Three tips for investors to get the best out of Africa

• Investors should not give up on Africa as it has an abundance of start-ups
• Growth opportunities are in 'boring' businesses rather than trendy tech
• The real innovation is in distribution rather than in the products
• Simplicity rather than sexy is the way forward for investors

Investors should stop their infatuation with tech start-ups if they are finally to see the potential of Africa realised.

Researchers interviewed 100 entrepreneurs on the continent and found the rapid growth that Western investors crave is not in snazzy technology but in ‘boring’ businesses like cement or land ownership, while distribution is where the innovation is.

Christian Stadler, Professor of Strategic Management, and Ronald Klingebiel, of Frankfurt School of Finance and Management, reveal in Harvard Business Review the three paths for investors to succeed in Africa.

“While African entrepreneurship is thriving, few ventures are large enough for Western institutional investors,” said Professor Stadler. 

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“Another reason is that investors are myopically infatuated with snazzy technology. A more realistic approach to making money in Africa might strike some as humdrum, but it will reap dividends.”

The three tips for investing in Africa are: 

1. Aim for the top of the pyramid: Disposable income sits with the upper middle class, so this is the group to target, rather than the bottom of the pyramid. How? Combine Western standards with African tastes. 

Professor Stadler said: “For example, we found Nairobi’s SuzieBeauty, which develops cosmetics catering to African tastes at a quality matching Western levels."

2. Factors of Production: Where the supply of basic inputs is thin, the researchers found controlling land and other factors of production is a pathway to success.

The most ‘boring’ businesses, such as cement production or land ownership, often reap big rewards.

Professor Stadler added: “If you own a fleet of lorries, you already have an asset to sweat.”

3. Innovation in distribution: The academics discovered overcoming infrastructure gaps matters more than product novelty and this is where the technology comes in.

“For answers to Africa’s infrastructure problems investors should think about mobile, drones, payment plans, small units, and social structures,” said Professor Stadler.

“So technology features in Africa, but not so much on the product side.”

For so long thought of as the ‘next China’ Africa has disappointed some investors, but Professor Stadler believes the huge amount of entrepreneurs can ignite the continent’s economy and overcome its structural problems.

“In places like Nigeria and Zambia they have the highest rate of entrepreneurship across the world,” said Professor Stadler.

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“These three routes to success for investors are more simple than sexy; that is likely why they receive little publicity.

"Yet they are probably the source of most of the recent entrepreneurial growth in Africa and ripe for investment opportunities.”

Read the full article at Harvard Business Review here.

Professor Christian Stadler teaches Strategy and Practice on the Executive MBA and Strategic Advantage on the Executive MBA (London). He also teaches Strategic Management on the Doctor of Business Administration.