By Ndubuisi Ekekwe, HBR Blog Network
VENTURES AFRICA – A few years ago, while I was a first-year Ph.D. student in the engineering school at Johns Hopkins University, I had a business idea. I had taken two excellent courses on microelectronics, and decided that I could build a business around them in my native Nigeria. As a college student in Nigeria, I had wanted to master developing microcontroller-based systems, but had never had the opportunity in practice, because no company there offered it. As the first year of my Ph.D. program progressed, I became more and more confident that there was no need to spend four years in the program, since the first semester seemed to have already prepared me for my dream. So, at the end of the academic session, I developed a business plan and sent copies to potential investors in the U.S.
I got some invitations to pitch and explain the idea. Most investors liked the business model and the fact that I was educated in Nigeria and knew the market. But there was one problem: my business plan had no exit strategy. In other words, while I had done a good job asking them to invest, I failed in explaining how they would get out of the business when they decide to leave. They all asked exit strategy questions and my answer, naively, was that we would grow revenue and share profits! Most smiled at that, and at the end of the day, I raised nothing.
With no funds, I decided to hang around and pursue my Ph.D., making changes to my business projections by starting small. With savings from multiple fellowships in school (Thanks, Johns Hopkins), I started my business, and hired and trained people in Nigeria. The company has since received a commendation letter from the Nigerian Presidency, and was one of ten companies (out of 3,300 firms) recognized in the 2011 Africa Awards for Entrepreneurship, which was organized by Legatum and Omidyar Network (a foundation started by eBay founder Pierre Omidyar and his wife Pam). Success brought partnerships with U.S. giants like Altera Corp and Microchip on design services and training.
I learned a valuable lesson: Entrepreneurs need to have plans in place for investors to exit, especially in developing countries. Most investors don’t have years to wait around to recoup investments through growth and profits. Most are gone after about four to eight years, and entrepreneurs need to present a clear path for that to happen. If you don’t, it’s very unlikely that you’ll ever get funding. It’s something that U.S. tech entrepreneurs may not need to be overly concerned about, since the tech ecosystem in the U.S. is dynamic, and investors know that there are companies interested in buying innovative tech startups.
The U.S. also has a vibrant IPO system to take companies public. But for entrepreneurs in developing nations, especially Africa, the exit strategy can be a challenge. Some countries in Africa don’t have stock exchanges, and where the exchange does exist — for instance, in Nigeria — the markets don’t value tech stocks very well. With foreign technology companies doing mostly of the trading in Africa, combined with a porous IPR system in the region, tech startups have limited opportunities for acquisition. That’s why most investments in Africa are in mature industries like oil & gas, real estate, and finance, among others.
So what can entrepreneurs in the developing world do? Follow the model of most South African companies — incorporate your business in Europe or the U.S. and run it from your own country. Doing so positions you to legally tie your assets to highly-liquid funding environments, and your exit path will be expanded.
What’s more, if you incorporate in these markets, it will be easier for investors to help you find buyers, who naturally will prefer U.S. and European companies compared to say, African companies, because indigenization policies in some markets make it difficult for foreigners to own controlling stakes in companies. Understanding how your investors can exit is important if you want to raise funds easily. Just keep in mind that incorporating internationally requires collaboration; you can’t work in silos. To succeed as an entrepreneur in a developing country, you need to look for partners and expand your footprint.
Image via AfricaReport