9 Mistakes Africans In The Diaspora Make When Investing In Africa

More than 30 million Africans live outside of their home countries. The financial capability of Africans in the diaspora is evident in the high remittance figures that Africa receives annually from its foreign-based communities.

According to estimates, that figure hit a record $40 Billion (2.6% of the continent’s GDP), not counting informal transfers. As of the end of the second quarter of 2022, Nigerian diaspora remittance to the country was $10.11 billion. Also, it is estimated that Africans in the diaspora save an estimated $53 Billion annually. Most set part of their saving aside for investing in Africa.

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These stats and the fact that one-third of Africans in the diaspora are in the middle class make them a formidable force for Africa’s growth. Despite the African diaspora’s eagerness to contribute to the continent’s development, they often fall into avoidable traps that void their intent.

What are the main obstacles to doing business in Africa?

Africa is home to the world’s fastest-growing economies and consumer markets. The continent has outpaced the global average GDP growth rate in recent years.

With the increase in population, urbanization, and the rapid spread of access to the internet and mobile phones, the continent’s burgeoning economies offer great opportunities for expansion in different sectors.

Despite Africa’s impressive growth, there are still risks to doing business on the continent. Here are some of the major obstacles Africans in the diaspora face when doing business in the continent.

#1: Finding skilled labor

A report by World Bank in 2017 revealed that firms increasingly rate workforce skills as the biggest constraint to doing business in Africa. The skills gap in Africa’s labor market is still very high. Although there are youths in Africa, finding skilled talent is a significant problem for companies looking to scale their operations.

Most African countries have misaligned school and training programs. Higher education systems in most African countries do not align skills with the labor market. Therefore, most graduates are unable to fit into the 21st-century working environment.

The problem is that most schools focus more on theoretical capabilities rather than critical thinking. However, Africa has a young and eager population that, when given the proper training and skill set, will succeed at any task.

#2: Electricity

Lack of access to electricity in Africa is another major challenge that Africans in the diaspora face when doing business in Africa. It is hard and frustrating to deal with incessant power outages. South Africa has been forced into stage 4 load-shedding and the rationing of electricity.

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The menace increases the operational cost of business as most businesses have to rely on diesel generators for power. This further leads to the price of the finished products.

#3: Logistic challenges

Logistics in Africa can be challenging since the continent’s infrastructure is still growing. There is difficulty in getting goods efficiently to the end user. Therefore, many manufacturers are forced to invest more in logistics to source their raw materials and deliver the products to the end users.

Even more challenging is for people to meet up to facilitate business transactions and deals, as the region prioritizes face-to-face meetings to build trust.

#4: Harsh government policies

About 65% of the quartile of the World Bank’s Ease of Doing business Index is occupied by African countries due to the ever-changing and challenging regulatory landscape on the continent. It is often challenging to start a business in Africa or get regulatory permits.

Even though there seems to be significant progress regarding the ease of doing business in Africa, more must be done to make Africa competitive on the global stage.

#5: High cost of securing capital

The interest rate on capital to start a business in Africa is very high compared to other continents. Bank loans in the continent come with double-digit interest rates due to the perceived high risks of doing business. Another reason for the hike in interest rates by commercial banks is the lack of tools to accurately ascertain a company’s creditworthiness.

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Repaying these high-interest rates limits a company’s ability to reinvest in the business to boost its growth. Thus, businesses find it harder to scale their operations for years because they are paying off debt.

9 mistakes Africans in the diaspora make when investing in Africa

While Africans in the diaspora are mostly eager to invest in Africa, the experience doesn’t always end well. From going broke soon after starting to finding it difficult to scale, one single mistake can end your dream of investing in Africa.

Sadly, every failed investor often works hard to discourage others from investing in Africa. Avoiding the pitfalls we will highlight below can guarantee a successful investment in Africa.

#1: Starting too many businesses at a time

There are many business opportunities in Africa, but starting one can be daunting. When you start too many businesses at a time because you see low-hanging fruits in them, you lower your chance of succeeding in all of them.

Instead, focus on building something of value that you will be known for. Build a business that identifies and solves a problem. Wait until your first business has become self-sustaining before moving to a new one.

#2: Lack of a business plan

Too often, Africans in the diaspora invest without critical thought and research. Before investing in a particular venture, research needs to be conducted on the target market. A good business plan will help articulate a strategy for starting your business.

It also provides insight into steps to be taken, resources required for achieving your business goals, and a timeline of anticipated results. In fact, businesses with concrete plans grow 30% faster than those without a plan. You should also ask yourself if there is a minimum capital requirement in the country you want to invest in.

#3: Not accessing the risks

Before you think of investing in Africa, you need to do a risk assessment of the business you intend to start. Most Africans in the diaspora underestimate the risks of starting a business in Africa.

Although Africa is an emerging market with lots of opportunities, it is also volatile. Hence, accessing business risks before starting will save you from costly circumstances such as changing government policies and frequent conflicts such as the case of xenophobia in South Africa.

#4: Choosing the wrong country

Another costly mistake Africans in the diaspora make is starting a business in the wrong African country. There are some countries with high market risks (and high business opportunities). On the other hand, there are those with high-risk markets (and low business opportunities for investors).

There are also countries in Africa with low-risk and high business opportunities. Another instance of choosing the wrong country is investing in a country where the available infrastructure doesn’t support your idea. For example, an electric vehicle is a good investment but some countries don’t have policies or structures to support it yet.

While Nigeria seems like the best place to start making and selling electric vehicles because of its huge population, the country has near-zero charging stations and constant power cuts. The combination of the two will bring such an investment to its knees.

#5: Emotional decision

No good business decision can be made from an emotional perspective. For example, you might want to invest in your home country but your home country may not be the best market for your industry. Perhaps, the investment decision was based on a business idea from a relative or a friend in your home country.

Instead of making your investment decision based on emotion, base your decision on statistics. It is OK to aspire to invest in your home country. However, if your home country lacks the right policies and infrastructure to support your business model, take it to a country that is ready.

#6: Not going high-end

Another mistake Africans in the diaspora make in their business is not selling to well-established businesses in Africa or limiting their products to African markets. Targeting big businesses or foreign markets can boost your profit margin and facilitate the growth of your business.

Although Africa’s spending power is increasing, it is still not there yet. Hence, you need to make sure that the quality of your product or service can compete favorably in the foreign market. This is crucial in the early stages of your business.

Also, avoid the lure to sell sub-standard products to maximize profit as Africans can easily identify and boycott such products for a better alternative. In Africa, a good name is worth more than gold. You need to work hard to keep your brand image clean.

#7: Copy-and-paste business model

Instead of importing ideas and trying to implement them as they are, Africans in the diaspora should refine the ideas to fit into the local context. Investors in the foreign community make a broad market offering instead of identifying a specific problem in the market and providing a solution to that problem.

For example, Nthabiseng Mosiav understood that most African countries had an energy problem, particularly in rural areas. She saw solar power as a way of overcoming the challenge. However, she also understood that most Africans in rural areas could not afford to pay for a solar setup.

To overcome this limitation while solving the problem, she created Easy Solar, a company that provides a pay-as-you-go solar solution. This model proved to be the game changer and the company has continued to enjoy exponential growth since its inception.

#8: Investing in futuristic ideas

Another mistake Africans in the diaspora make is not knowing how to recruit skilled employees. The importance of having skilled employees in a business venture can never be overemphasized. Your business will struggle to get off the ground if you don’t have the right workforce to drive it.

Africans in the diaspora that wants to invest in futuristic ideas in Africa might suffer if they don’t recruit skilled employees. Since STEM education is just taking off in some African countries, it may take a while to groom the right employees to handle futuristic ideas.

#9: Unrealistic expectations

Too often, many Africans in the diaspora want to come in fast and make a quick win – but it doesn’t work that way. Every business/market is unique in its own way. For some businesses, that thinking may work while in others, it takes years of a sustained push to see the desired result.

It takes time to develop the relationships, network, and partners needed to navigate the business development process successfully. To build a long-lasting business venture in Africa, you need a great dose of patience.

Conclusion

African countries are rising quickly. Every week the continent boasts of events, Bootcamp, competitions, or hackathons. All these will help to groom employers for 21st-century jobs which will give Africans in the diaspora a larger employee pool to work with.

Even though Africa has a growing market with lots of opportunities, it is important to critically analyze the market, government policies, and workforce to determine the type of business that is most suitable in the country. If you can avoid the mistakes that we mentioned, you will sing a different song.