Entrepreneurs have a pivotal role to play in Africa’s unemployment crisis. Today over a third of the continent’s young workforce (those aged 15-35) are unemployed. Another third are in vulnerable employment. By 2035, Africa will contribute more people to the workforce each year than the rest of the world combined. By 2050 it will be home to 1.25 billion people working aged.



To absorb these new entrants, Africa needs to create over 18 million new jobs each year. Governments need to put in place policies that drive economic growth and competitiveness. These in turn, will enable the growth of small and medium-sized enterprises (SMEs). This is important because they currently play a significant role in low-income countries, representing nearly 80% of jobs. They are also responsible for 90% of new ones created each year.



The challenge for countries is how to support the growth of SMEs. Various African governments have experimented with ways to help address the US$140 billion funding gap for startups and SMEs. For example, one approach has been to set up entrepreneurship funds.



Based on my experience of watching their performance over the past 18 years, I would issue some words of caution. Some entrepreneurship support models work better than others. And how they are set up – particularly the governance structures put in place to manage them – is key to their success, or failure.



<h2 class="wp-block-heading">Funding gap</h2>



Access to financing is consistently listed as the biggest obstacle to business for SME’s in African countries. They often face double digit interest rates from local banks. And venture capital penetration is still extremely low. Top end 2018 estimates put it at about $725 million for the whole continent.



To tackle the problem, African countries continue to start new entrepreneurship funds. In July 2017 Ghana launched the National Entrepreneurship and Innovation Plan. The aim is to provide integrated national support for start-ups and small businesses.



Almost a year later, Rwanda secured a $30 million loan from the African Development Bank for the establishment of the Rwandan Innovation Fund. This will focus on investments in tech-enabled SMEs.



As new funds are started, African countries must look to the successes and failures of both global and regional funds to replicate best practices and avoid common pitfalls. African governments should explore replicating models similar to Small Enterprise Assistance Funds and the USAID backed enterprise funds. Both include robust investment selection criteria for funds.



In doing so, African government-backed entrepreneurship funds would operate as fund-of-funds – where a fund invests in another private equity or venture fund rather than directly in businesses themselves – as do many development finance institutions globally such as the UK’s CDC or FMO of the Netherlands.



<h4 class="wp-block-heading">The what and the how</h4>



The fund of funds structure creates an arm’s length relationship between the government agency that houses the entrepreneurship fund and the businesses that eventually receive investment. In between, sits a professional fund manager that earns the majority of its income from making good investments, growing companies and exiting them after a period of five to seven years. In this way, there are natural disincentives for corruption and market-based selection criteria for the entrepreneurs who receive investment.



How the fund managers are selected also matters. To ensure true investment independence from the government, fund managers and board members must be chosen in a transparent and competitive process. And once selected, representatives of the government entrepreneurship fund agency can sit on the investment committee for oversight purposes but should respect the fund managers’ independent decision-making.



There are examples of funds being set up without the necessary independent, accountable fund managers. One is the YouWin program in Nigeria. Created in 2016, it was set up to help youth entrepreneurs grow businesses. But senior civil servants handed out awards to friends and relatives.



Government supported fund managers through the FoF model can also catalyse additional investment. By operating in markets and sectors often ignored by traditional private equity funds, Small Enterprise Assistance Funds and enterprise funds have mobilized additional capital for investment-starved companies. African government-backed entrepreneurship funds could do the same by participating in blended finance deals with development finance institutions, social-impact investment funds, local banks and other market players to back growing firms.



<h4 class="wp-block-heading">Measuring success</h4>



While not actively managing the funds’ portfolio investments, governments have a key role to play in guiding the funds priorities. Priorities may vary by country and given Africa’s growing rates of unemployment, funds should prioritise job creation by evaluating investment on key performance indicators. These would include the number of jobs created per dollar invested, indirect jobs created per dollar invested, and average salary of job. In addition to job creation, governments can direct funds to focus on specific sectors either in need of increased capital or high-growth areas in local economies.



Beyond establishing investment criteria, government-backed funds should prioritise rigorous measurement of investment results and long-term data tracking to inform future investment decisions. The UK British Bank regional growth fund found the cost per job created varied considerably by project from £4,000 to over £200,000. It concluded that a better allocation of funds could have led to thousands more jobs created for the same resources.



Data driven investments can not only lead to a better results, but further curtail issues around potential mismanagement of funds.



Tackling Africa’s job creation challenge requires innovative thinking and initiatives that support private sector-led growth. Looking to the model of Small Enterprise Assistance Funds and enterprise funds, African governments can spur local ecosystems and drive new private capital to regions today seen as unfriendly or too risky to outside investors.



Properly structured investments today could yield much larger dividends tomorrow.



-Aubrey Hruby; Senior Fellow, Africa Center, Georgetown University



&#8211;The Conversation



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Entrepreneurship Funds In Africa: Distinguishing The Good From The Bad

It’s a late afternoon in May and Jean de Dieu Kagabo is sitting, not in his airconditioned office, but on the steps of his two-storied factory in Kigali’s sprawling new industrial park. He gazes at the rolling green hills in front of him. It truly is a pretty panorama – Rwanda’s bountiful and verdant landscape.
Train the lens on Kagabo and his picture is impressive too: a successful, strapping young businessman in his shiny new office premises. Look closer and another layer emerges: a young man lost in thought, his silence impregnable.
<img loading="lazy" decoding="async" class="alignleft size-medium wp-image-2996" src="/wp-content/uploads/2017/04/Jean-de-Dieu-Kagabo_3404-1024x695-300x204.jpg" alt="" width="300" height="204" />
When he finally speaks, it’s with emotion.
“No one from the outside can feel the pain on our behalf. No one can feel the pain of the Rwandans more than us [Rwandans],” says Kagabo, the 34-year-old founder and director of Soft Group, a consumer goods company that started with manufacturing toilet tissues and is one of Rwanda’s most successful SMEs today.
“We have seen the reality, we live in the reality, we know where we came from, we know where we are and we have hope for the future,” he says, summing up Rwanda in one breathless sentence.
Kagabo was in Ndera, on the outskirts of Kigali, during the 1994 genocide, when his father was among the one million Rwandans killed. He does not want to revisit the pain that followed, but says it turned him – the happy-go-lucky 14-year-old that he was – into a man overnight. The memories of those 100 gruesome days still make him uncomfortable.
“My father had a petrol and transport business that was doing very well, but after he died, we lost everything. Even paying school fees became difficult. I shouldered responsibilities from a very young age,” he says.
Kagabo had no option but to finish high school and think of ways to make ends meet. His older brother had mismanaged much of his father’s fortune. With a capital of $3,000, Kagabo started out by importing cars from Dubai to Kigali, selling them for a profit in the local market. He then attempted to revive his father’s petrol station business. He was too young to convince the companies he approached for fuel and credit, but he presented them with business proposals and succeeded. He moved to Uganda to broaden his market, but that’s when his mother died, and he became a guardian to his two younger sisters. He had no option but to return to Kigali.
At the time, there was a new buzzword in Rwanda – China. He took advice from a friend who had studied in China and decided to head to this new land of opportunity. He picked up a few words in Mandarin and was soon on the plane to Guangzhou.
“China was advertising in Rwanda in the early 2000s. I didn’t know what I would do when I got off the plane in China. I knew I was taking a big risk,” he says.
Kagabo attended trade fairs while there. That’s when he saw opportunity in manufacturing fast-moving consumer goods and started looking for the right machinery.
In 2008, with $20,000 from his savings, he set up a small rented office overlooking a scrapyard in Kicukiro in Kigali. This is where he has been since, only recently moving to the industrial park.
He decided to provide Rwandans with the goods they needed every day, and started by manufacturing toilet tissues, eventually diversifying to kitchen towels, shampoos, soaps and sanitary napkins.
Kagabo says it took a while for his business to become profitable. It was not easy and he had to keep reinvesting. His target was the low-end mass market, the small groceries, retailers, hospitals and schools in Rwanda and the rest of East Africa.
At his new warehouse in Kigali’s industrial hub of Masoro, diligent staff test-run new imported machines that roll out reams of toilet paper.
“I bought my own factory. There was nothing here [in the new industrial area] two years ago. The Rwandan government is a gift from God,” he says.
With its new investor-friendly policies, Kagabo sees plenty of business opportunities in revitalized Rwanda.
Kagabo has invested $1.2 million in a new recycling plant for producing biodegradable woven plastic bags for farmers and manufacturers to pack farm produce. The new facility overlooks his factory, on one of the hills.
“Rwanda is encouraging agricultural businesses and they all need packaging. There is a big market for woven plastic bags,” he says.
Kagabo also says his company is the only one manufacturing drinking straws in Rwanda, and has been doing so for the last three years.
“Traditionally, Rwandans used natural straws, but these were considered unhygienic and the government banned them. People saw it as a problem; I saw it as an opportunity,” he says.
Be it tissues or straws, Kagabo feels it’s all about changing mindsets.
“The leadership is taking the time to educate people. The government is encouraging Rwandans to improve their hygiene and it has worked,” says Kagabo.
Kagabo has done well for himself. He lives in an upscale gated community in Kagugu; prized real estate in Kigali, drives a Mercedes ML350 and parties in Kigali’s nightclubs, mostly at the Legacy Lounge at the Hotel des Mille Collines by Kempinski.
He says he continues to look after his sisters, funding their education. One of them is a student of psychology in Brussels and the other is studying public relations in South Africa.
“I will feel settled only once they are settled,” says the still-single Kagabo.
Recognition has also come his way. In 2011, the Rwanda Development Board honored him with the Young Entrepreneur of the Year and Best SME in General Manufacturing awards.
“My company is still small, but my ambition is to help my country’s economy grow and be a part of its progress. I am grateful I have come this far through hard work.”
Like many in his country, Kagabo struggles to put his traumatic past behind him, but his success in rebuilding his life has seen him become a role model for Rwanda’s youth.

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