After stepping back from investing in export-focused businesses in Ethiopia, Renew Capital, a venture capital firm that began life as a private equity firm, is expanding.

“We did [private equity] for 10 years in Ethiopia, and it didn’t work. We have been through so many painful learnings and had to pivot and change up our investment model,” Matt Davis, Renew Capital’s CEO, told TechCabal.

The firm will invest between $50,000 and $500,000 in more than 40 asset-light asset-light and tech-enabled businesses within a year. It has opened its West African portfolio by investing in Affinity, a Ghanaian digital bank.

“We believe that the [Affinity] deal is going to open the gateway for us in West Africa,” said Chuka Ofili, Renew’s investment manager for West Africa.

Renew Capital runs two funds: a $6 million angel syndicate and a $15 million follow-on fund. The  $6 million fund powers an accelerator program that offers startup executives management training, digital marketing, and fundraising support. 

Startups that hit the metrics Renew Capital sets during the accelerator program will get up to $4 million in follow-on funding. 

“We invest $150,000 on average into a high volume [of startups],” Davis said. The firm will accept around 50 startups into the accelerator, with only 20% receiving the average follow-on check of $1.5 million. 

Besides investing in startups, it partners with foreign governments like Canada and the United States to promote investing in Africa. “We have this passion to change the way the world views Africa from a place of giving to a place of investing,” Davis said. As part of this partnership, Renew Capital invites foreigners to Africa as it pitches investing on the continent to them. 

“They have no clue what’s going on here, so we bring them here and they spend a week. It helps us because we need people to think differently (about investing in Africa),” Davis said. 

Matt and his wife, Laura Davis, the managing partner, run the firm together. “It’s our child,” Matt said about Renew. While acknowledging the risks of a couple running an investment firm, he told TechCabal that working with his wife has been “amazing.”

“Getting married [to Laura] is the best decision I’ve ever made. She has a unique set of skills that are very different from mine. I design and come up with the concepts and she executes them and turns them into results,” he said. 

TechCabal spoke to Matt Davis for this interview in which he shared Renew Capital’s investment thesis and why they are backing African startups. 

Most of your portfolio companies are based in East and Southern Africa. Why the shift to West Africa, especially Nigeria?

Davis: Our vision is to be in 27 countries and we are currently in 14 countries.  You have to be extremely intentional about country selection because each country has its own unique risk profile and opportunities. We spend a lot of time evaluating countries. As far back as 18 years ago, we knew we wanted to invest in Nigeria but we had to be ready. 

We had to learn and make our mistakes because when we go to Nigeria,  we would have to be on our A game. I didn’t feel we were even close till now. Nigeria is going to become one of the major global powerhouses, both from an investing and economic perspective.

Right now, I think the country’s leadership is trying a big shift and it is starting to make progress, although it’s painful because change is painful. The indicators we track allow us to monitor, on a fairly regular basis, the movements that are happening at the country level. Those indicators show that it’s a good time to start investing in Nigeria despite the current state of the currency and the macroeconomic environment. 

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Nigeria is going through one of the worst economic conditions in thirty years. How are you considering that when you are investing? 

Davis: I think it’s cyclical. I know it’s painful for the country to be going through this but I think it’s growing pains. In a way, it is a fortunate pain because the country has to rebuild fundamentals. 

Just like a business, Nigeria got overlevered by borrowing and spending a lot and now the revenue needs to catch up. During the global financial crisis when Spain, Portugal and Italy had to go through a painful period and now they are doing alright. 

Things will improve, judging by the sheer size of Africa and the size of Nigeria within that ecosystem. I won’t say you’re too big to fail, but the will and the strength of the population will make the gears start to click. It is going to take some time, but the country will get there. 

What is your investment thesis?

Davis: Finding amazing founders comes first. We think the future is Africa, but the people who are going to build that future are trustworthy,  focused, and very disciplined founders. We look for them in any market that we enter. We are sector-agnostic. 

We go after tech-enabled, highly scalable companies that are asset-light and disrupting industries by eliminating massive friction that has prevented those industries from getting to the enormous population that needs to be served. It all comes down to finding amazing founders. 

What do you think is the difference between the East and West African tech ecosystems? 

Davis: From what I see in our pipeline, I was surprised to realise that the Nigerian tech ecosystem is more mature and humble with valuations than I was expecting.  In East Africa, now, I feel like there’s a little bit too much hype and startup euphoria that needs to be hardened. 

Founders in West Africa understand that the trust band is low for startups generally in Africa. We all have to prove ourselves. In East Africa, you hear founders wanting a $10 million pre-seed valuation, which is ridiculous.  

You have been investing in Africa for a long time. What would you say are your biggest lessons? 

Davis: My biggest lesson learnt is that we are always learning. As soon as I think I’m smarter than the market, that’s when I fail. You have to constantly be in learning mode and walk into every situation with your eyes wide open. I always say to trust nothing but try everything. You have to just really be committed and you really have to be here. You need a great team and you need people you trust. 

What are your red flags? 

Davis: Transparency is the biggest one for us. I made some big mistakes early on so when founders are cagey and don’t share their pain problems quickly, we are worried that something else is going on and there’s a bigger risk happening. 

We have three criteria: coachability, scalability and trustworthiness. We have deeper levels of analysis that we screen founders on but it fails broadly under these three. The number one red flag is lack of integrity and we will walk away from the deal pretty quick if we sense that they are not trustworthy. 

Do you invest in startups without product market fit? 

Davis: Although it is very rare, we are willing to if the founder is very strong. We like to see that there’s market validation in the form of revenue but we will consider if it’s an exceptional team. Even if they don’t have product market fit, they should have a minimum viable product and show early indicators of great traction. 

They have to have some key performance indicator that shows that there is market interest in what they’ve built and revenue is wonderful. 

What does your investment process look like? 

Davis: We prefer convertible notes for $50,000 to $500,000. We write a fairly high number of those checks and for me, that’s better than any due diligence in the world. We put real money into a company, work with them and see how they perform. Then we get ready to invest in them again and this time we bring others around. We help them get through that funding raise as quickly as possible.

How do you pick the startups you invest in? 

Davis: We have a structured process. The first phase is an exercise where we want to see how the founders perform. A lot of companies might feel like they are beyond the stage of having to go through this but that’s not what we’re looking for.

Then our investment managers have their screening process and we let them focus on screening deals, then they present that to our investment committee. At this point, we start to engage our global network of investors. We often have deal calls where our investors can join in.

Finally, we sit down with the founders and talk terms and if everything goes well, they go through due diligence, which is heavy on the legal side. We are trying to make sure they are ready to get a bigger check from us in the future.