The Continent Ushers In Internet Era

A handful of firms are betting that Africa—once known as the “dark continent”—will provide golden opportunities in the coming year and become the next frontier for venture capital.

As most investors in the region readily admit, it’s a big gamble.

The region’s troubled history of political turmoil, bloodshed and famine are enough to scare off most investors. But those who know the region best say a new Africa is emerging from the shadow of the old, an increasingly tech-savvy continent that is firmly moving toward political and financial stability.

One newly created venture firm doubling down on sub-Saharan Africa is eVentures Africa Fund (eVA). Co-founder Vincent Kouwenhoven says he launched the $20 million fund in 2010 to capitalize on the rollout of undersea fiber-optic cable off eastern Africa, which is ushering in an era of high-speed Internet.

“We wanted to be here as soon as bandwidth availability got a boost,” Kouwenhoven says.

Only about 5% of the African population is connected to the Internet, Kouwenhoven says. But, according to his numbers, usage is growing 20% to 30% annually. He cites the example of Mozambique, which has 30 million people, but only 300,000 with Internet access. Now that fiber optic cable has landed in Mozambique, he expects uptake to be huge in the coming year. “That’s a big reason we created this fund,” he says.

Another reason is what he calls the return of the “cheetahs.” These are talented expatriates who are coming back home in droves after studying and working abroad. They are encouraged by the improving landscape of their continent and are eager to shape a new Africa.

We wanted to be here as soon as bandwidth availability got a boost.”

Vincent KouwenhovenCo-foundereVentures Africa Fund

Recently, for instance, eVA invested in a mobile payments startup called PesaPal that was founded by an African who had previously worked in the U.S. developing information technology systems for a global bank. The entrepreneur returned home because he saw an opportunity to create a Pay Pal-like service optimized for Africa and the mobile environment.

Almost every investor in African agrees that mobile is where the real opportunity lies. While Internet penetration is still low, about 37% of Africans own a cell phone, according to an Ernst & Young study.

Representatives from East Africa Capital Partners, another active technology investor in Sub-Saharan African, maintain that the success of the mobile phone industry is a clear indication that Africans are eager adopters of consumer technology. The firm raised an inaugural $100 million fund targeting technology deals and recently invested in Zuku, a triple-play provider of cable, broadband and phone service.

Richard Bell, who heads venture investments for the firm, is upbeat about the future. He believes that regional integration in African is creating an addressable market in excess of 350 million consumers. East Africa Capital Partners is also encouraged by the actions of regional governments, which increasingly recognize that technology holds the key to future economic growth, and which are throwing their weight behind a variety of tech-related initiatives.

At the top of that list is the Kenyan government. It established a $39 million venture fund to support tech projects under the Ministry of Industrialization. In March of 2010, the Kenyan government launched the iHub in Nairobi. The iHub is a startup center with a tech infrastructure. It offers on-site business coaching and provides an environment where entrepreneurs and developers can share ideas and connect with potential investors.

One promising Kenyan company called Jumuika Mobile has already sprouted from these efforts. Jumuika, which provides free SMS messaging to consumers in exchange for advertising, recently raised its first round from eVentures Africa.

Perhaps the biggest story technology story of the year in Africa—and one that shows just how far the continent has come—was the launch of Nimbula, founded by Chris Pinkham, who previously led the development of Amazon’s EC2 cloud computing service. Thanks in part to Pinkham’s pedigree, his company was able to raise more than $20 million this year from the likes of Sequoia Capital and Accel Partners.

It says a lot that we have companies here that Sequoia and Accel want to invest in. It proves that Africa can develop cutting edge technology.”

Andrea BohmertManaging DirectorHasso Plattner Ventures

One of the local firms that competed for the Nimbula deal, but didn’t end up landing it, was Hasso Plattner Ventures Africa. It may have lost the deal, but the venture firm sees many more opportunities on the horizon.

“It says a lot that we have companies here that Sequoia and Accel want to invest in,” says Andrea Bohmert, managing director at Hasso Plattner Ventures. “It proves that Africa can develop cutting edge technology.”

Bohmert, who is based in Capetown, South Africa, is overwhelmed by all the startup activity. “In Cape Town alone, there are more than 4,000 companies today in the IT sector, compared to only about 600 10 years ago,” she says. “I think we’ll see some very nice surprises in the coming year.”

The question, of course, is whether these companies will ever achieve an exit. For starters, there are only a handful of funds operating in Africa, so it’s hard to find follow-on investors locally. And most foreign investors, as well as most potential acquirers of Internet startups, are still wary of entering a continent with an ever-present potential for violence and upheaval.

Bohmert notes that all it takes is one success story for all that to change.

“We have some key advantages in that we can build companies very cheaply here and invest at very low valuations,” she says. “We’re just waiting for that one breakout company before VCs from all around the world take notice of Africa. This is an untapped market where so much money can still be made.”