Steve Beck, Co-founder & Managing Partner at Novastar, writes:
I love that quote from the Spanish poet Antonio Machado. It captures the entrepreneurial spirit of the adventure. A journey that starts with a vision of what could be, perhaps an outline plan, and unfolds along a path that turns out to be far more challenging and exhilarating than ever expected.
The Novastar adventure started way back in 2009 when we began making seed investments in East African start-ups with our own money. Our vision then wasn’t a VC fund. Those first investments were opportunistic attempts to test a hypothesis. Could we find early-stage, backable businesses that would scale by solving the biggest problems for the many, not just the few? Companies that addressed the unmet need for high-quality, affordable basic goods and services like education and information access.
It would have been irresponsible to invest other people’s money. We didn’t yet have a proof-of-concept. What we had was more a reasonable belief that Africa’s consumers represented a neglected market opportunity that could be met by entrepreneurs with the character, capacity, and ambition to innovate business models and adapt technology to serve them.
I say it was belief that was reasonable. The development of mobile tech and M-PESA had created an enabling environment for new business models. The financial crisis of 2008–09 prompted the repatriation of talented African diaspora who had been exposed to venture-backed entrepreneurship in the West. Some of them were talented, ambitious and crazy enough to invest their savings and max out their credit cards to start a go-big-or-go-home venture, rather than work in the family business.
Our first investment was in NewGlobe Schools Inc., the EdTech company then trading as Bridge International Academies in Kenya. We invested seed capital when the company had one school operating in Mukuru, Nairobi. Mobile technology and the cloud put dynamic expert lesson guides in the hands of teachers, and school management systems on mobile handsets for headteachers. Their mission was to improve educational outcomes for primary school kids — a $300 billion addressable market. This was a business model that was only economic at a very large scale…but what if it worked? Commercial growth would transform the educational outcomes of millions of children. In subsequent years, NewGlobe would go on to build over 400 affordable private schools before pivoting to provide its full-stack, cloud-powered education management platform to serve 2 million students across 8,000 government schools in Africa and India and counting.
A few months later we backed a Stanford educated Ethiopian who had returned to Addis to build a SMS-driven mobile information portal called 4Afri Media (there weren’t any smartphones in Ethiopia in 2009!). In ten months, that business grew from 100,000 to 6 million weekly users before a massive retroactive increase in bulk SMS prices forced the business to close. We lost our investment but glimpsed what happens when you find product-market fit where there’s latent mass market demand.
Like the entrepreneurs we back, we continued bootstrapping to build a proof-of-concept portfolio, attracting some likeminded friends to invest with us. Among them in 2011, was my Novastar co-founder, Andrew, who had run numerous venture funds in Europe for 15 years. Andrew and I began to wonder if the opportunity could support a VC fund.
When we approached institutional investors with the VC fund concept, we were inviting them to join a moving train. We weren’t sitting in a siding waiting for someone to capitalize the strategy. Our pitch was, “We’re going ahead whether you invest or not. The question is: will you partner with us to expand and accelerate this venture strategy?” It was worth going for. Even if it didn’t work. That was our mindset.
We were told by experienced investors in Africa that VC wouldn’t work there. The development finance institutions were used to backing PE growth funds focused on job creation. We weren’t raising to help SMEs grow their business. We wanted to back XS start-ups to help them grow to XL, or blow up trying. We often resorted to the negative sell — it’s not yet proven, it’s going to be hard, we may lose half the companies we back, you’re going to have to have a cast-iron constitution…
The unproven nature of what we were doing meant even our most enthusiastic supporters were cautious; our early investors required our first fund be capped at $80m even though we were oversubscribed. We thought the deal flow was there but others weren’t so sure, and many of them had been investing in Africa for decades.
Novastar I (and Novastar II that followed in 2018 when we opened a Lagos office), was based on a simple premise and one that guides our investment thesis today: opportunity lies in companies which provide the basic goods and services that everybody needs. Most people in sub-Saharan Africa, if they can access these at all, pay a ridiculous price per unit consumed compared with what you and I pay. Take data — users in Africa habitually buy expensive small data bundles and are then forced to flick their Facebook and WhatsApp on and off to prevent burning through their data. What they pay per MB is way more than what anyone pays in the West. That’s one example of dozens of markets characterized by latent demand, crying out for disruption through innovation.
The inspiration and fun of our work comes from partnering with outliers — the gritty optimists — who are called and driven to solve these issues. These tend to be people who are not sitting on the normal part of the bell curve. They see a future many can’t see and are instinctively drawn to the path less travelled… or not yet made.
Our underlying motivation is, and has always been, about creating significant, enduring value in the broadest sense: financial, social and environmental. That’s our core motivation. I don’t want to waste my time working on incremental solutions to marginal problems and inconveniences for the top 10% of the earth’s population. We love partnering with mission-driven entrepreneurs building businesses that address the biggest problems for the many, not just the few; for the planet, not just people; for future generations, not just this one.
But we have always been absolutely clear that impact would be stunted if the businesses we backed were not commercially successful. I don’t buy into the myth of scarcity. I don’t buy the zero-sum thinking that you can either do well, or do good. Or you can do good after you have done well. We came to this with a generative mindset; we can do both together. We don’t label what we do as ‘impact’ anymore because it’s a phrase that’s become vague through overuse. For us it’s about creating enduring value for the customer, for the companies and our investors, and for the wider community and the planet.
What we’ve been doing is hard. We’ve had our heads down. 13 years on, with $200m AUM, 20 portfolio companies and a 20-strong team in Lagos, Nairobi and London, we feel able to pause for breath and look up. We’ve updated our website, and plan to use this Medium blog to share the things we continue to learn day-by-day as we walk the path.
