From required scale to scaling up

African business needs to be supported. The issue is neither its absence nor its unimpressive performance but the fact that it is hard to measure due to the dearth of data and the frequent overlap between the formal and informal sectors. However, regardless of whether you take the digital sector where the effervescence is palpable, or traditional sectors (although applying the term “traditional” to African business is problematic), new projects are popping up everywhere and inundating support networks almost as soon as these become available. Start-up competitions are emerging all over the continent and it is unusual to come across a small business that does not have an expansion programme primed and ready to roll. The Covid-19 pandemic has not halted this dynamic although small businesses were often severely affected – especially in cash flow terms – by a combination of the health measures and the economic crisis, in a context in which government support was much more limited than in the big industrial economies.

But Africa is still caught up in a race against time due to its demographic boom. The figure of 450 million young people arriving on the African jobs market between now and 2050 advanced by the World Bank is now generally accepted. Meeting the professional expectations of these young people means providing them with proper qualifications, hence the crucial imperative of professional training in addition to the jobs on offer for them. Hence also the need to ramp up the number of start-ups in all sectors, to reduce the rate of business failure during the growth phase and to support existing SMEs and enable them to scale up. The resources needed to support businesses are well known and are already being deployed on a small scale. Nascent companies need incubator networks, acceleration programmes and business angels that can help turn their projects into reality, flesh out their skills and give them the wherewithal to get up and running quickly. We also need to remove the barrier of insufficient access to finance faced by small businesses and start-ups. Equity capital is crucial to developing micro businesses and SMEs, especially by providing them with access to debt, which is already a problem for numerous reasons such as the lack of a sufficiently formal business structure and land base. This need for support continues until these companies are big enough to be able to deal with traditional investment or debt players and start generating returns that are in line with market  expectations. And herein lies one of the key problems with this entire process. Until they have reached a phase of maturity that provides yields that are in line with those of the mainstream investment market, supporting such businesses – even the very profitable ones – is relatively unprofitable. Loss ratios, which increase significantly in the poorest countries where the economic fabric is fragile, business support and market access costs, and FX losses when international investors are involved, all make it difficult to achieve a market yield for those wishing to commit to African entrepreneurs. This is why public subsidies and private donations are needed for incubation and acceleration programmes. “Patient" capital that will happily accept moderate performances is also a must for equity investments in start-ups and SMEs, unless yield-enhancement instruments such as first loss guarantees can be used to attract higher levels of private equity into the sector. The economic and social benefits derived from developing this industrial fabric more than outweigh the limited financial returns on the investment instruments but, this is exactly what impact investing is all about.

All this is beginning to be known and accepted: African entrepreneurs need help to "scale up" and yield-enhancement instruments have been clearly identified. The intermediaries working with African entrepreneurs – incubators, accelerators, business angels, investment funds, etc. – are increasingly numerous and professional. The innovation and pilot-testing phase is nearing an end and it is nearly time to “scale up”. This requires formal recognition by both public and private decision-makers of the importance of this issue and of the need to include it as a priority on the development agenda. It will also allow for increased recourse, both from a financial and human perspective, to development agencies, public agencies specialising in private sector funding, foundations, “family offices” and private companies operating in Africa as banks and investment funds. The Africa-France summit in October 2021 will doubtless be an important step in placing this approach firmly on the development agenda and AFD Group has been a pioneer in this domain. It has continued to innovative with programmes that cover the entire range of needs, such as SIBC or the Creative Africa acceleration programme, interest-free loans for tech businesses, and of course the FISEA+ fund – part of the Choose Africa initiative that provides really excellent impact investing support. The latter programme will also tackle the challenge of professionalising and scaling up, while accepting the indispensable accountability in terms of ambitious public policy objectives that should hopefully lead to a massive influx of investment.

Obviously, African governments must continue the efforts undertaken over the past two decades to improve the business environment, spurred on by the World Bank's Doing Business rankings, and everyone with influence needs to keep things moving in this direction. Working in Africa remains very difficult for everyone especially entrepreneurs – in the face of still cumbersome public administration requirements and the reality of omnipresent corruption. But if we accept the importance of strengthening the productive sector and the entrepreneurial environment in resolving the issue of employment, then continuing to focus exclusively on the business environment is just like building a football stadium with a beautiful pitch in the hope that this will enable teams to emerge and a match to be played – i.e., essential, but not enough. And we should also add that it’s not just about one match – we need many teams to participate in a successful cup of nations for employment.