Brendan Mullen: Why we invest in ‘old, boring’ sectors in Africa

Staff Writer
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By Brendan Mullen, managing director, Secha Capital Partners

Secha Capital invests in established African SMEs in the consumer goods and agribusiness sectors.

We refer to ourselves as an “impact investing (micro) private equity” firm, but people mistakenly assume that we are a venture capital firm. Their first reaction is often: Why don’t you invest in technology, the future – blockchain, AI, IoT, fintech, healthtech, proptech? There is certainly a mountain of capital going into these sectors. And some of the successes in tech are used as analogues for the next great unicorn – “The Uber of …”, “The M-Pesa of …”, “The Amazon of …”. Surely no one wants to miss out on the next big thing. However, we take a contrarian view and invest where others do not and cannot.

Succinctly, we invest in consumer goods and agribusiness for three reasons: 1) Value-addition is the strongest lever to ensure success, 2) The path to profitability and financial returns is more robust, and 3) Impact can be created in myriad ways.

Let’s unpack each one to examine why it works for us:

1) Value-add

In sub-Saharan Africa, our sector foci are “boring” (we see them as staples of the economy), large and fragmented (many players serving a huge market). In the US and Europe, there are entrenched oligopolies and the only way for an insurgent brand to succeed is to raise massive amounts of “Silicon Valley” capital, leverage technology to go direct-to-consumer, and hope that the burn rate is slower than the market adoption of your brand.

We believe that in the African SME context, a little innovation goes a long way – and that is where our value-add becomes a multiplier. We leverage both financial and human capital resources to support context-specific innovation to ensure that adoption exceeds the burn rate (and thus the sustainability of the business model).

The consumer goods and agribusiness sectors also engender a “flywheel effect” for our team to become experts in key capabilities and to make key value chain connections. We thus “get smart” on logistics, route-to-market, pricing, inventory management, marketing and we can extract synergies across our portfolio.

Lastly, these sectors need evolution, not revolution. So, we can apply new tools to old industries. In some respects, “tech investing” today is like saying “electricity investing” 100 years ago! Investing in hair, biltong (dried, cured meat consumed in South Africa), shoes, energy bars does not preclude applying new digital marketing tools, fintech advances and big data to add efficiencies and innovation to our investee companies.

For example, at Nativechild (natural hair and bodycare brand), we leveraged the lessons and relationships from other operating companies. We received low/pro bono support and leveraged software and platforms such as Payfast, Flutterwave, Repsly, Klaviyo, SendGrid, Clicatell, Shopify, Twilio, Zapier, Google, Facebook (Whatsapp, Instagram), Alteryx, Tableau – all to maximise our physical and digital route-to-market, the reach of our marketing and the ROI of our digital spend. We developed this expertise while working with our portfolio of SMEs. And our relationships with the tech experts made it easier for them to help and support us in implementing these tools to create value for the SME.

2) Financial returns

We maintain that, for the majority of investors, these sectors have a superior risk-return profile. Unlike tech, these sectors are not winner-take-all; we focus on large, dormant markets that can be reinvigorated and/or niche, growth verticals adjacent large incumbent markets. Here, gaining market share and/or growing with the market means success for the SME.

There’s a saying in VC – “bits not atoms”. Bits (pure tech) are easier – global and fungible; atoms (people, widgets) are complicated and more expensive. However, that is also an advantage for a company in an emerging market: These SMEs become crucial pipeline for multinationals, strategic acquirers, platforms and other funds (aka secondaries). In these sectors, it’s easier to “buy” the SME than it is to import a substitute or build one from scratch.

Possibly most important is precedent – these sectors have a robust history of liquidity events such as stock market listings and M&A. Sub-Saharan Africa has many more examples of Nando’s, Discovery and Naspers than it does of creating its own Facebook or Uber. Now, Africa will very well make its own “unicorns”; we are more confident we can get a liquidity event for a 10–100x return multiple vs the required 1,000x+.

As an example, two Secha Capital portfolio companies, despite the early days, have attracted significant capital provider interest: Large multi-nationals in the beauty and cosmetic space have inquired about why Nativechild is doing so well with this growing segment of black females and they want to understand the unique product-market-founder fit. The business continues to show extremely solid growth with robust profitability. Stoffelberg (a biltong company), on the other hand, gets private equity outreach every month. Why? These investment professionals see the numbers on the secular game trend and realise that Stoffelberg’s assets create a moat to become the trusted brand of meat protein to more and more people.

This is positive proof that the risk-return profile becomes superior when looked at along the SME investing value chain. The sector risk is reduced by not having a winner-take-all model, growth risk is reduced by offering value-add services and the liquidity risk is reduced by investing in sectors with exit precedents.

3) Impact

The value-add and financial return expectations described above result in significant and multiple impact outcomes.

We invest in local entrepreneurs who do not fit the normal profile of venture-backed founders. We look for entrepreneurs who have grit, authenticity and who know their product and industry.

Importantly – yet often overlooked – these local SMEs keep capital local. The money we invest largely flows within the local value chain. Every time a consumer buys the SME’s widget, that’s money that stays local instead of flowing to some headquarters in the northern hemisphere. This builds an ecosystem of entrepreneurship, selling, trading, buying. If, eventually, our SMEs realise a significant liquidity event, you can be sure that our founders will pour a lot of that money back into the community and pay it forward.

These industries also create consistent, full-time jobs. Unlike tech, there are no diseconomies of scale that shrink the job market. Instead, the larger our operating companies grow, the more jobs they hire for. Plus, these are rarely “gig economy” roles, but the 9 to 5 type where you can drop your kids off at school and take vacation days when you need them. In these jobs, you can learn, up-skill, get promoted.

A great showcase of this is our two investments is in the footwear sector with Geestep and Equalization. Both companies are at the leading edge of design and footwear trending for large retail chains. They have leveraged their expertise and industry relationships to shift production to local factories – at lower cost and superior quality. All this leads to affordable consumer products, increased job opportunities and sustainable business practices.

Form to function: Boring sectors, with value add and new entrepreneurs equal impact and financial returns

Secha designed our sector focus from first principles: If the goal is financial returns and impact, then consumer goods and agribusiness are the sectors most conducive to achieving this. Thus far, we describe it as the best of both worlds: It has the return profile upside of angel investing with the value-add opportunities of a large private equity fund.

And the icing on the cake? A majority of Secha’s capital has gone to black, female-founded businesses. This is because the inputs often instil a gender lens on the pipeline opportunities; after all, this is where the market inefficiencies exist.

A great example of this is WUKINA, a company we helped launch which is the “African Avon for hair”. We helped hire founding members who designed this sales empowerment model. They hired WUKINA Women to spread the message across the country and signed up women who get a “business in a box” – a website to sell hair, earn a commission, without ever having to touch stock or cash. We expect WUKINA to create hundreds of jobs and also help stylists and even everyday women increase their monthly income 20–200%!

Thus, the next time you hear someone’s investment thesis, and they don’t talk “disruption” or “unicorn”, give them a minute and hear them out; they may be on to something.

Disclaimer:
The viewpoints expressed by the authors do not necessarily reflect the opinions, viewpoints and editorial policies of Woke Owl Pty Ltd.

We welcome all pitches and submissions to Woke Owl Opinion Pieces – please send them via email, to info@wokeowl.co.za

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