The power of the crowd

When Nigerian brothers Ngozi and Chijioke Dozie needed to drive interest in their Rwandan coffee business, their home market seemed like a natural fit.

“Rwanda produces great coffee, but it’s a very small market, it’s 9m people. Most of the best coffees are exported to places like Starbucks. So in order to build the market for our coffee, we started to export coffee to Nigeria,” says Ngozi Dozie.

Although there is a growing café scene in Nigeria, most of the coffee is bought from major global brands, such as Segafreddo or Lavazza. The brothers’ solution was to create their own chain, Neo, which has three locations in Lagos. The company now flies coffee on RwandAir flights four times a week and has also imported Rwanda’s former champion barista to train its staff.

Nigeria’s compelling demographics and economic growth have made it an attractive destination for consumer-facing companies. Major international fast food chains, including KFC and Pizza Hut, have returned to the country over the past two years, hoping to capture a share of the new urban middle class.

“In Nigeria in particular you have many quick service restaurants or fast food restaurants, and you have very expensive restaurants. There is no middle ground for the middle class, or the aspiring entrepreneurs or the creatives,” says Dozie. “That was the opportunity that we saw. South Africa is a great example. It’s a smaller population than Nigeria, but they’ve got over 200 branded chains, without even counting the mom-and-pop cafés.”

However, despite the opportunity, and despite the founders’ backgrounds – both brothers have MBAs from top US business schools – Neo faces the same funding challenges as many African small and medium-sized enterprises.

Interest rates in excess of 25% make bank lending unsustainable, while the small scale of the venture capital industry on the continent limits the opportunity to raise equity financing. Although private equity funds have invested in café chains in Africa – in 2012 Emerging Capital Partners made an undisclosed investment to fund Nairobi Java House’s regional expansion – in the main, the restaurant business is too small and fragmented to attract big ticket investments.

To fund their expansion, Neo has turned to Emerging Crowd, a newly-launched platform that matches small businesses with small investors over the internet. The company, founded by Will Tindall and Lucien Moolenaar, is an evolution of the successful ‘crowdfunding’ model for creative projects made popular by the US website Kickstarter.

Along with UK-based platforms Seedrs and CrowdCube, Emerging Crowd allows individuals to invest as little as £500 ($740). European Union investment marketing laws cap the total fundraising at a maximum of €4m ($4.3m).

The platform, Tindall says, was borne out of its founders’ frustrations working in the private equity and investment banking industries, where they found that good companies with solid track records often struggled to get financing from mainstream private equity, simply because they did not yet have the scale. Private equity companies typically look for ticket sizes in the tens or hundreds of millions of dollars.

Both men ran investment roadshows for small companies seeking less than $5m in investments.

“Nine times out of 10, [managers] loved the story, but it didn’t fit into the parameters of the fund,” says Tindall. “They’d say: ‘It’s too small for us. But I’d love to come in on a personal basis’. So rather than the fund putting in $5m, you’d get the manager putting in $250,000.”

Emerging Crowd aims to create a systematic way for these smaller investors to access opportunities in emerging markets, and for wealthy members of the African diaspora to invest back home. The platform manages their shares, linking into third-party custodians. Companies listed on the platform go through an intense due diligence process and have to report regularly to their shareholders.

Acknowledging that the underlying companies are, largely, unlisted companies in frontier markets, Emerging Crowd’s focus is on “trying to make the whole thing as comfortable as possible for something that is very high risk,” says Tindall.

The platform’s initial focus is on companies looking to raise around $500,000, with enterprises like Neo, which have a clear narrative and an easily understandable business model, are likely to be the early issuers, according to Tindall.

“Neo is almost too easy to explain. Everyone knows how coffee chains have expanded in the West. The majority of people know what the population of Nigeria is, the growth figures, the disposable income,” he says.“You’ve got a company that’s past proof of concept… they’ve got some traction in the market. They’re the largest coffee chain in Nigeria. It’s run by two brothers, one’s Harvard, the other’s Wharton. Ngozi worked for JP Morgan and his brother worked for the World Bank. They’re good, legit, trustworthy guys.”

For Neo, the benefits go beyond the initial funding, Dozie says. As a consumer brand, their business depends on word of mouth, and engaged investors can become ambassadors for the company as well as customers of the business.

“Through Emerging Crowd we get to talk to a lot of investors who are potential consumers of coffee… we want them to be tweeting, commenting on social media. It’s a great way to advertise the brand,” he says. “Coffee is one of these things where you’re an investor, you’re getting nice returns, and you’re also drinking
the coffee.”

Richard Cross