1. The Rising Opportunity in Africa
Though still often overlooked as an investment destination, African markets have been drawing the attention of a broader spectrum of investors who are keen to capitalize on its robust growth prospects, positive demographic trends and significant natural resources. The region as a whole is projected to post economic growth over the next two years that will “outperform the rest of the world.” Of the top twenty fastest-growing economies projected for 2023, eight are African countries. Many African economies have returned to post-pandemic GDP growth rates and are estimated to continue to maintain a positive overall trajectory despite global macroeconomic headwinds in the short- to medium-term. In the longer term, the region’s population is also projected to become at least 25% of the global total in less than 30 years, a demographic dividend that has the potential to drive additional growth especially if education, healthcare, and other societal infrastructure are prioritized in the coming decade.
Historically, funding flows into the region have predominantly come from development finance institutions and public investors seeking returns through infrastructure or agricultural projects or private investors exploiting the continent’s natural resources. More recently, financial services and telecommunications companies have received an increasing level of interest. And only a small portion of companies on the continent, the largest corporates or public entities, have benefitted from these funding flows. The continent’s largest segment of businesses, small and medium-sized enterprises (SMEs) as well as high-growth start-ups, often lack access to the needed capital for growth. In fact, it is estimated that the funding gap for SMEs in Africa is more than $400 billion per year. However, some encouraging trends reveal that this may be changing.
Funding through venture capital and private equity providers picked up steam in recent years. S&P reported that $7.7 billion flowed into the region for private equity and venture capital deals (excluding debt) in 2022, a five-year high. According to The Big Deal , approximately $4.8 billion was injected into the early-stage ecosystem through both venture equity and debt transactions in 2022. Providers of alternative debt models, such as revenue-share products, have also started to seek a foothold. Though the capital coming in represents only about 2% of the financing gap and less than 1% of the $2.7 trillion global private equity market, these represent record levels of capital flows for the region through these channels which is a positive sign that investors see long-term future potential.
At present, the flow of capital is also fairly narrowly focused by geography and industry segment. Four markets – Nigeria, Kenya, Egypt, and South Africa – were the greatest beneficiaries of the influx of capital, capturing approximately 75%. By industry segment, fintech companies still receive the largest share of investment capital, about 37%, followed by cleantech/energy and logistics which as a group make up 70% of total investment dollars. The vibrant entrepreneurial ecosystems in Lagos (Nigeria), Nairobi (Kenya), Cairo (Egypt), and Johannesburg and Cape Town (South Africa) are creating a fertile breeding ground for young start-ups to develop innovative solutions to the pressing challenges in their respective markets, driving job creation and investment returns. However, as has been seen in other markets worldwide, there is a persistent hurdle to ensuring that the distribution of capital is fair and equitable and that impact is being driven through these investments.
2. The Gender Financing Gap
The flow of funding in Africa mirrors how capital is distributed globally with a disproportionately smaller amount invested in female-led and gender diverse teams, despite the growing evidence that diverse and inclusive teams outperform their peers. The financing gap for female-led companies globally is estimated to be $1.7 trillion with at least $42 billion needed in sub-Saharan Africa (SSA). The gap widens if you add in companies that are gender diverse. In 2022, of the nearly $5 billion in venture capital deployed to early-stage companies in SSA, 85% went to male-only led teams despite the fact that more than 50% of high-growth companies in Africa had a least one female co-founder. Gender-diverse teams were nearly 7 times less likely to be able to raise capital while female-led teams were more than 35 times less likely to be able to source the capital needed for growth . There are a number of factors driving this disparity, the most important of which are a preference for industry sectors that are largely male-dominated, a lack of women in decision making roles at investment firms, and misconceptions about the riskiness of women founders and/or women-led companies.
“…female-led teams were more than 35 times less likely to be able to source the capital needed for growth.”
Following on from earlier McKinsey work published in 2015 and 2018, more recent research conducted by this firm across 15 countries and more than 1,000 companies indicates that diverse and inclusive companies outperform their peers by up to 36%, with increasing gains between peer cohorts from previous the studies. This means that companies that do not evolve and adapt to the principles of diversity, equity, and inclusion (DEI) will fall further behind (please see box below for definitions for and an illustration for understanding DEI). The causal factors for DEI-forward companies surging ahead is not yet clearly established, but initial thinking points to several important guideposts. Having a diverse team brings a multivariate of thought and experience to the table, which is linked to better ideation and problem solving. In addition, creating an equitable and inclusive culture built on equality of opportunity, transparency and strong communication promotes openness and a sense of belonging which drives higher productivity. A company which executes well on these fundamental principles is more readily able to capitalize on opportunities in the market and also identify both short- and long-term risks to the sustainability of the organization.
What is diversity, equity and inclusion?
More research is emerging about the impact of diversity, equity, and inclusion within the workplace and how incorporating these principles into business culture can have a positive impact on productivity, growth, and profitability. However, making a distinction between each element and how they are integrated may not be intuitive at the outset. Defining each of the principles and utilizing an analogy* can create a better understanding of how to leverage DEI principles effectively.
Diversity. There are a myriad of variations among human beings from race, gender and religion to national origin, educational background, and social class. Diversity seeks to pull in as many of these different experiences as possible to create a whole that is greater than the sum of its parts. Utilizing the performance of a great symphony as an example, a variety of instruments are brought together to make up the musical work. A mixture of “voices” are required to bring about the different elements of the melody and harmony so that they resonate together in the best form possible. Every instrument has its own sound which provides a unique element in weaving together the work. If one instrument or section is missing, the piece would sound entirely different and incomplete.
Equity. In a work context, equity relates to fair treatment and access to opportunity. In a great symphonic work, parts may be written for 20-30 different instruments, from violins to a harpsichord and trumpets to a xylophone. Each instrument has a range of volume that is distinctive from other instruments. One resonating trombone has the capacity to create a booming sound that can drown out other sections of an orchestra. At the same time, 20 violins playing at maximum volume will render one flautist effectively mute. An equitable balance needs to be struck for each musician to contribute at their best and for the composition to be pleasing to the audience.
Inclusion. To thrive, individuals need to feel valued and accepted. They need to have their thoughts and opinions considered without having to conform to how others speak and act. In short, their contributions are equally respected. At various points in a musical piece, one instrument or section will be emphasized to highlight their distinctive contribution to the work and the other sections will play a supporting role. But, the opportunity to be distinguished moves around the orchestra and each instrument and section is engaged to propel the musical composition forward. When a great symphony comes to life, the strengths and contributions of each instrument are recognized while creating a balanced blend of all of the instruments for a coherent collaboration.
Within a company, each individual provides their own unique perspective based on their life experience. Having a mix of people at the table based on gender, race, educational background and other factors allows for diversity of thought. A more diverse team will identify different and more innovative market opportunities as well as mitigate potential risks better. To achieve this, equal access to opportunity within a company – training, coaching and promotions – must also be equitably distributed. Going further, individuals need to feel that their voice is being heard and that their contributions are being valued. This requires a culture that recognizes the unique strengths of all of its employees and managers and seeks to increase engagement which leads to higher productivity and job satisfaction.
3. Utilizing a gender lens widens the investment pool
A starting point for propelling companies toward more diverse and inclusive cultures is to employ a gender lens in investment strategies. As noted above, female-led and gender-diverse founding teams raise disproportionally less than their male counterparts. Of the $4.8 billion deployed in the region in 2022, female-led and gender-diverse led companies raised approximately 2% and 13%, respectively despite making up approximately half of high-growth companies in the region. There is no research to indicate that these companies would perform less well compared to their male-only peers. In fact, research strongly suggests the opposite. A study in Africa by the World Bank’s Gender Innovation Lab and Briter Bridges found that female entrepreneurs “were more educated, had the same amount of professional experience as male founders, and experienced similar revenue changes in the previous year.” In addition, analysis of entrepreneurs in the U.S. conducted by the Boston Consulting Group found that for every $1 invested, male-run startups generated 31 cents, whereas female-led start-ups generated 78 cents in revenue, or over 2 times more. A critique of this positive disparity is that a fewer number of women are currently being funded and therefore, those that receive capital are the top performers in their sector. However, a more plausible explanation is that women tend to develop diverse teams from the outset, which are shown to be more innovative in their decision making. In a survey conducted by the World Bank, “Companies led by female founders were twice as likely to hire women, and four times as likely to employ female managers.” In addition, women may also perceive risk differently in the market. For example, if a female founder knows that less capital has historically been available for their demographic, then she may make decisions that drive higher growth and faster profitability, in case funding continues to be challenging to access in the future.
Utilizing a gender lens for calibrating an investment strategy can lead to significant impact, in the form of a more equitable distribution of capital, potentially greater job creation, for both women and men, and the elevation of qualified women into decision making roles. In addition, given the disproportionately less capital allocated to female-led and gender-diverse teams, utilizing a gender lens actually significantly widens the investment pool and allows an investor to capitalize on growth opportunities that others ignore. And by creating more inclusive cultures, companies are more innovative and have higher employee satisfaction and retention, increasing productivity and lowering costs which leads to better overall performance. The focus on female-led and gender diverse teams in the screening criteria for investments can jumpstart the process for achieving DEI within company cultures. Gender diverse teams have already begun to walk the path and women-led companies tend to be more gender diverse in hiring for decision making roles than male-led companies.
There are a number of ways to implement a gender lens within an investment strategy, including allocating all or a portion of capital to female-founded or female-managed companies or to founding and management teams that are made up by at least 30% women, with a higher percentage depending on the industry sector. The 30% threshold is generally accepted to be the point at which a minority group feels that they can share their thoughts and opinions openly rather than simply adhering to the mainstream culture within an organization. However, a number of European countries have now set a 40% target for women to hold Public Board Directorships in order to move companies closer to a 50-50 split. Additional areas of focus could include the make-up of the ownership of the company, the Board of Directors (following the 30% minimum threshold), the employee base, and the company’s customers. Combining one or more of these elements will likely have a greater impact on the outcome of the investment. A useful guide for establishing a gender lens within an investment strategy is referencing the criteria established by 2X Global, a collaborative of a broad range of investors working to unlock additional capital in both developed and emerging economies to support a more equitable investing ecosystem. To be a 2X aligned investment, one of four criteria needs to be met for direct investments related to having a minimum proportion of women in an organization as part of the founding team, leadership team, Workforce or benefited customer. There is an additional criterion for investors that are doing indirect investments through funds or on-lending facilities. The 2X criteria can be considered a baseline from which to build upwards.
4. Taking it a step further – implementing DEI principles
Given that the research shows a strong correlation that diverse and inclusive cultures yield better social impact and return outcomes, we have taken the approach at Samata Capital to invest in and work with teams committed to building DEI principles into the company culture so that these values scale alongside business growth. We have this conversation at the first engagement with an entrepreneur and clearly articulate how we believe incorporating these principles will help the team build a stronger and more sustainable company. To start off with a good foundation, we crowd in companies with female-led or gender-diverse founding teams. Our definition of gender-diverse during initial screening is either at least one female co-founder who is part of the decision making or, for a male-led team, at least 30% of the senior management team is female, excluding human resources or marketing. Though these two departments are fundamentally important to the overall success of a company, women are traditionally hired into these positions and we want to see that a male-led team has prioritized women into roles typically filled by men such as finance, engineering and business development. Additional DEI factors that we review during initial screening include diversity in company ownership, Board directors and advisors, employee base and customers. We also assess the product offering, marketing, and other materials for DEI orientation.
After the initial screening and as part of the broader financial and operational due diligence, a proprietary tool is applied, that we developed to map a company’s awareness and implementation of DEI principles. We investigate a company’s current status and future aspirations of incorporating DEI principles across seven dimensions in order to determine the team’s strengths, focus and intentionality. The results of the due diligence map to a diagnostic score and priority areas for support for the company. The founders’ commitment to incorporating DEI is enshrined in the investment agreements which includes co-creating an action plan and setting achievable and compelling DEI targets. We provide support and coaching over the investment period which we believe will have lasting impact on the company’s culture and performance.
5. Summary
Many investors believe that risk and impact sit on a spectrum and frequently offset each other. The thinking is that to achieve better returns, you have to sacrifice impact and to achieve robust impact, you have to dampen your return expectations. For certain areas of deep impact, this may be true and risk capital may simply not be the right fit. However, the evidence is clear that scaling impact alongside investment returns can be achieved by utilizing a gender lens and incorporating DEI principles into business cultures.
Adjusting mindsets and catalyzing change within company cultures will take time. We would advocate for taking a bold approach, but even small steps can be taken by investors now that will translate to significant outcomes down the road. Begin by incorporating gender lens criteria into investment screening and due diligence and working with investee companies to set targets for diversifying their Boards, management teams, and employee pool. Then, develop a systematic, business-driven action plan for implementing DEI elements into your own culture and operations and for supporting investee companies to do the same. This is how we can build an ecosystem of sustainable and equitable companies in every region of the world. Rather than return and impact offsetting each other, they are integrated; achieving far greater results in the long-term.