Glories of unicorns graze on a diet of venture capital from Dallas to New Delhi. Illustration: iStock

The state of African venture capital (VC) funding took a turn in 2018 with funding for African startups growing by an astounding 300%. VC firms are starting to take notice of established and early-stage startups on the continent and allocating larger sums to both. Nevertheless, while this is certainly good news for African entrepreneurs on the ground and for their respective countries’ economies at large, this does not necessarily mark a shift in the VC attitude toward the developing world.

In fact, outside the core tech markets, VC funding seems as unobtainable as ever. In the United States alone, VC investment is primarily funneled into bustling coastal tech hubs like San Francisco, New York and Los Angeles, leaving the most of the US out in the cold. For the least developed countries, VC neglect is even more pronounced. The year 2017 saw investment in developing countries drop by a considerable 14% as VCs hurried to finance the next hot digital trend in the US or Europe.

However, by keeping their eyes firmly fixed on the largely Western digital rush, VCs are missing out on profitable opportunities in the developing world. The United Nations has thoroughly mapped out the developing sectors that need urgent attention in its Sustainable Development Goals (SDGs), which are projected to cost about US$2.5 trillion over the next decade. Though water, housing and low-tech energy development may not have the same allure as artificial intelligence and blockchain, new initiatives from developing countries are demonstrating how VCs can invest in SDGs while still getting strong returns.

Rwanda, for instance, is already an exciting African tech hub hosting a growing number of successful digital businesses. Irembo, for example, an e-government platform, is turning long waits for government permits into a thing of the past, while Kountable is making supply trade financing available online to small and medium-sized enterprises (SMEs) throughout the continent. In neighboring Uganda, a new hydroelectric plant – made possible by funding from the Private Infrastructure Development Group – is slated to boost the economies of both Uganda and Tanzania as well bring new jobs to the region.

Still, VCs don’t have to enter this mostly unchartered territory alone, nor is there one single financial model through which they must invest in such projects. Rather, governments, philanthropists and private equity can come together to make these critical investments happen. These private-public partnerships explore options of reducing economic loss through first-loss funds established by public sector agencies. In first-loss funds, the foreign aid agency or government working with a VC agrees to absorb the first loss in a developing world investment project, mitigating the risk for VCs and ultimately making the project more attractive for private equity investors.

While the political volatility in many developing countries can make VCs balk at investment, political risk insurance (PRI) is empowering private equity to invest as it would in any Western country without fear of astronomic losses. Public-sector institutions like the US Overseas Private Investment Corporation or the Asian Development Bank have the financial backing to cover VC losses in cases where the political climate in developing nations rapidly shifts and torpedoes their investment.

Even with these economic and political safeguards in place, however, VCs are hesitant to embrace such high-risk investment. This reluctance is in spite of the fact that many developing economies are growing at impressive rates. According to the International Monetary Fund, over the past year alone Uganda’s gross domestic product rose by 6.1%, Rwanda’s climbed by 8.5%, and Libya by an astounding 17.8%.

Venture capital, when appropriately deployed, can create such a degree of innovation that developing economies can transition to become high-income and stable economies. Take Israel for example, a country that only 30 years ago was simple agricultural-based economy with a GDP per capita of around $6,000. Thanks in large part to enormous capital investments into the country’s technology sector from both government and private investors, the country now enjoys a GDP per capita of more than $41,000. Compare this with Argentina, also an agricultural economy in the 1980s with a very similar GDP per capita to Israel’s, yet today that country’s GDP per capita is unchanged.

According to the chief executive of First Media Group, Gal Yissar, an Israeli entrepreneur known for attracting large foreign investments to his country, “In the space of a few decades, Israel went from a little-known and unstable desert land to a global leader in technology and innovation. Foreign private investment was a huge contributing factor here, creating new industries on the ground while earning huge returns for investors.

“Throughout the developing world, new startups and undertakings are enabling private equity to combine high impact with high return. For VCs that are prepared to explore new partnerships and opportunities, developing countries offer an innovative way of diversifying their investment portfolio while hitting some of the critical objectives set out in the UN’s Sustainable Development Goals.”

With strategic economic partnerships and with comprehensive political insurance, VCs that are willing to look beyond traditional tech hubs will find they have everything to gain from investing in developing regions.

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Lin Nguyen

Lin Nguyen is an analyst in South Asian regional security, focusing on economic and political developments. Nguyen works on projects advising South Asian government ministries and also private enterprises seeking to do business in the region. She leverages her experience to write publicly about pressing economic and political issues that concern Asia at large.

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