Patient capital, diverse exits: Verod-Kepple’s vision for the future of African startups

Armed with a $45 million war chest, the Verod-Kepple Africa Ventures (VKAV) leadership team—Ory Okolloh, Ryosuke Yamawaki, and Satoshi Shinada—have decades of experience operating and investing in Africa between them.

Yamawaki founded Japan’s embassy in Botswana in 2008 but left after two years because “there’s no equity upside to being the founder of an embassy.”

He then moved to Mitsui, one of the largest investment houses in Japan, just as the company was expanding into Africa. After an MBA from Berkeley, he launched Kepple Africa Ventures with Shinada, who joined after investing in energy and infrastructure projects in West Africa for seven years.

Over the next three years, they invested in over 100 African startups. “We are not afraid of making mistakes, but we fear not learning anything due to lack of execution and speed,” was Kepple’s mantra as it invested between $50,000 and $150,000 in each pre-seed and seed-stage startup it backed.

Following the full deployment of its $20 million fund in 2021, Kepple Africa, which deliberately structured itself as a “hands-off” fund from a portfolio support perspective, was effectively shut down to align with a new focus on growth-stage startups. (Yamawaki and Shinada still monitor, track and report on Kepple Africa portfolio companies.)

The pair then partnered with Ory Okolloh, a tech and investment professional in Africa with experience at Google and Safaricom, to start Verod-Kepple Africa (VKAV), a venture capital fund that is partnered with Verod Capital, a Lagos-based private equity firm. The firm’s average ticket size is between $1 million and $3 million and it has invested in 11 growth-stage startups, like Moove (a Kepple Africa portfolio company), Shuttlers, Chari, and Julaya.

While Verod-Kepple has shed the seed-stage investing and speed that Kepple Africa was known for, it still retains the Japanese connection of its predecessor as it invests in growth-stage startups at the Series A and B stages. The venture capital firm typically brings on its limited partners, mostly Japanese companies, as co-investors in deals and, in some cases, eventually sets up an acquisition event for its portfolio startups for its investors.

TechCabal spoke to all three partners for this interview as they shared their investment thesis and why they are backing African startups.

Venture capital firms and private equity firms differ in their approaches to investment. Why did you partner with Verod Capital?

Shinada:

As the ecosystem matures, more startups are in the growth phase. They’re facing many issues, like governance, operation, hiring, finance, financial reporting, etc. These things are managed much better by Private Equity funds. They have significant stakes in their portfolio companies and try to make a turnaround quickly. They are very hands-on and focused on improving the performance of their portfolio companies.

We thought we [could] institutionalise that kind of experience and knowledge in the VC context if we kept investing in the growth phase of the startups. [Our partnership] also coincided with when we decided to move up from seed investments to Series A and Series B investments.

From Verod’s perspective, I think they wanted to diversify their asset class. Also, as part of their value add to their portfolio companies, they were looking for more tech solutions to improve the efficiency and productivity of their portfolio companies.

Read also: Verod Capital buys out Cardinal Stone’s stake in iFitness

Kepple invested in many early-stage startups in just three years. Now Verod-Kepple has backed 11 growth-stage startups in two years. What are some of the challenges faced by early-stage startups and late-stage companies?

Shinada: For early-stage startups, the biggest hardship is adapting the reality of the African market to investors’ expectations as a tech company.

Startups need to focus on African problems if they want to monetise. But on the other hand, many investor perspectives are shaped by global trends. I think that’s why, between 2020 and 2021, lots of money flew into African copies of global business models that were assumed to be asset-light and tech-driven. It didn’t work because, in Africa, it’s more important to create transactions than to get revenue share by tapping into existing transaction flows with tech solutions.

For later-stage companies, exits are a big headache. To exit, they need to understand what attracts global investors and also, from the perspective of public stock market investors, make an IPO happen. There has been a lot of misalignment between what investors are looking for and what African businesses are doing. No global investor is looking for a single business model with a single market exposure because Africa is risky. Investors are looking for a pan-African, broader, and more convenient index to diversify their exposure to emerging markets.

You have a diverse range of companies in your current portfolio. How do you assess which companies get to be in the Verod-Kepple portfolio? What’s your investment strategy?

Yamawaki: We always look for scalable and untapped opportunities that address some of the biggest frictions in Africa. We have three pillars on our website that represent the lens through which we see those opportunities, to make sure these opportunities are large enough and scalable.

Firstly, infrastructure. We want to back businesses that try to solve friction for the general public that should have been provided by the government. Shuttlers is one: public transportation is perhaps a human right, but there is no reliable and affordable solution for it [in Nigeria].

Secondly, inefficiency solvers. This is solving friction for businesses. For this, we have Julaya.

The last pillar is homegrown solutions. But we have revised that to market creators. Market creators refer to those creating economic opportunities for people based on the changing dynamics of the overall African economy, for instance, increasing GDP.

When it comes to assessment, we look at the deal to see whether the opportunity falls under these pillars very well. We don’t want to invest in models replicated from other parts of the world or businesses that just have a tech layer. We want to back businesses and founders that tackle deep issues and problems in Africa.

Regarding the actual process, we have two IC (investment committee) step-by-step processes with a modest degree of due diligence. After that, we do a deep dive into the details of the businesses and then make a final decision.

You mentioned that you do a modest degree of due diligence. Knowing that private equity firms take due diligence very seriously, does Verod-Kepple rely on Verod for support for due diligence?

Yamawaki: We run Verod-Kepple as a VC fund, and it is independent of Verod. But how our organisation is structured is that we share back and legal office functions, such as legal, finance, human resources, and other support functions, except for the actual investment team.

But this doesn’t mean we have the same list of due diligence for legal or finance. Especially for finance, because if you do the same level of finance due diligence just to check every single evidence of payment for startups, it is overkill.

We adjust our due diligence requirements for VC, but it also depends on the stage. The people behind the scenes who are running together with us are the same set of people [with Verod]. They have deeper sets of knowledge, especially on the risk side; they are aware of a potential risk area.

What type of founder is Verod-Kepple looking to back?

Shinada:

We want the founder to be very visionary and capable of putting that big vision into stepping stones. Having a big vision is not the same as having a big dream. When you call it a vision, you also have to have a robust thesis and background that underpin that big vision.

We also need founders to have global perspectives because we expect competition to come from anywhere, and we also want the founders to have the capability to learn from the successes and mistakes of different startups in Africa and the global market.

We also want founders to be bold enough to adjust their business models. We haven’t seen any founders just prove themselves by following their initial assumptions or initial business model. Most of them have been people thinking about and adjusting their business models.

Yamawaki: We always check for chemistry between us and the founder on a personal level. We have a strong intention to add value to our companies, and to do so, having good chemistry or maybe a personal connection with the founder is very key.

What about red flags?

Okolloh: Satoshi alluded to this earlier, but the first is if there is no pain-market fit. Is there a pain market fit even before the product-market fit? Because if you’re not solving that pain, you might acquire customers, but retaining them would be hard. You might subsidise them initially, but getting them to pay for it becomes difficult.

The second is around people. If there’s high turnover within your team, if you get a vibe when you go to the office. How are the employees feeling? What’s the energy? What’s the enthusiasm? Because these are the things that will sustain you in the long term. So, another red flag we look at is turnover and employee satisfaction.

Another red flag is the lack of transparency. If you have to keep digging around for every little thing, then that’s a red flag. Once we get a sense of a misalignment of values, that is also a big red flag for us when we’re doing our diligence.

What are the ways Verod-Kepple supports its founders and startups besides funding?

Okolloh: Both internally and in collaboration with the Verod team, we cover hands-on support through governance. For example, we’ve helped one of our companies move from an advisory board to a more formal board and helped with drafting a board charter.

We have also helped with everything from recruitment and putting processes in place on an HR basis to ESG and impact. Some of our companies are starting their journey around tracking impact or putting in better ESG measures and we’re able to support that.

The most important one is building a peer network in our portfolio. We firmly believe that the best source of learning, sharing, and even partnership will come from entrepreneurs working with other entrepreneurs. This is a key metric that we will be tracking in terms of the value added that we brought as investors.

Kepple signed a lot of cheques in a short period. Investing in more than 100 startups must have come with lessons. What would you say are your biggest learnings from investing in Africa?

Yamawaki: One thing that struck me most is that the total market size matters. As a startup, starting in one specific country, it is important to have a gigantic ambition or market potential. If you become a niche in a single country in Africa, I don’t think you can be a VC-backed business just because of a lack of scalability or potential maximum size, or if it takes 30 years to get the majority market share in a given market, then it’s not a VC market.

It takes time to build a viable business model; you cannot just launch your app and then do the marketing. Often, you have to go up and down the value chain and build everything for it to make sense. So because it takes time and money for it to be justified, it needs to have a large potential market size.

As Africa emerges from the post-bubble valuations, how does Verod-Kepple think about future investments?

Okolloh: It’s cyclical. That’s the first thing to remember. For many folks, this is the first downturn in the African VC market, but there was [a downturn] in 2014/2015 and going into 2016. Out of that came a lot of the winners that we see now in the space, like Paystack and Flutterwave. It’s important for investors not to see this as a one-off or a unique phenomenon. It’s just the cyclical nature of VC across the world, and Africa is no exception. I think there was some correction that needed to happen. Our perspective is that it’s a great time to be investing and deploying capital. It’s also a great time to see the founders who make those tough decisions, pivot early, adjust to the realities and sharpen their business models.

For the companies facing challenges that are out of their control, especially on the macro side, [we are] partnering with other investors, other sources of capital and resources that we can bring to bear to help them navigate this tough period.

Shinada: It’s time that patient founders should be rewarded with patient capital. Before this market downturn, founders who wanted to make quick money were rewarded by quick money investors. The good thing is that those who wanted to make quick money already died and those investors who had a very short-term incentive also burned a lot because of this downturn.

How does Verod-Kepple think about exits?

Yamawaki:

We need to have a good portfolio of different types of exits. Unlike in other markets, we cannot just rely on IPOs. Three types of exits are possible: secondaries, buyouts and IPOs.

For secondaries, we cannot just wait for it to happen. We also need to craft it when the timing is right. The biggest number of exits that we can make from our portfolio will be from secondaries.