessarily physically scale into markets that an investor would expect to see in a deck.
Let’s talk about impact investing, about companies that have impact baked into their business models. What have you seen with impact investing in Africa? It is evolving or is that more of an imposition of investors from the outside in their thinking about what the market is?
I think the challenge comes in when you are trying to put a certain label on an investment philosophy or strategy because you need to tick certain boxes. Again, I'm going to sound like a broken record about the concept of time horizon but we need to be more thoughtful about distinguishing between short-term and long-term impact outcomes. Don’t get me wrong, we need both approaches in parallel, we just need to ensure that the capital available to take a more long-term holistic view doesn’t also need to demonstrate (potentially conflicting) short-term outcomes to keep going. One of the principles associated with impact investing is finding a balance between financial upside and non-financial economy-wide benefits. These need not be mutually exclusive, in fact we have seen how the latter outcome can increase the likelihood of the former. So the concept of impact investing, if executed well, can be effective. We just need to ensure that the need for short-term results does not negatively impact long-term impact.
What does long term mean to you?
A minimum of 10 years, if you're going to see any sort of meaningful adoption change. We’ve seen investments happen in waves. I recently spoke about the ‘three waves’ of investment that have just happened throughout my 10 years between 2010 and 2020, and how that's kind of evolved and where I think we are right now in that investment cycle. Yuval Noah Harari, the author of Sapiens, puts it very well. He says if we don't, as a population, quickly develop the ability to digitize and make use of our own data on the continent, we will simply become data colonies for those who have the long-term time horizon to do that. You have the likes of your Facebooks and Googles, but you also have the likes of businesses like Stripe, who have now passed that existential crisis point and they can take a long-term view. I was listening to a presentation by someone who works at Stripe a couple of weeks ago in Cape Town and she was talking about the way they think about their growth. Their mantra and vision is to increase the GDP of the internet. If we take a similar approach, go back to basics and see that all we need to do right now, rather than think about exponential returns, is to simply digitize so that we have data that we own, that to me is enough of an impact. That will set the foundation for that job creation and that growth and that adoption. Without taking a view of simply investing in that foundation we will struggle.
Let’s go over some of the trends and what you’ve seen since the pandemic. I’m curious if you feel there are new opportunities for startups.
I've been talking about what I call a 4-D approach. What that means is creating a foundation. The investment waves that I’ve spoken about started off with very optimistic, macro pictures. You had this private equity wave buying into a macro growth story, which hasn't panned out because we didn't take that sort of long-term time horizon.
Where we move to now is that we’ve come full circle to a completely decentralized approach to building out investments on the continent. So now, rather than an optimistic macro story that's going to generate returns and economic prosperity, we want to create the ability for people to build bottom-up. We're seeing in every sector that I work in—healthcare, finance, agriculture—the ability to build decentralized value chains, but for that to work, you need everyone to be speaking to each other through a centralized technology platform.
What we've seen because of COVID is an acceleration of decentralization as an investment thesis. You have founders and businesses that are building now not because of the macro but despite the macro. And you have founders who have a pretty difficult task ahead of them, which is: can we build our own businesses in a decentralized fashion despite macro instability and a lack of macro growth, and rather create that ourselves. The combination of technology tools and COVID has, if anything, accelerated that philosophy. What we've seen more quantitatively at the seed stage of investment is an increased appetite to take on more risk, because there's been that acceleration of decentralization and digitization and incumbents have been forced to think more existentially about their competitive advantages in this new era.
So my first 3 “Ds” are: digitization, decentralization and the resultant data that you get from that. The final D is not as obvious for those who don’t think about entire value chains. This is the distribution element. So now that I've got a decentralized and digitized economy, how am I getting A to speak to B C D in such a way that we're thinking about effective distribution? Right now we have a physical distribution constraint because of roads and ports and those kinds of things, which we're trying to leverage technology to also solve, but distribution and thinking across a value chain is the element that's going to bridge that gap between the decentralization and digitization, then you've got this bridge of distribution. If we can decentralize, digitize, focus on distribution and speak to each other in the right ways, then we start to own our own data, we start to use that to create a loop structure to inform how we then iterate.
In the US and Europe, there's often a misperception that investing in Africa is a higher risk. Is this a misperception? Do you think Africa is higher risk than other markets around the globe?
I don't completely disagree with that. It is higher, for many reasons. If someone says there's political risk, that's certainly true. Do you have currency risk? Absolutely. Depreciation is real. Do you have the risk that we were talking about earlier which is the fact that you still have a continent that is highly fragmented and offline, so the cost to acquire customers is significantly higher? All of those things are completely true. The nuances around that statement is that it's made - or can be made - by people who haven't seen the other side of that spectrum because they may not be as close to the tangible positive steps that are made.
In South Africa, for as many years as I can remember, corporate governance structures have ranked as best in the world. On the opposite end of the continent, Egypt has incredible academic institutions which produce world-class professionals. Without the benefit of sitting within a market context, you can easily lose sight of the positive to create a more balanced narrative. So yes, I agree with a lot of the sentiment. I think that we're just kind of missing the communication and local context which helps to create the balance in that narrative.
Any further thoughts?
One thing that always frustrates me is the statement, which finds itself into many African conversations, that Africa is a land full of opportunity. The continent has been a land full of opportunity for too long. And I think if we all look for ways in which we can very tangibly convert opportunity into reality, that will make me extremely happy.
To learn more about Rajiv Daya and Founders Factory Africa, visit foundersfactory.africa.
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