Transition to What?

In light of today's summit talks between the leaders of several African nations and Zimbabwe, one of the proposals on the table is to form a transitional government between Mugabe's government and the opposition under the leadership of Tsvangirai. Notably absent from the talks is South African President Thabo Mbeki. A transitional/provisional/caretaker government would perform the administration functions of the government while tensions eased and electoral reforms pursued. The main question is, who will oversea the process and will the transitional government yield a free and fair election in the future?

Calculating Market Size

I read an interesting article about how although Belgium has about the same number of internet users as South Africa, the size of the internet advertising market is $236m vs. $30m in South Africa. With a population of over 47m people, $30m seems dismal compared to other countries and one might interpret this as large market potential.

However, the number of tax payers in South Africa numbers only 4.6m. Many firms that estimate South Africa's market potential miscalculate by basing it on its population or by extrapolating per capita GDP times population. However, when calculating market potential in South Africa, one must be cognizant that South Africa has a 50% poverty rate and a seriously polarized society. One cannot simply use metrics used in the U.S. or Europe to calculate market size in South Africa.

South Africa Needs to Play a Bigger Role in the Zimbabwe Crisis

The opposition to Mugabe's government in Zimbabwe recently announced the withdrawal from elections, due to its belief that a fair and free election in Zimbabwe is no longer achievable. Opposition leader Morgan Tsvangirai has asked the United Nations to intervene in Zimbabwe. However, South Africa and the Southern Africa Development Community (SADC) have to be an active player in any negotiations with Zimbabwe. A denounciation from the SADC would have much more legitamacy than from the West, since the Mugabe government is so entrenched in anti-white rhetoric/policies.

However, South Africa continues to play a limited role in any upcoming negotiations. Aziz Pahad, the South African Foreign Affairs Deputy Minister, stated "[It] is a decision the Zimbabwean people must take as there is no country that has the right or authority to impose that decision. It is not in our power to say anything to the Zimbabweans about the processes or what form of government they must have at what stage." However, at what stage does South Africa decide to get involved, especially considering there is little evidence that the people of Zimbabwe are going to have any say in the outcome regarding its future? Are they going to wait until we have another situation similar to what happened in Kenya? South Africa continues to be a shining example of democracy in Africa, yet it does little to promote it in its neighboring countries.

The Land of Opportunity

The idea of doing business in Africa is often met with critics and predictions of doom and gloom due to its unfavorable environment. Political instability, conflict, red tape, corruption, inadequate infrastructure and disease are often cited for reasons why you should not invest in Africa. The World Bank issues an annual Doing Business report that shows countries in Africa on average are some of the worst places in the world to do business, and the region with the lowest growth in reform to promote business.

However, there are examples of successes that show that opportunities exist in the vast continent of Africa. For example, mobile phones have been suprisingly profitable. An article in the Economist, Africa Calling, dicusses how Mr. Michael Joseph of Safaricom, took over a company in Kenya with 20,000 customers in 2000 and grew it to a business with 10.5 million customers today. His boses at Vodacom (controller of Safaricom) predicted the market would top out at 400,000 customers. They were off by an order of magnitude and Safaricom recently made an annual profit of $223.7 million.

Graham Mackay of SABMiller is also very optimistic about opportunities in Africa. Expansions of breweries into places like Uganda have been very successful. With interests in 29 African countries and investments of $2.4 billion, SABMiller is one of the largest investors in southern Africa. Mackay says, "If there was any more of Africa, we'd be investing in it." Since 40% of the economy is informal, local knowledge is extremely important. Investing in Africa requires a different set of skills, argues another article by the Economist, Different Skills Required. Business managers cite as the most common constraint on doing business, complicated logistics, poor infrastructure, abundant red tape, shortage of skilled labor and HIV/AIDS.

All businesses face challenges. And as the article in the Economist argues, some require a different set of skills. The set of skills vary depending on the type of environment and industry your enterprise resides. A large corporation in the U.S. will have developed a set of complex skills useful for operating in places with a strong rule of law, developed free markets and formal institutions. These type of organizations are not well-equipped to deal with a complex external environment and informal institutions in places such as Africa. However, I would argue that opportunities exist for an organization that is highly flexible and is primarily focused on developing core competencies such as local knowledge and working with informal networks.

Placing businesses into buckets of categories based on the type of challenges they face that is core to their success, I would place them into the following categories:

INNOVATION

• high growth industry
• heavy investments in technology or R&D
  
• business friendly environment with little or no government intervention and regulation
• on the technology frontier
• access to high skill labor
  
• i.e. Apple and Intel

SCALE

• mature low but steady growth industry
• business friendly environment
• drive profit by cost-cutting and/or increasing scale
• access to high skill labor
  
• i.e. GE and Kraft
  

ADOPTION

• transitioning business environment
• adopt global business practices and technologies to a new environment
• some access to mid to high skill labor
  
• government intervention and regulation, although business friendly
• i.e. Lenovo and Genpact
  

PIONEER

• unfavorable or conflictual business environment
• significant resources dedicated to adopting global business practices and technologies to a new environment (discovery costs)
  
• limited access to mid to high skill labor
  
• high degree of government intervention, regulation, rents
  
• i.e. Safaricom and SABMiller
  

In conclusion, every business focuses on building a skill set appropriate to the type of challenges they face. This is no different for a business that operates in highly unfavorable business environments such as Africa. It is erroneous to believe that you cannot do business in Africa. Instead focusing on on developing the appropriate skillset (i.e. lowering discovery costs, interconnectedness with government, utilizing informal networks and so forth), could yield a vast continent of opportunities for the right players.

Note: Criminal organizations effectively utilize informal networks. More on this in a later blog.

How Much Does Your Gov't Spend on You?

Some of my colleagues will be working in governments such as Southern Sudan, Liberia and Cape Verde to promote development. I charted the government expenditures for our respective countries per capita and in total (let me know if my numbers are inaccurate).

Liberia clearly has the smallest budget in both total and per capita terms. With $27 per person, the government of Liberia has to rebuild the country from scratch, having experienced two civil wars as recently as 2003. With $27 per person, the government of Ellen Johnson-Sirleaf is charged with rebuilding roads, developing a modern health care system, providing clean water and food distribution infrastructure and providing education and social programs. They have a big task ahead of them. Good luck Team Liberia!

2002: A Space Odyssey - Mark Shuttleworth

In 2002, Mark Shuttleworth became the first African in space, as a participant aboard the Russian Soyuz TM-34 mission, paying approximately $20 million (USD). Besides his interest in space, Mark is actively involved with the development of open source software and other internet technologies, including ownership of Canonical, the commerical sponsor of Ubuntu, a free Linux-based operating system. He founded Thwate in 1995, which specialized in digital certificates and internet security. He then sold it to Verisign in 1999 for about $575 million (USD).

In 2000, Mark started HBD Venture Capital, a fund to invest in startups and entrepreneurs in South Africa. With a $150 million (USD) sized fund, HBD has about 11 portfolio companies, in the media, telecom, internet and retail industries. HBD is one of very few venture capital firms in South Africa. He also created the Shuttleworth Foundation with the aim of driving social innovation in education.

T.I.A. - This Is Africa

After watching the movie, “Blood Diamonds,” a colleague and I used the phrase “T.I.A.” whenever something went wrong at work. Now that I am in Africa, I am able to use the phrase with a bit more authority.

I was at a bar in the Long Street area of Cape Town this weekend hanging out with some other travelers, interns and students. A beggar woman strolled into the bar and started asking for some donations. Unsuccessful at winning our money, she eventually left and we thought nothing of it until one of us realized that she had unwittingly stole a watch off of his hand and camera from his side pant pocket. I’ve seen informal redistribution before but never with such skill. T.I.A. – This Is Africa.

Dreaming with BRICs

For one of my first projects at HBD Venture Capital, I completed a study of trends in the private equity and venture capital markets for the BRIC countries. BRIC stands for Brazil, Russia, India and China. A research report by Goldman Sachs in 2003 argues that the BRIC nations will overcome the G6 nations in GDP by the year 2050. The paper outlines the growth projections underlying its thesis and argues that China and India will become the dominant global suppliers of manufactured goods and services and Brazil and Russia will be the dominant suppliers of raw materials.

Although I agree that the economies of the BRIC nations will be a force to reckon with, there are a lot of factors that need to be overcome in order for the projections to hold. For instance, the World Bank issues a ranking of “Doing Business” for all the countries in the world. Singapore, New Zealand and the U.S. are ranked in the top 3, while the Democratic Republic of Congo is ranked last of 178 countries. Brazil, Russia, India and China are ranked 122, 106, 120 and 83, respectively. The ranking is done on a number of indicators, such as:

• Indicator: ranking of Brazil, Russia, India, China
• Starting a business: 122, 50, 111, 135
• Dealing with licenses: 107, 177, 134, 175
• Protecting investors: 64, 83, 33, 83
• Enforcing contracts: 106, 19, 177, 20

In other words, the World Bank study supports the argument that there are a lot of improvements that need to be made before the economies of the BRIC nations can sustain long-term growth.

A summary of trends in the private equity and venture capital markets for the BRIC countries:

Brazil

• Second wave of growth after the 1998-2002 financial crisis, spurred by improvements in legislation and policies to reduce legal and credit risk to promote long-term investment, and not attract the volatile and speculative capital inflows of the 1990s which led to the crisis
  
• One of the 10 most entrepreneurial countries according to the Monitor Group

Russia

• Strong government influence on supporting innovation sectors (i.e. state-supported funds such as $1.2bn Russian Venture Company created in 2007 and focus on technoparks, technology transfer centers and special economic zones)
• Technology sectors still in early stages (IT sector relatively new and older scientists/academia not familiar with commercialization of technology)

India

• Crowded PE/VC market (over 300 funds in India with another 60+ being raised)
• Wider sector coverage (most VC deals in 2007 were in IT/BPO sector, however a lot more deals in engineering services, medical devices and energy in 2008)

China

• Uncertain legal environment due to changing property and operating laws (exit opportunities in stock market and overseas markets unclear and state still a large stakeholder)
  
• Most VC deals in 2008 were in internet and media sectors.