The African Development Bank (AfDB) will launch a fee-based investment-tracking product aimed at venture capital investors later this year in a bid to plug the chronic funding gap for small African businesses, according to senior banking officials.
The African Start-up Index will track the performance of a selected number of unlisted African start-ups over time.
The product will be launched on a pilot basis in 10 regional member countries this month ahead of a full launch later this year, and will be marketed to VC investors, who will pay to access specific company information, including some financial performance measures.
The bank hopes the product will provide greater financing channels for African micro, small and medium-sized enterprises, as well as facilitating greater venture capital investment across the continent.
“Africans don’t lack ideas, but they are unable to put their ideas before the market, so the index can play an important role in connecting investors and small businesses,” Sibry Tapsoba, head of the African Development Institute at AfDB, who is spearheading the initiative, told Emerging Markets.
“We can’t boost development unless we create an environment in which the private sector can flourish. Governments will still continue to have a role in developing financial institutions, but others must come on board as well.”
Advisors on the project believe the fact the index is being launched by a development bank should help to lend it credibility and arouse investor interest.
“An institutional platform will work well to bring investors on board, because here you have a very credible organization that doesn’t only look after their own interests but looks after African interests and that institutional credibility will hopefully bring credibility to the platform in terms of attracting investors,” said Fredell Jacobs, CEO of the South African Start-up Index, which was launched in 2009 and has served as one of the models for the AfDB’s new index.
According to Tapsoba, this is the first time a development bank has launched such a product. He stressed the bank would charge for the service to cover costs and make it self-sustaining, but also because “you value things more when you pay for them”.
However, while the bank will adopt strict selection criteria for companies on the index, he stressed the index was a “knowledge tool, not an endorsement tool,” and acknowledged the AfDB would ultimately have to rely on the companies to provide honest financial information.
“We are not auditors, and we don’t want to take responsibility for whether companies are lying and being corrupt,” he said.
Although he acknowledged the bank may leave itself open to criticism should some of the companies on the index later be found to be providing misleading information, he stressed the onus would be on VC investors to conduct their own due diligence.
“Although we are making these investment opportunities visible, I don’t think VCs are going to take $1 million and just invest it in a company because it’s on our index, but hopefully it can
provide them with a targeted list of potential companies that they can then investigate further.”
VCs will be invited to roadshows to highlight top-performing companies. “Hopefully later on investors will come on their own to the index and see Africa as an opportunity platform rather than a big, dark scary place,” Jacobs said.