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Investing in Africa – an Interview with Steven Grin

Over the last few years, businesses and investors have been increasingly looking to Africa for new opportunities, better returns, and portfolio diversification. With COVID-19 upending the global economy, many investors focused first on protecting their existing investments, and second on finding new opportunities. And those opportunities exist if you know where to look. Businesses across Africa are adapting to meet changing consumer needs and demands, and some represent new prospects for investors that can help them pivot and grow.

Prosper Africa spoke with Steven Grin on the opportunities he continues to see across the continent. Grin is the managing partner of Lateral Capital, a $21 million venture fund with offices across Africa and in New York. Opportunities to leap-frog existing services and infrastructure abound in Africa, and Lateral Capital invests in foundational technologies that are reinventing legacy industries and building new infrastructure on the continent. Since launching the fund in 2018, Lateral Capital has made 13 investments in sectors ranging from healthcare to education to financial services.

The following interview has been edited for clarity and length.

How did you get started investing in Africa? Why Africa as opposed to other geographies?

Steven Grin: About eight years ago, I began angel investing in sub-Saharan Africa because a friend of mine from college left a good job in the Midwest to go back to East Africa and build a solar project. He decided to start a development company focused on renewable energy, and I backed his venture. By 2016, I’d amassed about a dozen angel investments on the continent and what I saw happening was something that I had learned about from my studies, and something that happened in other markets — a significant increase in the repatriation of talent. I saw a real structural, non-cyclical shift that the continent was ready to bring back home its talents. In a world in which capital and opportunity are not evenly dispersed, I wanted to back that talent with capital.

Could you talk more about that repatriation of talents? Can you provide some examples of entrepreneurs who are innovating in particularly exciting ways that are unique to Africa?

Grin: Innovation in a vacuum — when you’re thinking about this sitting on the West Coast — is different than innovation on the ground. Innovation on the ground needs to solve local problems, but it also needs to compete internationally.

One of our earlier investments was in a business in the cooking fuel industry. If I were to present that to a sophisticated U.S. investor, I’m not sure that they would know what cooking fuel is because when they turn their stove on, the gas works. It’s the magic of infrastructure in the developed market. But there are over a billion people who are using some combination of charcoal, kerosene, dung, and wood. And there aren’t just health implications to that. Both the economic and environmental costs of cooking fuel are unfathomable.

For the most part, most of the global interventions in cooking fuel focused on small shifts in efficiency. But the group of entrepreneurs that we funded were looking to tackle cooking fuel from a behavior change perspective. They were looking at how e-commerce emerged in rural markets and built on the infrastructure of the postal system to distribute ethanol as a cooking fuel replacement for charcoal and kerosene.

It’s a very unsexy sector, but it’s also the third or fourth largest spend for the average household. When the cost of cooking fuel increases, you can imagine the impact that has on people’s livelihood. Supporting an existing fuel that’s safe, that’s reliable, that provides a 50% savings to the average household — that’s something we get very excited about.

COVID-19 has turned the world upside down over the last few months. Certainly that brings real challenges. Are you also seeing any investment-worthy innovations in the wake of the pandemic?

Grin: It’s a challenging time globally — even more so for the emerging markets we focus on. I’m honored to be part of the venture ecosystem because there are early-stage companies that are coming together and working together to respond to COVID-19. A collective of early-stage companies in East Africa have formed a “safe hands” initiative, where they’re installing cleaning locations (wash basins, free soap and public disinfectants) in places like Kangeme and Kibera, which is the largest slum in Africa. It’s great to see the private sector stepping up in a big way.

Obviously, there are sectors that are hurting, and proximity-based businesses are facing real challenges. What excites us right now, however, is the incredible innovation we’re seeing around essential services and the adoption of digital solutions. We’d seen the rapid adoption of mobile money in East Africa before COVID-19. Now, we’re seeing that happen in other markets where mobile money adoption hadn’t been as rapid before, and it’s being driven from the top down. Governments need to protect their citizenry, moving away from a cash-based economy where cash represents nearly all of the transactions in many of these markets. Adopting mobile money creates an opportunity for financial service companies to come in and improve financial inclusion.

And of course, there’s the health sector. For example, we invested in MEDSAF, an exciting company in Nigeria with two female co-founders. One of the founders is a pharmacist, while the other founder worked in the healthcare industry for a long time. MEDSAF partners with drug manufacturers to bring high-quality medicines to pharmacies and hospitals at discounted pricing.

It sounds like they’re solving a very simple problem, but it’s such a pernicious and complex task. Around 50% of the drugs in Nigeria are either fake or have lost their efficacy. Poor storage and inefficient supply chain management can all cause drugs to lose their efficacy. When people take an ineffective or counterfeit drug, they risk their health and even their lives.

MEDSAF was already meeting a critical need, and with COVID-19 they’ve seen a huge uptick in demand. Their revenue is growing and fortunately they were prepared.

In times of uncertainty, we may expect most people to protect their investments and not look at new opportunities. However, we continue to hear that isn’t true. There are opportunities out there if you know where to look. Beyond the boom in mobile money and investments in health, what else are you seeing?

Grin: Out of a crisis, opportunities will emerge. Obviously, people have lost their jobs, but the rate of entrepreneurship has continued to grow in these markets for various reasons. We’re also seeing companies try to shore up their balance sheets. And perhaps a company that didn’t need to come back to market is coming back to market a little bit earlier to bring in strategic capital, so they can weather the storm.

At Lateral Capital, we’re taking a slow and steady approach. We’re thinking long and hard about what sectors will thrive in this environment, but I think the jury is still out. You have your health-focused and digital-focused industries, but we’re also looking beyond the obvious opportunities.

It’s a matter of thinking of first order and second order effects of COVID-19. You have many people working from home, but you also have essential workers that must work outside the home to survive. In many of the markets where we work, public transportation is either nonexistent or not reliable. In those markets, I would expect to see the used car market grow. That’s one of the surprising tailwind effects of COVID-19 — a car, which in many markets is a luxury good — is now an essential service. It’s an essential investment required for an individual to earn his or her livelihood.

In a market like sub-Saharan Africa where there isn’t a lot of local car manufacturing, there is a unique opportunity for companies to come in and build trust networks. Technology, as we’ve seen time and time again, creates an opportunity for companies to come in and apply an aggregation methodology — a trust platform or network — to bring these different actors together. Ideally, this creates a more transparent and cost-effective way for people to buy cars. That could be through financing or that could be through other means.

This is something we’re excited about and seeing a lot of uptick in. So, in a world where there’s an economic downturn and more remote work, you would expect car ownership to flatline or fall. Instead, the surprising second order effect is the exact opposite. Car ownership is increasing in emerging markets, and we think that same rise will occur in African markets.

What are some of the challenges facing businesses now where you think Prosper Africa can help?

Grin: Trade finance is one area in which Prosper Africa can help. Take the case of our portfolio company MEDSAF. If I’m a Nigerian hospital, suddenly I need to procure everything from ventilators to PPE to ambulances, which we certainly have never done before. If our average order volumes were a hundred thousand dollars per order, those average order volumes have increased exponentially. We don’t have the balance sheet to go out there and procure those goods. So, working with partners like Prosper Africa to bring in trade financing to help organizations like that to access a balance sheet, to intermediate these orders, would be quite exciting. That’s one very specific example in the healthcare sector where relatively small dollars will have a dramatic impact on the improvement of people’s livelihood.

Any final thoughts or tips you want to share for those who might be on the fence when it comes to investing in Africa?

Grin: I think this crisis will present unique opportunities for rapid adaptation and digitization, and history will repeat itself, perhaps in a different framework here. If you look at Southeast Asia and China’s last crises over the past 15 years, we see similar patterns and trends taking shape here. Much like every other market in the world, it is entrepreneurs and small and medium enterprises that are the drivers of GDP and growth. In a market where jobs are essential, I think more U.S. companies should be investing in Africa and in the sectors that we’ve already put our money towards.

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Prosper Africa is a U.S. Government initiative to increase two-way trade and investment between the United States and Africa. The Prosper Africa toolkit includes more than 60 trade and investment support services across the U.S. Government. To support Prosper Africa’s goals, 17 participating U.S. Government agencies are adapting existing tools and creating new ones to help U.S. and African firms adjust their strategies, protect their investments, and find new opportunities in the wake of COVID-19.