Chinese VC in Africa: Cultural barriers

The China-Africa Mobile Internet Economy Summit – staged in Nairobi earlier this month by mobile phone maker Transsion, arguably China’s most bullish tech player on the continent, and the state-backed China-Africa Development Fund – had a layered way of revealing the challenges facing the world’s most ambitious cross-border development movement.

First and foremost, the event highlighted snowballing investor interest in the massive migration of Chinese resources and knowhow into a quickly modernizing market of 1.2 billion people. Western economic powers have tried this before with mixed results, but the advent of the digital age is seen as changing the equation this time. China is a freshly minted expert in the art of leapfrogging a low-tech society into the future, but by most accounts, that’s where the similarities with Africa stop. Tech investors in this space may therefore need to think more about immersion than disruption.

“At the end of the day, China and a lot of African cultures are really quite different, and it takes a bit of facilitation and encouraging to bring these groups together,” Stephany Zoo, founder of China Africa Tech Initiative, tells AVCJ. “The purpose of this conference is for Chinese investors and companies to learn more about African companies, but they’re clustering together and not talking to the Africans. A lot of Chinese VCs ask, ‘Where do we start?’ They need to think about it from an ecosystem standpoint.”

That means grassroots integrations, time on the ground, and especially, communication with companies and entrepreneurs, irrespective of whether there is an intention to forge direct partnerships with them. Standoffish conference delegates aside, Zoo sees significant traction on this front, and predicts that a major Chinese VC firm will establish an office in Africa within two years. This may come out of corporate experiments such as Transsion’s Shanghai-based but exclusively Africa-focused incubator Future Hub.

Cultural friction remains the key variable, however. There has been significant government and industrial support for China-Africa cultural connections, including a much-ballyhooed initiative for cross-border scholarships. But all too often, despite good intentions, something in the relationship building process misfires at the ground level, such as African students signing up for exchange programs only to find all the courses are taught in Chinese language.

Episodes like this say much about the mixed local feelings on Chinese investment. Even in the practical and cash-strapped trenches of the start-up community, there is suspicion fueled by longstanding concerns about debt-trap diplomacy and misunderstandings caused by an offset in expectations. For African start-ups, Chinese money should deliver access to Chinese resources, including suppliers and technicians, and there has been some frustration with what is seen as a surprisingly hands-off approach. This sentiment has permeated the broader tech sector.

“Take Tecno, for example,” says one industry professional, evoking one of Transsion’s most successful mobile service brands. “They are on the Johannesburg Stock Exchange, but they are reputationally a very Chinese company, which has both positive and negative associations. Chinese money has a certain connotation here, even if it seems there is not a direct relation, and it does impact the mentality of the founders who are raising.”

Home bias

Very little of the early Chinese VC going into Africa has backed wholly local companies, which demonstrates a logical tendency to build up comfort in stages. Yahui Zhou, founder and chairman of Shenzhen-listed online game developer Kunlun Tech, is a case in point. Best known as a prolific early-stage investor in China, he advocates the pursuit of entrepreneurial activities in Africa because the competition is less intense than in Asia.

In 2016, Zhou acquired Opera, a Norwegian web browser operator that now has one-third of its 350 million users based in Africa. He listed the company on NASDAQ in 2018 and launched Opera News – an equivalent of Bytedance Technology’s Toutiao platform – the same year. It quickly became the most downloaded app in countries like Nigeria, Kenya and South Africa. Payments app OPay duly followed and Derrick Neuman, Opera’s head of investor relations, tells AVCJ that services ranging from ride-hailing to food delivery are being launched with a view to creating synergies.

In July, OPay raised $50 million from the likes of IDG Capital, Source Code Capital, Sequoia Capital China, Meituan-Dianping and GSR Ventures. Zhou told a conference earlier this year that Africa is the place for Chinese entrepreneurs to go because it is easier to secure a market-leading position than in Southeast Asia or India. Chinese VCs are willing to provide support, but some industry participants argue there is a limit to the success that can be reaped from this approach.

“The companies that do best in Africa are the ones that are born in Africa,” explains Bryonie Guthrie, an investment analyst at Acorus Capital, citing how pan-African telecom operator MTN Group has seen off the threat of Vodacom, which has strong ties to UK-based Vodafone. “MTN understands African and how to do business here. They understand you can’t apply the same principles you do in Europe when you’re investing in Africa.”

Indeed, there remains a general wariness of the continent among Chinese investors. Yan Huang, partner at CDH Investments, tells AVCJ that China is 20 years ahead of Africa, which means a lot of China investment experience still cannot be applied locally. These sentiments are echoed by 01VC.

Maison Capital led a $20 million Series A earlier this year for Boomplay, a music streaming platform launched by Transsion that comes pre-installed on all its handsets. Roger Wu, a partner at the PE firm, stresses that it amounted to a statement of confidence in the company rather than Africa itself. “Africa is an interesting place, but we have only made very few investments there,” he says. “I cannot say it is a definite trend for us.”

With offices in Hong Kong and Johannesburg, Acorus pursues China-Africa crossover plays, targeting Africa-headquartered small businesses in telecoms, manufacturing and technology that are already profitable. Most of its LPs are non-Chinese, but its core strategy is to leverage industrial partnerships in China to grow the portfolio. Pan-African expansions are expected to be facilitated by recent progress on the African Continental Free Trade Agreement, but the China factor is still a cultural wild card. “I’d say China needs to engage in a bit more public relations on this,” Guthrie says.

Navigating complexity

Scaling will also be limited by Africa’s sheer political complexity. VC activity in East Africa to date has been fairly diversified, with agricultural tech, mobility, and education apps, representing some of the standpoints. It is expected to be an important focus of China’s One Belt One Road policy, although it is unclear to what extent this will encompass digital infrastructure and business models.

West Africa’s start-up scene has grown faster thanks to Nigeria and Ghana’s combined population of 230 million. Consumer-oriented e-commerce, logistics, and fintech plays have dominated, notably regional payments leaders Flutterwave, which has raised $20 million in VC funding, and Paystack, which is backed by China’s Tencent Holdings. Cryptocurrency players are also taking off due to concerns around hyperinflation and the stability of reserve banks, although this trend cuts across the entire continent. Indeed, sub-Saharan Africa is now commonly tagged as the world’s fastest growing fintech market.

China’s most obvious presence is in southern Africa, with Huawei Technologies hosting a massive regional headquarters in Johannesburg and Tencent setting up shop in Cape Town. This sub-region benefits from improved infrastructure, rule of law, and more diversified economies, but is often framed as somewhat disconnected from the buzzier VC ecosystems orbiting Nigeria and Kenya. 

North Africa has attracted the least attention from China, although it hosted one of the highest profile deals of recent months, when Beijing-based MSA Capital backed a $42 million Series B for Cairo-based bus-hailing app Swvl alongside a troupe of international VCs, including local investor Sawari Ventures. 

Other Chinese VCs active in the region include Crystal Stream Capital, which has identified Cairo as one of its primary targets, along with Nairobi and Lagos, the largest city in Africa at 21 million. Most recently, the firm backed Lagos fintech player Gona alongside Beijing-based Unity Venture and Shaka Ventures, a Kenyan VC backed entirely by Chinese LPs. Crystal Stream screened dozens of start-ups before choosing Gona. It says the deal is no one-off, but rather part of a larger plan to build up a presence across Africa.

“As one of the Chinese early-bird investors, the biggest challenges are the knowledge of local markets and business culture,” says Chen Yun, an investment director at Crystal Stream. “First, we researched markets and talked to local people at the front lines to deliver real insights. We linked up with Chinese corporates like Tecno and StarTimes [a Chinese pay TV provider with a large African presence], and entrepreneurs. Their knowledge helped us get a deep understanding of local business ecosystems.”

Crystal Stream is seen as having gotten ahead of the game with the Gona deal by clubbing with Shaka. A lack of direct cooperation and communication between Chinese and African funds is considered one of the key bottlenecks for development of the China-Africa theme. In this instance, a multiplier effect appears to be likely, since Gona is planning to onboard more local investors in its next round.

Finding partners

Unlike many emerging regions, almost all African VCs depend on foreign LPs. Shaka is rare, however, in the sense that its LPs are Chinese. The firm makes deployments of up to $1 million, with focus sectors including fintech, logistics and healthcare, the latter being a core industry in the LPs base.

Partnerships are important – about 60% of the pipeline is sourced from other local VCs, which usually contribute to rounds. Local knowhow is important too – investees must have at least one co-founder native to the region of operation.

“You can find foreigners who understand demand, but in things like behavior, you need someone who understands that element,” says Carol Ogallo, an investment director at Shaka. “We feel a good company has somebody who has global understanding and somebody who has local understanding.”

Cathay Capital, which was established as a China-Europe cross-border investment business, offers insights into what can be achieved through considered collaboration. The firm launched a pan-African fund in April with AfricInvest, a local peer with $1.5 billion in assets under management and a track record comprising 170 investments and 90 exits. Meanwhile, Cathay Capital’s VC affiliate has backed Hong Kong-based KaiOS Technologies, a provider of operating systems that gives feature phones internet connectivity. Africa is one of its key markets.

Mingpo Cai, Cathay Capital’s founder, believes investors with a foot in China and Africa can take advantage of similarities in areas such as technology adoption. “Just like China has largely skipped credit cards and moved directly to mobile payments, the younger generations in Africa are hungry for innovation and have demonstrated a capacity to leapfrog several technological cycles,” he says. “Mobile money is now a reality there. All technology players are now looking at the continent with interest, and our role is to anticipate their needs.”

This view helps clarify the logic of the comprehensive ecosystem approach. In Africa’s various VC communities, circles are small, and people tend to know each other. Having success in this environment is therefore not only a matter of knowing who’s who and how to navigate the network, but also how to actually become a trusted, integral part of it. There is no fast way to do this, but Chinese investors must at least recognize that the current prevailing approach to Africa must evolve. 

“These investors parachute in for two weeks, have back-to-back meetings talking to companies, and they’re just inundated with pitches,” says China Africa Tech Initiative’s Zoo, who is also head of marketing for Nairobi-based cross-border payments start-up Bitpesa. “Their view of the entire market is skewed by the information that these companies are giving them. It’s not an actual understanding of the market from experiencing it and knowing what’s going on in the countries, cities and specific industries.”

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