Invest Like the Best with Patrick O'Shaughnessy - George Rzepecki – Investing in Africa - [Invest Like the Best, EP.146

Episode Date: November 5, 2019

My guest this week is George Rzepecki, the found and managing partner Raba, an Africa focused investment firm. George is making investments across Africa in early-stage companies. Africa represents a fascinating opportunity: a huge and diverse population and enormous room for per capita GDP growth. We cover all aspects of investing in the continent, including unique potential rewards and risks. Please enjoy our conversation. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes 1:18 – (first question) – Interest in emerging markets and the tech landscape in Africa 4:57 – Similarities across all of the different metro markets across Africa 8:05 – Why has the continent lagged behind the rest of the world 10:49 – What is the history and landscape of capital in the African continent 13:32 – The market opportunity given the demographics 15:44 – US investment/involvement in Africa 18:06 – Kinds of companies that he likes to invest in 23:26 – Initiatives and investments that could help lift the population out of poverty: finance 29:33 – The public marketplace landscape in Africa 31:49 – Capacity on the private side 34:24 – How the valuation of deals compares to other markets 36:13 – Unique risks in the investments they are making 38:28 – Most exciting trends or changes he is seeing 40:22 – The professional investor environment 43:25 – How to learn more and get involved             43:49 – China Africa Research Initiative             44:17 – China Africa Project             44:38 – Factfulness: Ten Reasons We're Wrong About the World--and Why Things Are Better Than You Think   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfield guide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunsi Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for

investment decisions. Clients of Oshonasi asset management may maintain positions and the securities discussed in this podcast. My guest this week is George Zakey, the founder and managing partner of Raba, an Africa-focused investment firm. George is making investments across Africa in early-stage companies. Africa represents a fascinating opportunity, a huge and diverse population, and enormous room for per capita GDP growth.

In our conversation, we cover all aspects of investing in the continent, including unique potential rewards and the largest unique risks. Please enjoy our conversation. I'd say Africa for me and this emerging markets generally really kicked off in 2006. I was working at Golden Sacks, and I raised my hand as one of the analysts there to pursue an opportunity to work in our Bangal or India office. And I was really amazed by just the magnitude of difference of what was happening in that city in that part of the world, whether it was new roads and infrastructure, the busyness of the

place. It really captured a lot of my attention and was this really cool. And I thought, wow, such a different experience than what I was used to coming up in the U.S. and then sort of had the opportunity to come to East Africa and spend some time in 2013, really focused mainly on some work around education. And you'd imagine 2013, 14, you're in Nairobi, Kenya, and you're probably one of few venture capitalists or anyone who's interested in technology companies meeting with entrepreneurs. In my own curiosity, I would go off and attend tech meet up and meet entrepreneurs. And one thing really struck me then, which was the quality of people I was meeting

in these tech get-togethers or these one-on-one meetings. It was folks who were leading really, really established careers at exceptional companies like Google or Uber or other companies. And they were coming and setting up shop in Nairobi as at that point, I thought some intriguing ideas. And I knew nothing about the local dynamics of the market, but the thesis that, hey, these people are really smart. And then they were able to attract other smart people to come build companies with them,

or build that company with them. And they needed a little bit of capital to kind of get started. So this gentle application of early stage capital back in 2013 and 14, first was a just the sheer personal interest. And it really evolved in saying, wow, this is exceptionally exciting. You have this incredibly young continent. Average age is 19 years old. You have rapid urbanization, you know, over 50% of people now live in cities across the continent. You have more and more technology becoming pervasive. Everyone has a handset, cost curve phones. And I remember buying a used techno phone, which was made by this Chinese manufacturer called Transcim.

$20 phone I bought secondhand did virtually most of what I was able to do in my iPhone. And so you're just seeing young people engage with products and services, very different experience than what their parents were doing. So I thought there was a real opportunity to build a layer of products and services for these markets. And specifically, what we kind of define as foundational areas, what that means for us is, A, solving really hard problems in areas like, how does food get delivered? And how does food make its way from rural parts of the country to urban centers?

Because food is prohibitively expensive in many cities across Africa. Take, for example, a banana in Kenya that's being grown just a few miles away from the city center, but it's basically the same price as a banana is in central London that's travel thousands of miles to get there. So what creates that dynamic? And so that curiosity led to exploring and meeting entrepreneurs who took on these problems head first, And then that kind of expanded to say, hey, there's an opportunity to build a world-class, long-term-term-oriented investment firm focused on these markets. One thing I'll say is Africa is home to 54 different countries, different markets. But there are some structural things that are very much similar and very much the same across our markets that we focus on.

So that's the background of how it came together. Can you say a bit about what the similarities are across all those countries and maybe what important differences are? We're going to come back later to sort of unique risk factors to, let's say, building a business or investing in Africa. But first, just some very basic groundwork. My guess is that almost nobody listened has any investment exposure to maybe the entire continent. Yet it's a continent of an insane amount of people and culture and all these other interesting things. So what are the commonalities that you've observed thus far across all the countries in Africa from a business standpoint? I would say one general commonality is that certain institutions,

industries have very low technology penetration rates, have high friction, high transaction costs, inadequate sort of resource utilization. And I'll specifically point to one area, which are in and around supply chains and logistics. Kind of the analogy is plumbing. So how to products, whether it's food, pharmaceutical products, or even transportation, how does that work in cities across Africa? South Africa is a bit of an outlier, and you can argue northern Africa is as well, but the square sort of sub-Saharan Africa, a lot of the same issues of high friction and high cost is really the same. And so when we go market by market, city by city,

we see a lot of that commonality of high food prices relative to incomes. Across the continent, people are spending 40 to 50% of their income on food, whereas in a country like the U.S., it's best in 10%. In logistics, certain products, up to 70% of that product cost is just embedded friction of logistics. And so we see that as one sort of common pain point that we focus on. The second is just payments infrastructure. It varies across the continent, but cash is just ubiquitous and dominant. You've had amazing success with platforms like M-Pesa, but still the vast majority of transactions in the country like Kenya are cash-based. And so what does it take to build

a modern payments infrastructure company? That analogy of plumbing holds true in areas that we focus on. And I would say that the friction of moving products around a country, enabling more digital payments and services, that certainly is a commonality across our markets. What I find so appealing about that is if you talk to venture capitalists here in the States, everyone's obsessed with product market fit and it's a stately elusive thing to build a product that people actually want to use. You're literally talking about getting food in people's mouths and being able to pay for things. We know the use case is good in this case. Yeah, I liken it to having grown up in the U.S. I take for granted that the interstate system was built many, many decades ago.

Payments. I grew up with kind of digital payments really sort of from high school on. There really wasn't much friction around that. It's not the case in these market. And I think today, these foundational businesses that are coming up are really enabling the next future, their set of entrepreneurs to build on top of them. You're right. It's less of a exact product. market fit. We know that these businesses should be built. We know what they can enable, and it's really about the team and set of expertise and really the capital that's needed to enable a growth of these types of opportunities. So the very fact that the opportunity exists to build some very basic, like you said, plumbing, begs the question why? Why has in general the continent

lagged behind more of the developed markets that have laid this infrastructure a long, long time ago. What are the important forces? Because I guess this is another way of asking the risk factor question, maybe embedded in the reasons why is a concern about it not happening in the next 10 years, too, as an investor. So what are the reasons that it hasn't developed as fast? I think some of that's due to just sheer penetration of technology. So the cost curves of data, which incidentally, data across parts of Africa are still some of the most expensive on a per gigabyte basis in the world, but it's come down significantly. And then the cost of just handsets. Handsets are affordable by the masses. And I think those two pieces have enabled, I would say,

enough of a platform to be built with all the infrastructure needed to enable that. That really wasn't possible 10 years ago. And so when you look at just number of devices per country, you look at internet penetration rates and all the initiatives they're on, I think that's been one platform. The second is just the sheer intention and level of investment that's coming in from places like China. And I think we can talk a lot about infrastructure projects, but I think that's missing some of the more nuanced things that's happening. What I mean by that is away from just high-level infrastructure, there is considerable investment happening in sectors like education. Today, upwards of 75,000 African students are studying in Chinese and

universities and they're coming back and they're equipped with skills and relationships. And this is up from single digit thousands and the not too distant sort of memory here. And so education combined with a lot of infrastructure and technology and a lot of capital that's coming in is enabling a lot of different opportunities. If you spend enough time in these markets, Patrick, I know you've mentioned traveling across this continent, you see a lot of the infrastructure deficits. And those are being made up with some earnest, I would say, a cause that you're seeing from leaders of countries in making those investments, building those

relationships with places like China. But it's not just the China story. It's other countries like Japan, Turkey, India that are engaging at different levels and providing not just capital but expertise. And so I think it's an amalgamation of a lot of factors that have come together that I think are enabling what I believe to be an incredible opportunity to build technology companies. So it's multifaceted human capital trends. It's actual capital coming in and in technology.

I think the convergence of those three is creating a really fertile environment to build technology companies today. Can you talk a bit about the capital landscape? So you've already mentioned some large countries that have made large initiatives in Africa, maybe even give a little bit of a history lesson. So I'm always interested in things like natural resources. I don't know a whole lot about African natural resources relative to other developed countries throughout the world. the primary source of the biggest capital sources interest in the African continent. So maybe China and Japan specifically, just a bit more background on how much capital has come in and for what reasons?

Sure. So China, I'll have talked a bit about their initiatives. Every three years, there's an event called a FOCAC. And FOCAC is a sort of symposium between China and the vast majority of sort of leadership across the continent. And so in the last FocAC summit in 2018, there was a pledge of $60 billion that cut through foreign direct investment, loans, and better for infrastructure projects, to do more trade with the continent. And that's on the back of another $60 billion that was earmarked in 2015 Fockech announcement. So it cuts across in certain countries that have sort of rich resources. There's certainly capital that's sort of earmarked for development of that and having.

direct relationships for sort of China's needs. But I would say in other countries where they perhaps don't have sort of natural resources, if you will, places like Ethiopia, there's considerable amount of investment that's gone into places, things like manufacturing and building out a manufacturing hub of different types of industry. That is, I would say China's had a fair serve degree of involvement in other countries. Certainly Africa is blessed with tremendous amount of resources, but it's also blessed with a young and burgeoning population of potential consumers. And so I think oftentimes the narrative around China's involvement gets caught up with, hey, these projects, they're expensive, they take on a lot of debt.

I think that's really short-sighted. I think that specifically China is thinking very, very long-term and very carefully around their involvement in the continent. That's not measured within six months or 12 months or even two years, but over even a multi-decade type of time horizon. And it's hard to really look through these projects and see the efficacy or the rate of return or the measurement stick in the near term. But I think over the long term, it'll be apparent that these are enablers of economic activity. Some of it, to come back to your question, is dedicated towards resources. But there's a number of economies that places like Kenya or I mentioned Ethiopia before, that the involvement is less around sort of a commodity play or some resource play.

It's more around developing relationships with, I think, a potentially large end. consumer market that'll evolve for the next decade. Yeah, it's a fascinating idea and story where, again, what you started with, which was just a huge population that's really, really young. Probably average age of 19 with the penetration rates you talked about, a lot of those people growing up with digital technology and talk about a massive market. I mean, just that alone makes it an interesting investment case. Yeah.

And I think one of the things to pay attention to is really the ports. China's really good around building out port infrastructure. And over 90% of products that come in and out of the continent flow through Africa's port. Just to give you a semblance of their involvement in this, of the 46 existing or planned port projects across sub-Saharan Africa, over half of those were financed by Chinese entities. And 11 of them are operated by them, by their Chinese entities. And these are significant investments. Some of these projects are well north of $10 billion. $10 billion projects.

And they're happening at a speed that is, A, it's incredible to see if you visit these cities, but B, it's bringing down the cost and making Africa more competitive. Containerized shipping in Africa is anywhere from one and a half to almost three times more expenses than other competitive markets. For this continent to be competitive as a potential exporter, it really starts with building out the appropriate levels of infrastructure. You're seeing that. You're seeing that really up and down the continent from the,

East Coast to the West Coast, and this is some really significant heavy lifting that's happening. It's hard, again, to say, measure that over these short time horizons, but I think over time you'll see the benefits and the multiplier effects of all these projects, because what's rooted around these projects as well are things like special economic zones that are inducing more manufacturers to come in. You're seeing some auto players like Volkswagen, for example, start to set up assembly plants across the continent. Their activity back in Africa dates back to the 50s when Volkswagen had an effort here in South Africa, but now you're seeing them set up in Kenya, in Rwanda, and really across the continent. And I think some of it's

built on the back of their ability now to have enough infrastructure to lay this kind of footprint and lay this kind of groundwork. Say a bit more about the same period trends in U.S. investment and involvement in Africa. One thing that, I think it's Kai Fu Lee that is the person that's talked about this, where basically the strategy you just described, it's not a military, seizure or anything, it's economic. The fact that they are able to move such large amounts of money from sort of a centrally dictated source, the government, relative to the U.S. Just I'm curious what the U.S. investment in Africa looks like and whether our emphasis on, say, private markets or something different than the way that China's operating is affecting

things. The U.S. has been a major foreign aid partner to the continent for a very long time. and really more focused on development, I would say, versus taking on some of the large infrastructure project type opportunities that China is doing. There are some exceptions at companies like the Bechtel Group and GE have a history of doing projects, but it's limited. And from what we're seeing, China just seems better suited to taking on those kinds of projects. But depending on the sort of investment class, maybe I can talk a little bit about the venture capital

landscape because that's the area that we're focused on. I would say we're seeing much more interest from Chinese investors, venture capitalists, even private equity groups. And when we have conversations with these parties, what's interesting is that the experiences that Chinese entrepreneurs went through building companies in China, in many ways it's very similar to what some of the entrepreneurs in African markets are going through. And it's oftentimes dimension that's very different than what perhaps U.S. entrepreneur and building a company in the U.S.

And that perhaps there's better understanding between Chinese investors in the venture space, for example, into kinds of opportunities that are presenting themselves. Our interest, I mentioned, kind of goes back to 2013 all the way through to today. And over the last 12 months, we just have seen a significant level of interest coming from Asia into engaging with our companies, making direct investments, where I would say we're not seeing that same level of interest from the U.S. VCC community. Many of our investors are U.S.-based D-Cs, but we're not seeing sort of the follow-through at the same scale or size that we're seeing from other parts of the world, specifically Asia.

Well, let's talk about now the specific kinds of investments that you're making. So I'm fascinated with sort of the macro and the micro. You kind of walk through a country like China and enormous infrastructure macro-type investments and maybe we'll have a little extra time to talk about those too later because I think it's so interesting. But talk about specifically the kinds of companies that you are looking to either incept or fund, the stage at which you want to do that, why it's an interesting, again, I love the collaborative funds villain test that you should do things good for the world but also good for you. So the selfish reason would be to earn great returns for you and your LPs. So talk about

just sort of the nature of the investments you're making and why you think they're so attractive. So from a perspective, but we come at it saying we really want to solve incredibly hard problems. And so we're looking for passionate founders who we align with around the problems that need to be solved. And then it's the question, well, what are some of those problems in some of the markets that we're focused on? And I mentioned plumbing. I come back to the analogy because we think there's an incredible opportunity to build what I would call digital infrastructure businesses. So businesses that operate in space sort of B2B that connect market participants in a way that takes out a lot of friction. So I'll share an example.

We're investors in a company called Twiga. And Twigga's premise was a simple one, which is question is, why does a banana cost as much or more than a banana in central London? So when they went back to the value chain to look at how agriculture is set up in a country like Kenya, how is food moved? how is food processed and ultimately how is it sold, it looks very different than it does in a system like the U.S. Many of the folks who the foods procured from are smallholder farmers. There's a certain number of middlemen who are moving that product from rural to urban, and then they get sold in informal markets. So about 95% of the food sold in Kenya, sold through small shops, for lack of a better word. And the opportunity is immense.

A city like Nairobi, Kenya can sustain a multi-hundred. million dollar revenue opportunity just in fresh fruits and produce. And so what would it take to build that? And so we met this incredibly young dynamic founder who set off to solve that. And he was writing his thesis on food security and food security specifically in East Africa from his time at Oxford. And he and his co-founder, his co-founder had deep supply chain expertise, having been at Coca-Cola for a long time across the continent, had built supply chains here. We weren't sure. We invested some capital, but it wasn't clear what takes to build a company like this. And today, fast forward to a few years since our engagement of the company, they're moving considerable

amounts of food across Kenya, enabling farmers to have clarity and more visibility into their income stream, but also lowering the cost of food for the everyday person. So I mentioned the statistic that over half of a person's wallet share is going towards food. Well, companies like Tweed are bringing that down. And that's extremely exciting. What, you're doing good. And and embedded in it, there's an opportunity to build a really significant enterprise. And what's caught up to that is just investor appetite. Today, we talk about the company to global investors who are looking at our markets. That was absolutely not the case a few years ago.

And so where we like to position ourselves is really to be amongst the first investor in the company. So think of us as the traditional seed investor into a series A, use that as a sort of rubric. and then continue to build with the entrepreneur as a partner for a very long time. That's sort of our stage and our area focus. It's food, logistics. So we've looked at and invested in companies that are providing trucking logistics platforms. And I'll share an example for you. In certain markets, the utilization of trucks is around 10%.

That's some of the lowest utilization in the world, if not the lowest. So how do you connect fleets of independent truck owners with folks who have shipping needs and need to move products around the country. It's a massive market across the continent. It's roughly $200 billion a year is spent on truck college. In many of these markets, they've not had sort of technology permeate and build better business models. So that's an area that we're also intensely focused on.

And I've backed a few companies, one in Kenya called Lori, L-O-R-I, with a great group of partners in that business. And the team, if I were to show you the biographies of people involved in the business, it's exceptional. It's as good as sitting down with a fantastic sort of entrepreneurs in any market. And we're seeing more and more of that stream of talent come into these markets. And one of the, I think the biggest trend is young people that are joining technology companies say want to solve really, really hard problems.

And it's not to say that really hard problems don't exist in the U.S. and other parts of the world. They certainly do. But there are some foundational sort of problems that need solving. I mentioned food and other staples around the everyday person's life that is extremely attracted to talent and people who are leaving San Francisco or New York or London to come into these markets and be part of it. So that trend is something that really excites us and we're continuing to see more and more of.

And I'd say frankly, it's accelerated over our time of investing here. There's a couple really interesting charitable foundations that I'm pretty familiar with in Africa. One of them is called Glimmer. And what I love about Glimmer is they've developed such a specific model for like the major elements of what can help lift rural communities or communities out of poverty. And you've mentioned food. I think theirs is more water-centric, but kind of food and water, finance and education

being the primary categories. We've talked about food. I'd love to ask about finance. You mentioned payments earlier. And also education as key sort of foundational things that I think are important for long-term development stories. So tell me a bit about your. take on finance maybe to begin and then we'll go to education? Sure. So finance, we think financial

services is one of the most significant and largest untapped opportunities across the continent. And I'll share an example. We've invested in a company called Flutter Wave and it's a payment infrastructure business built around what a modern API-based payments company looks like. And they effectively help enterprises, small and medium-sized businesses all the way through to consumers to be able to pay for things with digital format versus cash and help businesses be able to transact in a digital way. So think of it as the sort of equivalent of a company like Visa and MasterCard and PayPal and Stripe kind of rolled into one. They started in Nigeria and over the last several years since their founding, I remember being with one of the co-founders in my living room

in San Francisco when we were kind of discussing some of the early parts of the business and the direction of the business and they were really excited because they just signed up a large enterprise customer, which was Uber at that time. And fast forward all the way through to today. And they've transacted over several billion dollars of process volume. They're in over 30 countries across the continent. I've signed various partnerships. One recently announced one was with AliPay to create a platform between Chinese enterprises and African businesses. So we think payments infrastructure, that digital rail is a huge opportunity. You're really excited about what the Flutter Wave team is building.

Moving over to another foundational space, education. I have to say that some of the most talented entrepreneurs that I've met in my career are focused on education in the continent. They're doing some amazing, amazing work all the way from primary school education, passed into post sort of high school opportunities. Companies like Bridge were not an investor in the company. but they're signing some of the largest private public partnerships across the continent, one that they signed in Nigeria.

They find this really unique partnership where they're educating over 270,000 students at over 1,000 schools. And results of their work is nothing short of transformational. When you actually look at the data, just the efficacy of what they're doing. So I think companies like Bridge have a significant opportunity to partner. with municipalities across countries to do some amazing work at Bridge. I'm really excited to see what they do and I'm rooting for their success because the best predictor of a long-term GDP is focused education and so we pay a lot of

attention to what's happening at that layer of education. Another segment of education that gets us really excited is perhaps when you graduate after high school going to a four-year university program may not be the right thing for you. And so we're seeing more and more of these technology sort of, for lack of a better word, academies training software engineers. There's a deficit of software engineering talent globally. And so we're seeing some really, really, really inspiring work at companies like Meringa in Kenya or Gebea in Ethiopia. We were just there a couple of weeks ago visiting. And they're the first sort of technology focused, software engineering focused school in that country. There's tremendous

to see the work that they're doing. And they're creating really highly skilled people that have fantastic earnings potential. And I think that that has a huge knock on effect where that person who's working as a software engineer, they're for a local company or for an international company. They're inspiring the young people behind them. That's a real live example of someone who's doing it. And I think that that is one of the biggest trends that we're seeing of people kind of moving into the digital sort of work space. and the aforementioned companies that I mentioned are doing some tremendous work. And that's really, really, really exciting.

Maybe the highlight of my trip a couple weeks ago to South Africa was visiting a place called the Good Work Foundation that starts with kids in fourth grade and it's focused on digital literacy. So it's supplemental education on top of their normal schooling. The kids get one hour per week. They put thousands of kids through this program in five rural towns. And the impact is remarkable. The testable impact is crazy.

The opportunity for advancement. is wild, so it's neat to hear about even larger scale examples. Yeah, and like I said, you sit down with these entrepreneurs and the mission-driven attitude, the type of people that they can attract to these companies is incredible. And I root for all of them because I think the combination of all these factors, especially education, you take today's five and six-year-olds and you look out 10 years, look out to 2030, they're going to be mid-age to the young teenagers, if you will, And they have a really exciting path for those who have an interest in technology.

There's viable paths to take on work that's intellectually stimulating, exciting, and is an amazing alternative for some folks in the markets that they're in. And so I think that there will be a profound shift in these cities of young people taking on these types of roles. And the organization you mentioned starting in early childhood education, it's really hard to measure that today and now, but I can bet you over the next decade, it'll have a profound impact on what's happening in places like South Africa and some of the other countries I mentioned. Can we talk a bit more about African capital markets in general?

So maybe sketch out what public security markets look like, what debt markets look like in preparation for our call. When I just Googled something simple like Africa ETF, there's almost none available. The ones that have tiny amounts of assets in them, the biggest is actually not a full African ETF, but a South African ETF, which has like $400 million. The largest broad Africa ETF I could find, which was from Vanek, has $50 million in it. So tiny, tiny penetration. I'd love to hear more about your take on just public capital markets across Africa.

That's a neat question. I'm glad you touched on it. From the work that we've done and just speaking to investors, especially in private equity, it's not been an attractive, for example, asset class looking back 10 or so years. And I think some of that has filtered through to the nascency of the capital markets and countries across the continent. So there really hasn't been a lot of companies that have been built that have been able to exit and get to the public markets. And the second thing is when we talk to our entrepreneurs and those that are entrepreneurs that we're not investors in but are further along the curve of being able to list the company, I would say by and large, most think about listing outside of the continent and thinking about the U.S. or Europe.

Europe or other markets. And so sort of, I think, a bit of a chicken and the egg where you want to list in a market that has deeper liquidity, broader set of investors, and that makes sense. So we look at the African public markets as a proxy for some of the businesses that I think are competitive in the space. But by and large, to your point, they're quite small. And I'm hopeful over the long term they'll develop, but we don't even seen a catalyst for that development from our lens and from our business.

perspective. And like I said, most of the entrepreneurs have we're backing those that most all believe that they can list a company and take and sort of control their destiny, but they're very much thinking about it and doing it outside of the continent. I'm curious what you think the capacity is on the private side. So if I said to you, there's some X amount of money that you would just say, look, there's just no way that we would get it deployed responsibly and in good investments over a five-year investment period or something. What do you think that capacity is for private venture style investing? Yeah, so I'll share a statistic with you. So last year, 2018, Africa as a whole raised about the same amount as the city of Atlanta did last year.

So I don't think it's a question of the capacity to be able to take on more capital, but it's nascent. So 2018, it was about a billion dollars. But a few years prior to that, it was only $250 million. So it's still really, really nascent relative to venture capital and other markets. There's companies that have raised more than the entire continent has. But that's changing. And I think over the last, our estimation is that venture really has taken root over the last few years. And now you're starting to see companies start to get to a scale where they can take on more capital. And I think the question is now, what's their ability to now scale past these later stage

growth rounds into meaningful liquidity events for investors. I think once you start to see some of that happen in a more systematic fashion, I think that'll really open up the opportunity. But we think about it as we want to be able to fund 20 to 25 of the best companies over a period of a few years. And from the earliest stages, what's great is it's just the cost of building a business today and technology has gone down significantly less than what it was 20 years ago. I think that's another factor that's kind of inspiring young people to come and build companies. And so they're less capital intensive. And then some of these markets, you don't have to pay software engineers in the same way that you would and some of the other sort of large ecosystems. I think the cost of living is just

very different. And we thought hard and long about what's the right size being our first fund. And we hope to have an aim to have many more funds after this. And I think sizing was really important. You said, a billion dollar earmarked for or more earmarked for venture, I think today you might be challenged in being able to deploy that prudently. But we're seeing the ability of companies to be able to absorb more capital. But that's not necessarily a good thing either. I think being capital efficient and being able to build a business on less capital, I think there's something really important things to take away from thinking that way.

I would say Patrick, by and large, it's fairly nascent. And it's really concentrated in three countries, which are Kenya, Nigeria, and South Africa, which absorb of roughly two-thirds to 70 or so percent of the capital in the venture space specifically. Can you say a bit about the observed and realized valuations at which you're doing deals, say relative to U.S. equivalence or developed market equivalence in the venture space? I'm curious how much of a quote-unquote discount exists in countries like that. Yeah, it ranges.

but I would say it's a significant discount to what you would see as a prototype of seed investing in an ecosystem like Silicon Valley and to frame that a little bit. So when we're investing in a company kind of cuts through sort of our process in terms of what we're looking for in the business and the team, it's not sort of, I would say, we're seeing pricing of things that are up to half or 75% I would say in terms of a valuation discount in what you're seeing in Silicon Valley. Given our relationships in that ecosystem, we get to see quite a bit. And I think what we're seeing is an acceleration of valuations on the early state side and some of the sort of, I say, larger ecosystems like Silicon Valley. Whereas for us, because we've been in this market for some time, I think we've built a fantastic reputation with entrepreneurs.

They seek us out as partners. Our model, for example, we have a set of entrepreneurs and founders that we've backed that work with us as identifiable. buying next set of opportunities helping us in local markets. But coming back to your question, I'd say it's anywhere from half to 75% or more. It's really dependent on certain factors. We have a program we call the build program, and that's where we write the first check. We help put the right people around the business.

And I would say that the valuation at that stage is even 90% or more of a discount to what you would see in a developed market equivalent seed stage round. Yeah, it's a supply-demand equation right at the end of the day, and it sure makes the whole thing quite interesting. What about more unique risks? So there's supply demand and then there's kind of risk return. Talk about the unique risks that exist and the kinds of investments that you're making, maybe again relative to U.S. equivalence. Yeah, unique risks are getting payment oftentimes in certain markets. You're getting paid in cash and you have to figure out a system to account for that. that and reconcile it and make sure that your customers are paying you on time. And there's

challenges in doing that. You don't have that entire neat infrastructure that's built out where everything is digitized or it's very simple to sort of platform to plug into. Other risks are, I'd say, from a human capital perspective. We, at a certain stage, there's not an abundance of software engineers in each of our local markets that we can kind of plug into our companies. while there's great initiatives to change that, it's still fairly nascent. And so once a company gets to a certain scale and needs certain types of expertise, it's hard to find that locally often. And I think the culture of joining a venture-backed company,

for someone who's working at a larger company, it's not as evolved. There haven't been events where early employees of companies have had, call it liquidity events or the value of their equity and the meaningful contributor to their own network. And I think while that's changing, it hasn't been sort of pervasive enough where people are leaving roles, where they might have a comfortable salary and pay to join startups. And I think there's green shoots there, and that's fantastic. But it's certainly, I would say, a unique facet of working in these markets.

And the others are in certain markets, you may have an issue with just making sure the lights can stay on, where there's no foundation sort of national grid that powers the country. you rely on generators. And so there's unique attributes in each market that you have to tackle. But I think what entrepreneurs are coming into these markets or building businesses, you start to identify those constraints early and you make contingency plans around them that allow you to effectively manage through them. But these are unique things that you're just not facing city in California or New York, and they're unique risks in, I'd say, in our markets, for sure.

I've always interested in rates of change or things that are changing more recently. what are some of the most interesting and or exciting trends that you've observed, whether it's in your travel or in talking to entrepreneurs more recently? Yeah. One of the trends that's really exciting is the ability for our companies to track really, really, really smart talent from anywhere in the world today. And that just wasn't the case five years ago. But today it's happening.

It's happening where, like I mentioned, people, people really want to work on hard problems. They want to be part of something bigger than just a paycheck. And I think our companies in space offer those types of opportunities. So that's a really big trend. The second is it comes back to kind of a foundational thing, but education. It's so cool to just see what some of these companies are doing and building out talent locally. And you see people believe in themselves and take on ownership of projects and be able to do things for themselves enough for families for their families that was five or ten years ago, which wasn't possible. So that's transformational.

And then I think one of the most powerful trends is because there are successful entrepreneurs in these markets, there's young people who are really aspired to be like them. And when you're seeing someone who's Kenyan or Nigerian or South African, build a successful company, bring about change, do something amazing, that's incredibly inspiring for young people. I think that trend is one of the most powerful trends because it's, hey, that person is just like me and he or she was able to do this. That I think is going to have profound knock on effects over a long term. And so I think those are some of the big, big trends. That's in the kind of the venture human capital side of things. But those

are areas that we pay a lot of attention to. Yeah, fascinating. A couple more questions. I'm curious what the other important investor group looks like. So you've mentioned some sovereign countries that are doing a ton of investment. There's sort of the more micro-focused venture capital type firms. Is there anything in between? Is there a layer of professional investors that you think are doing good work in Africa? Yeah. Outside of venture and some of the sovereigns,

we're developing relationships and have some LPs that manage private equity firms. And I think that certain firms have done a very, very good job. And I think there's some exciting opportunities, especially for some of our companies over the long term. I think that some of these companies will be wonderful candidates for later stage, perhaps in sort of growth or post-growth investment from private equity. But it's kind of a barbell. It's like you've got the venture capital community that's fairly nascent. And then you have these really big state-owned infrastructure projects. In that middle, it's still fairly nascent. The statistic I last read that private equity as an asset class for the continent is roughly around 50 basis points of global private equity.

And that's just crazy to me. When you think about this, the sheer size of the continent and the potential opportunity set, so I suspect you'll see more private capital potentially coming into that market as the opportunity set unfolds. And some of the key themes that we're seeing, I would say from what we're seeing, it's heavily bar-billed because our area focus is on one end, and then a lot of the sovereign capital is coming in. The sheer amounts of it, Patrick, is so significant that you've never had these kinds of flows coming into the continent, period. And what's interesting is I think China kind of moved on it first, and then it's had a knock-on effect where now there's other countries who are coming in and bidding on projects,

providing financing for those projects. And so it's created this more competitive dynamic that I think in the end is great for countries that are thinking about building up of their infrastructure, building up of their different business segments. And one thing I think worth mentioning that aside from just this state-owned capital, it's also the investment that's kind of happening on the ground level. We see often announcements of schools and places like Kenya that are going to start offering Mandarin as a language where you're starting to see Chinese, TV dramas being aired in Kenya. There's a number of Confucius centers around the continent, teaching language and culture. And so there's a lot happening that's not just big headline projects,

but a lot's happening in sort of cultural, I think, ties and things that are bringing sort of two worlds together that's making for some really, really interesting dynamics. Yeah, it is a fascinating opportunity set that seems singular and completely unique as you look around the world. Obviously, there are some other great emerging, emerging market stories too, but for an entire continent like this with such rich history,

it's a pretty cool setup. I'm fascinated by what you're doing. For those that are interested in, I guess at two levels, one and just learning more about this whole story, and second in being actively involved as investors or otherwise, what do you recommend that those people do? Sure. So I think there's a few wonderful resources out there that I would recommend. And one of them comes from Johns Hopkins, and there's this woman named Deborah Brodigan, and so they have the China-Africa program there that produces an abundance of different statistics around trade, investment across sort of what's happening between the continent and China. I would definitely check out their work, and it's called the China Africa Research Initiative.

It's really, really, really good. The second, again, this is on China, Africa, but they do a wonderful podcast, It's led by a gentleman named Eric O'Lander, and he's the author of The China-Africa Project. And so they do a really great podcast that touches on a number of areas from technology to infrastructure to just some of the cultural pieces that I mentioned. So I think that that's worth listening to. And then I would suggest a book. I'd suggest have it here with me called Factfulness. Wonderful book, yeah.

Yeah, great book that just will open up your mind to the rate of change and progress that's happening because all too often, I think there's a narrative in people's head around a continent in this case that's just flat out wrong. And there's a huge perception gap into the realities of what's happening in these cities and these countries versus what people might think in their heads. And so I suggest reading factfulness because it's rooted in really good data and statistics around the rate of change that's happening around the world in these foundational areas like health and education.

And I think it just will open up your mind. to the potential and the opportunity, especially in some of the markets that we're focused on. Yeah. Well, this has been really fantastic, a topic area that I'm especially interested in and haven't found quite the right person to have this kind of conversation.

So thanks so much for all the information. I think you'll spark a lot of interest amongst those listening. And thanks for your time. Yeah. Patrick, thank you. It's a pleasure. Hey, everyone.

Patrick here again. To find more episodes of Invest like the Best, go to investorfieldguide.com, forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfield guide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, OSHAG. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for

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