Milain Fayulu SM '22 simultaneously pursued a master’s degree in political science and developed a new enterprise with the support of a fellowship at MIT’s Legatum Center for Development and Entrepreneurship.
In 2021, 80% of all US-based venture capital (VC) investments on the African continent were concentrated in just four countries: Nigeria, Kenya, South Africa, and Egypt. However, collectively, these countries only account for 32% of the continent’s population and 50% of its gross domestic product (GDP). Why is venture capital flowing to Africa overwhelmingly concentrated in just four countries?
Few industries have epitomized the importance of networks like the venture capital industry. Despite its perceived sophistication, the VC world runs on the simple principle of social capital, which is derived from the (social) network of professionals, experts, and other venture capitalists in which the VCs are embedded.1 As investments overlap with social networks, they tend to favor the most connected destinations. The less integrated ones suffer from a lack of reputational inputs, resulting in a higher perception of risk. This creates a self-perpetuating mechanism, ultimately resulting in a winner-takes-all situation. VC funding outcomes in Africa provide a fascinating glimpse into this network capitalism. In a continent with few mature capital markets, prohibitive interest rates for small and medium-sized enterprises (SMEs) and heavy reliance on foreign aid, the relatively novel asset class of VC is set to disrupt the financing ecosystem.
My research finds that since VCs primarily make investment decisions based on familiarity (existing networks) they have strong biases in favor of well-networked African countries as investment destinations.
My research finds that African access to elite American universities increases access to VC. This occurs because VC allocations are largely based on the credentialed networks formed at elite universities. On the African continent, a few first mover countries have institutionalized network advantages by a) increasing the flow of co-nationals to those schools; and b) refocusing network building and cultural content towards their own countries while on campus. My research finds that since VCs primarily make investment decisions based on familiarity (existing networks) they have strong biases in favor of well-networked African countries as investment destinations.
Moving from macro to micro
When investigating the determinants of venture capital investments across Africa, scholars have focused on the role of country level factors. In some cases, they advance factors such as accounting standards, business freedom, fiscal health and judicial effectiveness.2 Others point to digital infrastructure, high technology exports, internet coverage and market size.3 There are also those who advance the role of public markets and capitalization.4 Yet, a rich body of literature has argued that the role of networks is a determinant in shaping economic outcomes. However, too little focus has been placed on understanding the role of interpersonal relationships on funding outcomes in Africa. Leaning into this idea, I explore the social capital of African startup founders and how it signals abilities, norms and values.
An elite network theory of VC investments
As the number of African graduates from elite universities has increased over the years, so too have their interactions with American students. It is important to consider how the interactions between both groups shape investment patterns. I contend that network effects tend to create monopolistic outcomes. The US elite institution apparatus has a long tradition of selecting members of the top one percent of Americans to attend, thereby perpetuating inequalities.5 Less known is how this American elite education concentration impacts wealth creation and distribution in other countries. To shed some light, consider the fact that most top fund managers (as measured by investment to exit ratio) studied in the top 20 US universities (as per US News and World Report).6 While attending these institutions, VC managers both past and present, met a population of African international students. They tend to come overwhelmingly from a handful of countries referred to as “the big four”: Nigeria, Kenya, South Africa, and Egypt. I hypothesize that this asymmetrical matching facilitated by the university network translates into the investment differentials observed across African countries. Specifically, African countries with higher student representation at US elite universities will receive commensurately more VC investments. I argue that this is because social ties developed at the university level carry through investment theses. In other words, fund managers tend to invest in markets with familiar founders. This familiarity extends to business standards and practices. Since social ties are reinforcing, early connections yield long-term advantages for this select group of countries.
The power law
Network effects and positive feedback loops explain the concentration of investments in specific African markets. The buildup of ties between American investors and African founders from the most highly represented countries create a phenomenon of preferential attachment.7 Here preferential attachment refers to a process whereby each additional student from the big four strengthens existing social ties with American networks. The preferential attachment process concentrates power among a select few.8
MIT offers one example of this process. The institute’s rich entrepreneurship ecosystem facilitates connection between students and VCs. It does so through accelerator programs, fellowships and networking events. Participating students and their ideas become more visible and therefore can significantly improve their odds of receiving financing by actively tapping into those opportunities. Similar to its peer elite institutions, MIT’s African student population has historically been composed largely of students from the big four. Hence, they tend to capture a larger share of those signaling opportunities relative to their African counterparts. As a result, capital purveyors develop familiarity with those markets over time and deepen their social capital ties within it.
During my time at MIT, I personally demonstrated the power of elite networks in funding outcomes. I come from a non-big four country, the Democratic Republic of Congo, but I was able to create strong signaling for my venture by leveraging the school’s network. As a result, I obtained substantial funding support for my idea. My own story provides anecdotal support for my argument that ties to elite universities are positive for startup funding outcomes. However, I wanted to examine the evidence to determine how much of African venture capital trends are explained by elite university networks.
Similar to its peer elite institutions, MIT’s African student population has historically been composed largely of students from the big four. Naturally, they tend to capture a larger share of those signaling opportunities relative to their African counterparts. As a result, capital purveyors develop familiarity with their markets over time and deepen their social capital ties within it.
I adopted a multimethod approach to empirically examine my theory. I conducted semi-structured interviews to determine the role networks may have played in shaping investment outcomes for various stakeholders, including VCs, African entrepreneurs, and African students. I also interviewed researchers and ecosystem builders to probe their beliefs about the drivers of investment concentration and to identify control variables. Additionally, I collected statistical evidence about African enrollees at elite US universities. To study their post-education startup funding outcomes, I collected a unique dataset from “Africa The Big Deal,” a database updated on a monthly basis that lists all reported funding deals that have exceeded USD 100,000 secured by startups in Africa since 2019. I extracted the complete results for US-funded deals and created a dataset. After excluding all non-top 20 American schools, I was left with 180 deals to investigate. I compared those deals with the broader dataset to determine whether founders who had graduated from elite schools fared better than the rest. I also collected data on total venture deal flow in Africa since 2017 from Partech, a Silicon Valley investment platform.
When examining the nationalities of African students attending the top 20 US universities, Nigeria, Kenya, South African and Egypt overrepresentation stands out. To put things in perspective, they represent 32% of the African population but 60% of elite American university students and 54% of VC funding. This corresponds to my intuition that venture funds are more comfortable investing their money with founders graduating from such elite schools.
The institutionalization of an uneven playing field
The dominant narratives about Africa at the elite university level are those of entrepreneurs and startups in the big four. The cultural content at Africa Business Conferences is almost exclusively Nigerian. People in leadership positions at American universities are compounding this effect by focusing academic trips and tours to these countries with “familiar faces” who, to their credit, act as bridge builders. Recruiting trips from admission teams go primarily to the big four countries. For instance, this summer the Sloan School of Management will visit Nigeria, South Africa, Kenya and Ghana (the 5th most represented country).
These networks contribute to a lack of signaling in other parts of the continent, particularly in Francophone Africa. Francophone students with the language skills and academic aptitude to succeed in elite American universities simply do not apply because of an absence of signaling in their network. I interviewed several African students at both MIT and Harvard who all had anecdotes about how their path was leading to an elite university in France or the United Kingdom until someone in their network encouraged them to think about an elite US university track. Such students are exceptions in that they obtained path-changing information at a crucial juncture in addition to the necessary support to act on it, often in the form of mentoring from alumni from an elite US institution. The work of Eric Pignot’s Enko education is testimony to this. An MIT Sloan alumnus (MBA ’13), Pignot started Enko education with a mission to increase access to the world’s leading elite universities for African students, particularly in francophone Africa, through high quality international education. His school network is now successfully placing students at elite universities worlwide including prominent US institutions such as Yale, the University of Pennsylvania and Columbia. Most capable students who lack such networks do not consistently receive important signals and the related support.9
In early-stage financing, which is the predominant stage currently in Africa, VCs heavily rely on credentials and social networks. In boardrooms from San Francisco to Cambridge, this often translates into following people with degrees from the best US universities. These graduates command greater trust and are found predominantly in English-speaking countries.
Conclusion
Capital tends to flow to founders who happen to come from the trusted circle of elite US universities. Such founders are predominantly nationals of Nigeria, Kenya, South Africa, and Egypt. Existing ties reinforce the dominance of these countries as recipients of venture capital in Africa. However, there are ways to breakout of this status quo and level the playing field for the rest of the continent.
In the US, there needs to be more awareness about the current imbalance in African representation at US academic institutions and actionable strategies to correct this imbalance in a way that is not heavy-handed. Similar to the diversity visa that opened the door to the United States to immigrants from marginally represented countries, universities could signal intent to recruit more qualified students from African countries outside of the identified big four.
Another strategy to mitigate this situation is to devise strategies to create pipelines with US universities, sending students on a meritocratic basis but with a contingency to return home once they complete their education. In addition, exchange programs beyond the big four should be developed so that other African countries can benefit from reverse brain drain. Whenever possible, the creation of satellite campuses of top American universities and research institutes should be considered.
Ultimately, it is up to individuals, particularly from non-networked countries to change the status quo and refocus attention towards their countries. As a student at MIT, I tried to do just that. I was awarded the Legatum Fellowship, I qualified for the Fuse and Delta V accelerators sponsored by the Martin Trust Center for entrepreneurship, I attended pitch competitions, collaborated with the D-lab and my venture was featured several times in MIT News.
Technology can help too. One solution might be to create a digital social network that connects African innovators across the world to Africans at elite US universities to help level the playing field. In the digital realm, one is not subject to obtaining a visa to connect with potential board members or partners, which are critical drivers of efficiency. Such a solution could remove friction, particularly as it relates to the speed of making meaningful connections and establishing new networks. African students from across the institute, irrespective of their country, could spearhead the effort and demonstrate a commitment to Pan Africanism.
In conclusion, this research contributes to the literature on social capital and networks by providing an early look into the structural foundations of Africa’s twenty first century network capitalism. Whereas scholars have traditionally focused their research on foreign aid, international development agencies, and the role of multinational enterprises, I have brought to the forefront a new scholarly view on the literature on core-periphery relationships by focusing on the novel asset class of VC.
1. Alexy OT, Block JH, Sandner P, & Ter Wal, A LJ. Social capital of venture capitalists and start-up funding. Small Business Economics. 2012;39 (4):835–851. doi:https://doi.org/10.1007/s11187-011-9337-4
2. Benali M, El Ghalfiki J. Access to venture capital in Africa: The role of public institutions and corporate governance. International Journal of Business Performance Management. 2021;22(2–3):257–272.
3. Jaoui F, Amoussou O, Kemeze FH. “Catch me if you can” on drivers of venture capital investment in Africa. African Development Review. 2022;34:S117-S140.
4. Oni O. Determinants of Venture Capital Supply in Sub-Saharan Africa. Journal of Economics and Behavioral Studies. 2017;9 No 4(J) :87.
5. Gamoran A. American Schooling and Educational Inequality: A Forecast for the 21t Century. American Sociological Association. 2001;74:135–153. doi:https://doi.org/10.2307/2673258
6. Jain A. These Are the Top Venture Capital Firms of 2020. Entrepreneur. December 11, 2020. Accessed May 19, 2023. https://www.entrepreneur.com/business-news/these-are-the-top-venture-capital-firms-of-2020/361514
7. Newman ME. Clustering and preferential attachment in growing networks. Physical Review E. 2001;64(2).
8. Mallaby S. The power law: Venture capital and the making of the new future. Penguin; 2022.
9. Carey K. How Much Does Getting Into an Elite College Actually Matter? The New York Times. Published March 15, 2019.
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