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Engineering News: Intel’s Investment Arm Turns its Attention to African Prospects

By: Schalk Burger

The new optimism surrounding future economic prospects for Africa – home to six of the world’s ten fastest- growing economies over the past decade – is becoming more and more evident. The outlook for growth and development remains relatively positive, notwithstanding the pressures being experienced in the continent’s key trading area of Europe, and the countries of sub-Saharan Africa are still expected to grow by an average of more than 5% in 2012.

This reality, together with the possibility of a future demographic dividend, as Africa’s fast-urbanising and youthful population becomes increasingly educated and affluent, has not escaped the attention of the global business community.

There is already tremendous competition for Africa’s mineral resources involving both traditional companies, as well as new powers, primarily from China and India. Cellular and financial services groups are making a serious play for the African consumer and US retail giant Walmart has also made its African aspirations plain, with its recent acquisition of a stake in South Africa’s Massmart.

But there is also fresh interest in the technology sector, a development that is arguably epitomised by the interest being shown in the continent and its technology companies by the strategic investment arm of Silicon Valley chipmaker Intel.

Known as Intel Capital, the entity invests in start-ups and technology companies worldwide and it is seeing significant new opportunity in Africa’s technology value chain, in areas as diverse as infrastructure and content creation.

Intel Capital Africa regional director Sam Mensah says the prospectivity of the continent has also increased as local business adopts global best practices and introduces competent corporate governance structures. In addition, the potential for growth in the technology value chain is material, given that Africa has about 15% of the world’s population, but only represents about 2% of personal computer users.

“The reason Intel Capital continues to invest in technological innovation outside our core business is because, in the long run, it is beneficial for Intel if a country has a vibrant technology ecosystem,” he adds.

“From the perspective of the companies in which we invest, the strategic value that a large Silicon Valley technology firm, with a global network, can bring to a local company looking to expand is significant and goes beyond the value of the investment,” he explains.

Intel Capital does not require companies to match its investment, focusing on young technology companies seeking expansion capital. These companies have typically achieved some market traction in their sector but require external investment for further growth.

The potential and future growth of companies in a region is also considered.

Further, Africa is an important region for Intel Capital, in which it has identified significant growth opportunities for online and mobile content and services.

“Also, we are increasingly seeing reputable international investors entering the market and coinvesting alongside local investors. This is a welcomed trend as we take a collaborative approach to our investments,” states Mensah.

Intel Capital backs strong management teams and supports the companies in which it invests to build the necessary governance structures. Entrepreneurs are mostly young, ambitious people with good ideas but often lack experience.

“We strengthen boards by bringing in expertise to meet the need for strategic guidance that exists in many nascent technology companies,” he says.

Collaborative Investment
“Innovation in emerging markets has created tremendous opportunity for entrepreneurs. A strong technology sector can be a boon to developing countries, improving economic efficiency and creating jobs that pay well,” says Intel Capital president Arvind Sodhani.

“Internet capacity in Africa has gone up from a few kilobits to terabytes, greatly increasing the quantity of access. Investment in undersea cables has increased the amount of bandwidth into Africa almost 200-fold. The undersea bandwidth problem is history. The challenge now is to get the capacity inland, which required further investment in terrestrial fibre and last mile solutions, to get connectivity to where the people are,” adds Mensah.

“What you do once you have connectivity is where the challenge lies now. Bandwidth pricing is no longer the biggest challenge, because competition is driving the prices down. The biggest challenge now is generating enough bandwidth-intensive content and services,” he says.

Africa needs more locally generated content and bandwidth-hungry applications that people want to use. Mensah also notes that mobile devices and not computers are the primary means by which most Africans access the Internet.

This underscores the importance of content consumed on mobile devices and is part of the reason Intel Capital has teamed up with Irish communication technology company Altobridge to improve the performance of existing infrastructure to increase throughput and coverage, he adds.

“The [Altobridge] technology helps mobile operators optimise data throughput and performance on their networks, reducing the need for increased capital expenditure in new infrastructure. This also enables mobile operators to provide telecommunications infrastructure in remote locations where it was previously uneconomical to do so.”

When making investments, Intel Capital considers not just the prospect of near-term financial return but also the potential for long-term strategic return, such as the development impact computers and technology can have in rural communities suffering from infrastructure underinvestment and digital exclusion, he notes.

Specifically, Intel Capital has made investments beyond the prospect of financial return because of the social impact computers and technology can have in rural communities suffering from infrastructure underinvestment and digital exclusion, he notes.

Further, international development finance organisation the World Bank Group’s International Finance Corporation (IFC) has teamed up with Intel Capital and other technology infrastructure companies to develop infrastructure and improve access to telecommunications services across the continent.

IFC communications officer Josef Skoldeberg states that access to new technology can increase the productivity of businesses and can reduce costs for entrepreneurs wanting to start companies. In many cases, it decreases start-up costs and, where broadband access is available, can mean access to new markets.

Further, improving certain infrastructure, such as broadband and data centres, can mean that sectors heavily dependent on information technology (IT) systems, such as financial services, electronic commerce, health and education, can take routes into new markets and deliver new services.

IT services companies can create relatively well-paid, high-value-added employment opportunities and enable businesses in other sectors to reduce costs and increase productivity through access to outsourced IT services and shared resources, such as cloud computing, he adds.

“The [investment] focus varies, depending on the maturity of the market and local opportunities. In Africa, the IFC is focusing on broadband infrastructure, such as wired and wireless broadband networks and data centres, electronic payments and some IT services.

“With these types of earlier-stage-tech- nology companies, we are making an equity investment in the company itself, not in a project being carried out by the company. As a result, we are not looking for the company to match our investments; instead we expect them to use our money to expand their operations,” explains Skoldeberg.

Mensah mentions that partnering with global coinvestors ensures adherence to international best practice.

When the IFC considers an investment, it evaluates the project from a financial, development and sustainability standpoint. In the technology sector, this means it is looking for a business with growth potential that is addressing a direct technology need in developing countries or using employees in developing countries to design, produce, sell and service a global product. The IFC also ensures the company follows high corporate governance, environment and social standards, explains Skoldeberg.

“The demand for ‘green’ and renewable technologies continues to grow, so we are very interested in companies innovating in that space, such as in renewable-energy solutions for cellular base stations, tower sharing and other telecommunications infrastructure that can reduce the environ- mental footprint of such networks. The IFC and Intel Capital recently invested in Altobridge, which is a great example of this.”

In March 2011, the IFC and Intel Capital provided Altobridge with $12-million in equity financing. The company uses solar power and satellite connected mobile stations to extend voice and broadband services to remote communities. The firm was recently named a 2012 World Economic Forum Technology Pioneer and received a 2011 Technology Innovation Award from the Wall Street Journal.

Further, Skoldeberg adds that, in both the IFC’s debt and equity investments, it maintains a close relationship with clients and monitors their financial, governance, environmental and social performance on an ongoing basis. If there is an area that may need improvement, it works with the company on pragmatic steps to improve its operations.

The IFC’s aim is to bridge the digital divide in developing countries by supporting companies that build modern communications infrastructure and provide access to information technology. By making applications more widely available in developing countries, local populations can access the latest technologies, best practices and wider markets, besides increasing the efficiency of operations, he emphasises.

Regional Integration and Regulatory Harmonisation
Meanwhile, Mensah says: “My main message to governments is to make it as easy as possible to invest in a country, enabling more international investors to enter African markets. More regional integration in Africa, such as the harmonisation of regulations and taxes across markets, would make African markets less fragmented and more attractive to investors.”

“Accelerate the pace of regional inte- gration for the purposes of doing business,” he emphasises.

“Africa does not receive enough recognition for the number of people that have exciting visions and are working to turn their ideas into reality. My message to international investors is to simply come and talk to the companies in Africa – you will likely be pleasantly surprised.”

A renewed focus on investments into Africa is driven by a number of factors, including improving stability, increasing democratisation and accountability.

“Skills are required in this growing market. During the slowdown of the past three years in Europe and North America, we have seen a repatriation of skills and knowledge from Africans in the diaspora. Many young entrepreneurial companies have benefited from this infusion of skills, which has also increased their attractiveness to potential investors.”

Edited by: Martin Zhuwakinyu

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