Re: Facebook IPO vs “Africa IPO”

As of 4pm EDT on May 22nd, Facebook achieved a market capitalization of $66.28 billion (which is based on a price of $31 per share). This is four times the GDP of the DRC, with a population of 71 million. Even more impressive was the split second exorbitant wealth crashing upon Facebook employees at that IPO moment:

The Republic of Facebook: $16 billion (from IPO)/3,000 people =$5,300,000/employee for that IPO nanosecond.

The Democratic Republic of Congo: $15.668 billion/71,712,867 people = $220 per citizen for the entire year

Now that the much anticipated Facebook IPO hurrah is over, I was brought to the attention this like-minded article comparing Facebook to capital markets in Africa: Obviously the article is written in an angel-investor’s tone. There are some interesting points raised that warrant further discussion:

1) Facebook’s gaudy IPO reinforces this basic problem: The rich world is capital-saturated while the poor world has very little physical capital per member of the labor force:

There are plenty of reasons why the rich world is capital-saturated. But a primary reason that was not mentioned in the article is that their labor is more productive. Physical capital increases labor productivity and vice versa so the two mutually reinforce each other. On the other hand, African countries are stuck in a low productivity, low capital investment vicious cycle. Without investments to upgrade equipments (most factories and machines in these factories are STILL from the Colonial days), or leapfrog into new ICT technology, labor will continue to be unproductive. On the other hand, low investments in human capital result in poor returns to physical capital investment. So this is a chicken and the egg dilemma for EVEN OPEN-MINDED investors who have assessed all other risks.

2) Investments in emerging markets like Kenya don’t get funding largely because our capital markets are weak. Entrepreneurs here have little access to the global pool of money:

This is another major obstacle. The size of the capital markets itself is a self-perpetuating prophecy. Studies after studies have shown that diversification in a portfolio is good for risk mitigation. Yet capital markets in every country tend to be overly bullish toward their own country’s opportunities while risk averse towards other markets. This is the kiss of death for African capital markets trying to gain foot-holds in the global capital market pool.

3) Aid-oriented grants and micro-loans are the world’s conventional offer to African entrepreneurs, and they are literally not taking care of business. The “middle market” in many emerging economies generates most new jobs, yet these small and mid-size enterprises are too big for the lauded microfinance revolution, and too small for traditional banks chasing real estate projects.

Well, in many African countries, this “middle market” simply doesn’t exist. I don’t think it really exists as of yet even in Kenya, despite Kenya or Nigeria or Ghana’s economic successes and what the author claims. Despite talks of “middle market” or  promising “middle sized companies” requiring hundreds of thousands of dollars of capital injection, my experience has been that many of the challenges are the same as SMEs – the basic access to reliable and affordable credit – whether it’s for expansion, initial start-up or working capital. Many of these problems are not solvable simply if some magic threshold of foreign capital investment is injected, but are fundamental legal or investment climate challenges that need to be changed via policy reforms and education of financial institutions. For instance, lack of urban planning in Africa is resulting in most suburban areas missing the most basic identification – addresses. Why on earth would any financial institution lend to some company or person located in an unknown jurisdiction?

Furthermore, Western and African definitions of SMEs are very different. Virtually all home-grown African private companies would be SMEs under a US classification. Besides the state-owned or partially state-owned or formerly stated owned enterprises, virtually everybody else struggle because of uncompetitive market rules and practices. It is not a coincidence that the most successful sector in Kenya and Nigeria are the state-controlled telecom and energy sectors. Even state-controlled sectors and companies can bring about innovation and economic growth for the whole country (just look at China). But does that really fundamentally solve the market failure problem of dearth of global capital investments? NO

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