Points to think about when considering investing in Africa

This post is primarily for those of us in Diaspora. There are a lot of attractive opportunities to invest in Kenya. One should think about whether they want to be a passive investor or an active investor.

If a passive investor, I recommend real estate and stocks. While I have very little confidence in the NSE and CMA, it is still possible to get attractive returns primarily on momentum rather than fundamentals. However, following the numerous scandals in the last couple of years, CMA might acquire some teeth which are critically needed as an oversight body for NSE and the listed companies. The beauty of the NSE is that the money and the assets remain in your name. You might appoint a manager you trust to trade on the account if your doesn't allow, but they won't have the ability to withdraw funds. Real Estate is ideal if you can do the due diligence yourself and plan to sit on the property for while before offloading it. Appreciation alone gives a more attractive return than treasuries and savings accounts in the West. With no capital gains tax and the possibility to develop the land in the future, it makes sense. However, cannot emphasize enough on location and due diligence.

For the active investor here are some additional thoughts. By active investor, I mean someone who is looking to find an opportunity to either buy an existing business, start a new business or partner with someone else to start a business.

1. Barrier of Entry: Kenyans are smart, hardworking, knowledgeable and well capitalized - to a point. So, if you start a business that even appears to be profitable, there will will be a gazillion other people starting similar businesses. And if you've been in the west for any period longer than 24hrs, you do not have the skills to "hustle" on the level that your competition does. On capitalization, all you need to do is look at Kengen and the amount of money that came from "under the mattress" to buy those shares. As for competition - think about the matatu industry for example. These are industries that "seem" to make money and attract a lot of people. So you are competing with someone who knows how to "talk" to the police, who knows where to repair their vehicle at a more competitive rate and who drives their own matatu. You have a driver. Your overheads are obviously higher than theirs. Talking about the matatu business, City Hoppa has been successful ( I guess it is important to define success) because the owners had a lot of experience with KBS. They were also capitalized enough that in order to compete with them, one needs $2m in initial investment. They also positioned themselves not as a matatu but as a luxury shuttle. That positioning allowed them to charge a premium and not destroy their vehicles through the "hustle" that other matatus are involved in. They invested in developing the brand. The guy who buys a single matatu expects dinner, rent, fuel and school fees from that matatu from the get go. So there is no money to maintain the vehicle, to develop a brand etc. City Hoppa had those resources.

So, look for opportunities that allow you to position yourself differently from the guy on the street. This will help you sell your offering not on price (which you cannot compete) but on positioning. Also, make sure you have a significant amount to invest. This will eliminate a large portion of the competition.

2. Sweat Equity doesn't work. In the US, a lot of companies are founded on sweat equity before angels, VCs and capital markets. In Kenya, for the most part, this doesn't work. This is primarily because very few people if any, have credit cards, savings accounts, trust funds, student loans, mom and pop loans etc that help pay for their living expenses while they found their company. So if you are going to start a company with partners in Kenya, make sure you offer them competitive salaries right from the get go. That allows them to focus on growing the business rather than on survival tricks which more often than not, are at the expense of the venture you are starting together.

3. Lawyers. A lawyer, accountant and security guard are important people to have. Your accountant should be your best friend. A lawyer should be someone you talk to before any major transaction. That said, all contracts, however strongly worded, are no excuse for due diligence and getting things right the first time. This is because enforcing those contracts is very expensive in cash and time. So do the contract thing with your lawyer, but make sure you have all the necessary safeguards yourself. For example, if you are renovating or building a house, pay based on performance. No deposit or very minimal deposit, then pay as milestones are achieved. This calls for much more engagement, but that is what it takes to keep your money.

4. Once money leaves your pocket ( or bank account or mattress) it is very difficult if not impossible to get it back. So set things up so that money never leaves your control. If its acquiring assets, pay for them from your account rather than issuing cash to a said third party to buy and deliver these.

5. Local knowledge is critical. Find people you can trust and get different perspectives on issues relating to your business. If there are discrepancies, walk. Local knowledge however, should only be a small component of your due diligence. Anecdotal evidence on the potential of a particular opportunity should only be a first step, never the premise on which an investment decision is made. Get data. In my experience, correct data is the difference between a viable investment and a black hole for your money.

6. Availability and time commitment. Any new business, whether in the West or in Africa, requires a tremendous amount of time to get right. Having been in the West, you offer a different perspective that could be the difference between a scalable business and a barely breaking even mom and pop shop.

7. Talking of scalable - If you are making an income in dollars, you should consider investments that have the potential to compensate you on the same level whether in Kenya or wherever. Think about it from a time invested perspective. And no, life in Kenya isn't cheaper than in the West. You are used to a certain lifestyle which comes at a premium in Kenya. Two movie tickets at the village market are $15 to $20. Gas is 2 to 3x more than in the US and housing in most places is $400 to $1000 a month. A year 2000 corolla will cost you around $10k, and no, financing isn't an option - the interest rates just don't make sense. And we're not even talking about Runda. That said, there are enormous advantages to being in Kenya. So when structuring the business, find a business that will throw off enough cash over time to allow for an income equivalent to or higher than your income in the USA. Particularly since there is a risk premium associated with being in Africa - actual or perceived.

There are people who have moved to Africa and after going through their savings, returned to the West. There are those who have gone back been very successful and stayed. And there are those who split their time between Africa and the West. I think it would be interesting to interview these people and learn from their experiences................