Wednesday, February 06, 2013

(BN) African Investor Takes Silicon Valley Tough Love to Kenya

(Bloomberg )  Alliy is sitting in a conference room in a Nairobi, Kenya, tech center, an Apple MacBook close by. He's interviewing Toni Maraviglia, the chief executive officer of MPrep, a company that allows African teachers to administer homework assignments via text message. Alliy, 31, runs a venture capital firm called Savannah Fund, and Maraviglia wants him to invest in MPrep.

"Are you a social entrepreneur?" Alliy asks. "It's a trick question."

He is concerned that MPrep has foundation funding -- it doesn't -- and the Stanford University-trained venture capitalist says he's wary of such businesses because they have too little incentive to grow and make profits. Maraviglia, an American who moved to Nairobi to start up MPrep, gets the hint. She says no, MPrep is a real company that wants to give investors a return, Bloomberg Markets magazine will report in its March issue.

More from the March 2013 issue of Bloomberg Markets:

  • Cover Story: The Lie in Libor
  • Slideshow: The Top 20 Emerging Markets
  • Rankings: How We Crunched the Numbers

"OK, good," he says. "But you're going to make your money off teachers? Think about that. Can teachers afford this? Who should you be targeting instead?"

He passes on the investment, for the time being.

Alliy, born in Tanzania, says he thinks the tough love will pay off. The tech revolution has come to sub-Saharan Africa, and Kenya, with east Africa's most developed economy and infrastructure, is one center of it.

Electoral Violence

However, the country ranks No. 22, and fourth in Africa, in a Bloomberg Markets survey of frontier market countries most attractive to investors. One reason investors shy away is Kenya's history of ethnic and electoral violence. More than 1,000 people were killed in the 2007 presidential vote, and violence has flared up again ahead of March elections.

Nonetheless, Alliy sees Kenya as ripe for tech investment. Though only 23 percent of houses there have electricity and just 9 percent of roads are paved, mobile-phone penetration is 75 percent in the country, up from 5 percent in 2003. The rapid gains have spawned innovation. For example, pretty much anything in Kenya can be bought via text message, which is convenient in a place where credit cards are rarely accepted and carrying cash can make one a target for robbery.

Alliy moved back to Africa in April after four years in Silicon Valley and three as a product manager for Microsoft in Seattle. He's convinced he can make money by schooling local tech entrepreneurs in the ins and outs of venture capitalism.

200 Pitches

Getting his Savannah Fund started was his first challenge. He had to pitch more than 200 times before he found someone to back it. Now, even with names like Russ Simmons, the co-founder of Yelp Inc.; Dave McClure of 500 Startups; and Tim Draper, of New York-based Draper Fisher Jurvetson, among Savannah's investors, Alliy hasn't reached his target of $10 million.

Alliy spends his days talking to budding entrepreneurs about term sheets, capital structure and other basics of corporate governance.

"One startup asked me, 'What is a board? Why do you need a board?'" he says. "We spent an hour and a half going through that."

Many of those who come to him have been operating on grants from charitable groups such as the Bill & Melinda Gates Foundation and have little concept of how to make a profit.

Alliy's first investment was in BiNu Pty, an Australia- based company that developed a program that strips down smartphone applications so they work on the very basic phones that most Africans carry. He put in an undisclosed amount of money himself and helped raise a total of $1.5 million in a first round of funding.

Accelerator Program

Alliy has also started a so-called accelerator program through the Savannah Fund that gives entrepreneurs management advice and a small amount of cash in exchange for a 15 percent equity stake. The program has helped launch three companies: Ltd., a Ghanaian enterprise that aims to be the of Africa; Kola Studios, a mobile-game developer in Uganda; and Kenya-based SafariDesk, which helps plan African vacations.

Savannah Fund investor Draper, who put in $250,000, says he's eager to get in at the onset of Africa's tech development.

"We were among the first venture capital investors in places like India, Eastern Europe and China," he says. "This kind of early fund can have an enormous impact in a region. Entrepreneurship spreads, and wealth and jobs follow."

Jim Forster, a former Cisco engineer with investments in Ghana, Kenya and Somalia, says he gave Alliy money partly because he admired his commitment to helping Africa.

Investment Models

"The question that was in my mind, and to some degree still is, is how is the investment model that has worked in Silicon Valley going to work there?"

Alliy's fortunes may turn on the growing interest of multinationals in Africa. Google Inc., International Business Machines Corp., Nokia Oyj and Samsung Electronics Co. have all given time or money to iHub, the Nairobi mall turned tech center that Alliy works out of. They give the budding entrepreneurs phones for testing and send executives to give talks at the mall's top-floor coffee shop.

And at tech conferences from Nigeria to South Africa, startups are giving demo pitches and seeking venture capital or grant funding.

In his determination to succeed, Alliy spends countless hours working for no pay -- calling prospective investors in the U.S., mentoring entrepreneurs even after he has rejected them for funding and gathering market data. He had to interview local retailers himself to learn which is the most popular smartphone in Kenya: It's the N3 from Hong Kong-based Tecno Telecom Ltd., running on Android.

'I'm Doing It'

Potential investors both in Africa and Silicon Valley are eager to pick Alliy's brain.

"I'm doing it," Alliy says with frustration. "But I can't be the only guy doing calls, every night, with investors abroad."

If his and other African ventures are to succeed, he adds, investors have to take the risk and put down their money. 

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