RENEW Strategies

Part 4: A Case Study in Ethiopia

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Matthew Davis, CFA
| March 13, 2012

A New Strategy for Africa and other Emerging Economies (Part 4): A Case Study in Ethiopia. Note: this post is a bit longer than the others, but hopefully worth the read.

When you’re given permission to have a different perspective…

We recently hosted a group of “impact angel” investors in Addis Ababa, Ethiopia, so I thought it would be fitting to share a bit about what we observed during their trip, and how this approach is helping shape a new strategy for how the U.S. and West can engage Africa and the developing world. I will organize the blog into three sections: (1) a brief recap to orient us about where we are in the series; (2) the impact angel trip to Ethiopia; and (3) how this all fits into the new strategy.

Orientation
First, a quick recap of where we are in our series. We started (Angel Investing, Impact Investing and SMEs) by explaining that we believe three trends will shape a new strategy for how the U.S. and West can engage Africa and the developing world. They are: (1) the rise of angel investors; (2) the potential of SMEs in developing countries; and (3) the formalization of impact investing. We then dove into angel investing. Blog 2 (The Rise of Angel Investors) talked about how angel investors are a major driver behind the growth of the private sector in developed countries like the U.S. (angel investing rivals in size to venture capital but invests in many times more businesses.) In blog 3 (Angels Going Global), we talked about how angel investors are ‘going global’, driven by enabling technologies, affordable global travel, the rise of wealthy BRIC-angels, and the formalization of impact investing (investing for profit and social gains.) We profiled some famous and up-and-coming angel investors, and observed that angel investing in developing countries can be lucrative, and requires investors to have a network of people they trust to support their remote investing.

Impact Angels in Ethiopia
In this blog I will provide (1) some background on what we did leading up to our recent investor trip; (2) a high-level rundown of what happened during the week; and (3) some observations we made of the group.

Leading up to the trip: RENEW spent more than seven weeks preparing the group for their trip to Ethiopia. We hosted a dinner for them in Washington, D.C. (served Ethiopian of course); ran conference calls; provided documents and emails containing information on specific business opportunities, Ethiopia’s economy, growth sectors, and investment laws; and provided guidelines to ensure the group was prepared for business conversations in Ethiopia’s cultural context.

A rundown of the week: Here’s a very high-level snapshot of what happened during the week the team was in Addis. We had:

  • Nine site visits with local businesses to see their operations
  • Between 15 and 20 formal and informal meetings with entrepreneurs over lunch, in lobbies and at their places of business
  • Two meetings with Ethiopia government leaders to discuss Ethiopia’s policies towards foreign investors and plans for the country’s health sector
  • Lunch with the U.S. Ambassador and USAID Mission Director to learn about what the U.S. government is doing to stimulate private sector investments in Ethiopia
  • Several visits out of Addis to innovative projects (including one of the best hospitals we have seen in Africa), and to visit the breathtaking and historic city of Lalibela
  • A cultural dinner night to taste the local foods, smell the Ethiopian spices, watch Ethiopian dancers, and listen to Ethiopian music
  • A visit to a leadership academy that is training local youth to work with the poor
  • Countless side excursions to local restaurants and shops
  • Numerous meetings with local friends and new acquaintances

See more pictures here.

Observations of the group: There were five in the group (excluding the RENEW team), all with various backgrounds including medicine, accounting, investing, management, entrepreneurship, and music and the arts. Most had skills that spanned multiple industries. Some had extensive experience traveling in Africa. Some had not visited for years while others make regular trips. Needless to say, all of this offered us hours of discussions in the car between meetings, and stories over evening dinners.

Here’s what we observed (Note: The group understood that we would be taking notes of their reactions for the purpose of continuous improvement of our process.):

  1. They were surprised by Ethiopia’s growth: As our car buzzed through Addis, down newly paved roads, passing literally hundreds of concrete skeletons reaching toward the sky, we heard one investor say “the growth is almost overwhelming.”
  2. They were excited that their skills and experiences applied: The doctor inquired about the radiologist’s certifications at the diagnostic center; the executive observed the need for stronger middle management; the entrepreneur asked about the local dairy supply chain; and the accountant eyed the thriving shops at the local market, running numbers in his head. They were all excited to “talk shop.”
  3. They were eager to understand the business environment: Many were curious about the foundational elements of the country’s economy. Any concerns that were raised centered around government controls, investment laws, inflation, and the ease of getting money out of the country.
  4. They were respectful and curious of the culture: A few had come prepared and were well-read on Ethiopia’s history and culture. One in particular became the resident ‘Ethiopia maven’ providing insightful context for much of what we experienced.
  5. They were first drawn to the entrepreneur, and then their business: Many say the key to investing is to ‘trust your gut.’ In developing markets, where credit scores and audited financial statements are hard to come by, your gut read becomes your best ally. Post-meeting car talk focused on the their impressions of the entrepreneur, and then moved to the growth potential of the business.
  6. They were focused on building relationships: Business follows relationships, and everyone knew this. The group wanted to spend more time getting to know a few key people, than rushing around to briefly engage with many people.
  7. Most understood the need to ‘go slow to go fast’: Many saw the wisdom in starting with an investment between $100K and $2M before committing larger sums of capital.
  8. They enjoyed connecting with each other: You get to know a lot about people when you spend five days buzzing around a foreign city. The car rides became a classroom where investors shared war stories, battle wounds and lessons learned. They asked each other as many questions as they asked the entrepreneurs.

The results: In the end, we got strong commitments to move forward on some opportunities. There’s a lot of work to be done, but overall the trip was a huge success.

How this fits into a new strategy for how the West can engage Africa
What happens when you change the perspective by which people view something? For years I believed Africa was full of problems, until I went to Uganda in 2006. Before I left, someone told me, “Don’t go and try to fix anything. Go there to have fun.”

What would happen if you gave a group of Western business and investment professionals the permission to come to a developing country with a different purpose – to look for opportunities? We believe there’s considerable potential. Here’s why.

If you have ever read the book “Switch” by the Heath brothers, you would recall three actors that influence people to change: (1) The rider who deals with one’s logic. (2) The elephant that deals with one’s emotion. And (3) a path that provides a new way for the elephant and rider to move together. If the two are not aligned, and there is no path, change doesn’t happen. The book details how marketing firms are masters of creating and implementing these strategies. It also shows how others have altered the course of a country by understanding these three fundamentals of change (I am grossly oversimplifying the book - so I recommend reading it!).

Graphic from http://tradingaprofit.blogspot.com

Now, let’s apply this theory to what we are doing in Ethiopia. Your “rider” may have read the December 2011 issue of the Economist titled “The hopeful continent: Africa rising,” and concluded that Africa is in fact changing. Your elephant may get excited by the opportunity to get involved in the growth of a continent, or it may be upset that you passed on the opportunity in China 15 years ago. Your elephant may also know deep down inside, that, although giving to charities is a good thing, and aid has helped millions of people, it is the private sector in developing countries that will ultimately pull countries out of poverty – I’ll tell you for a fact, people in Africa want jobs rather than donations. Yet your rider and elephant may struggle to agree on how to proceed. There has not been a clear path for them both to take. The donor path, which has been well traveled for years, is the only real option you know. And as much as your rider may tug the elephant to take a new path, the elephant is nervous and bigger. So, exhausted, the rider concedes and you either do nothing or continue giving (which again, is good! It’s just not what we focus on.).

But, what if there was a path? After a week of observing a team of five investors in Ethiopia, who were given the permission to look for opportunities, we can comfortably conclude that the elephant and rider agree, and in fact, are already starting down the new path. The path involves several weeks of preparation before you get on the plane. It involves a well-run investment trip. It requires follow-up from an in-country team of professionals to help you register as an investor, negotiate terms with the business, structure the deal, oversee the disbursement of capital, monitor and consult your investment, and ensure you get your returns. Now the rider and elephant can go down a new path, and use their capital and skills to build the private sector in a developing country, and have a huge impact on the local economy.

Put all of this together, and you see how angel investors, seeking a financial and social impact from their investments, can change how the U.S. and West engage with countries like Ethiopia. In a few years I hope to see the airports and hotel lobbies in Addis filled with Western businessmen and women – not just our savvy friends to the East.

So our request to you: Next time you’re planning a trip to visit a developing country, start with a different framework – look for opportunities (vs. problems). If your rider and elephant agree, this is the first step down the path of a new strategy for how the West can engage with Africa and other emerging economies.

We would like to conclude by thanking the business owners, U.S. government officials, local partners, Ethiopian government leaders, and the many others that took the time to meet with the angels. The investors mentioned that meeting you (they mentioned many of you by name) was the most valuable part of their experience.

And of course we want to thank the impact angels. You are truly pioneering a new model that, we believe, will have a huge impact in Ethiopia. And yes, more opportunities are coming soon...

If you would like to join RENEW on our next investment trip or if you just have questions about what we do, we encourage you to contact us at renew@renewstrategies.com.