In 2021, 80% of venture capital investments from the United States on the African continent were concentrated in just four countries: Nigeria, Kenya, South Africa and Egypt. Yet, collectively, these countries represent only 32% of the continent's population and 50% of its gross domestic product (GDP). Why are venture capital flows to Africa massively concentrated in these four countries
Few industries illustrate the importance of networks as much as the venture capital industry. Despite its apparent sophistication, the world of venture capital operates on the simple principle of social capital, which arises from the social networks of professionals, experts, and other venture capitalists into which investors are embedded. As investments interweave social networks, they tend to favor the most connected destinations. Less integrated destinations suffer from a lack of reputation, which translates into a higher perception of risk. This creates a self-perpetuating mechanism, ultimately leading to a situation of monopoly of capital flows. The study of venture capital in Africa offers a fascinating insight into this network capitalism. On 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 new asset class of capital- risk is expected to change the financial ecosystem.
My research shows that African access to elite American universities promotes access to venture capital. This is because venture capital allocations are largely based on the skills networks formed at elite universities. On the African continent, a few pioneering countries have institutionalized the benefits of the network by a) increasing the flow of co-nationals to these schools; and b) refocusing network building and cultural content on their own country during their stay on campus. My research demonstrates that venture capital funds make investment decisions primarily based on familiarity (existing networks) and have a strong preference for African countries with a sizable elite network as investment destinations.
Table 1: African Students at Elite American Universities (2015-2020)
Note: Author's calculations derived from information publicly available on the sites of the top 20 American universities according to US News World Report
Traditionally, when studying the determinants of venture capital investments in Africa, researchers focus on the role of domestic factors. In some cases, they highlight factors such as accounting standards, business freedom, taxation and judicial efficiency. Others point to digital infrastructure, high-tech exports, internet coverage and market size. Still others highlight the role of public markets and capitalization. However, an abundant literature maintains that the role of networks is a determining factor for the results of economic agents. However, too little attention has been paid to understanding the role of interpersonal relationships and its impact on investment in Africa. Building on this idea, I explore the social capital of African startup founders and how it influences operational capabilities, norms and values.
The number of African graduates from elite universities has increased over the years, as have their interactions with American students. It is important to examine how interactions between the two groups shape investment patterns. I argue that network effects tend to create monopolistic outcomes. The institutional apparatus of the American elite has a long tradition of selecting the richest 1% of Americans, thereby perpetuating inequality. Less is known about the impact of this concentration of American elite education on the creation and distribution of wealth in other countries. To better understand, you should know that most of the best fund managers (based on investment-output ratio) studied in the top 20 American universities (according to the US News and World Report ranking). By attending these institutions, former and current venture capital fund managers have encountered a population of international African students. The vast majority come from a small number of countries called “the big four”: Nigeria, Kenya, South Africa and Egypt. I hypothesize that this asymmetric interconnection facilitated by the university network results in the differences in investment observed between African countries. Specifically, African countries whose students are more represented at elite U.S. universities receive proportionately more venture capital investment. I argue that this is because fund managers tend to invest in markets whose founders are familiar to them. This familiarity extends to business standards and practices. As social ties strengthen, early connections produce long-term benefits for this select group of countries.
Table 2: Number of deals (beyond USD 1M) for the year 2019 by nationality with a degree from a top 20 American university
Network effects and positive feedback loops explain the concentration of investments in certain African markets. The accumulation of links between American investors and African founders from the most represented countries creates a phenomenon of preferential attachment. Preferential attachment here refers to a process by which each additional Big Four student strengthens existing social ties to American networks. The preferential attachment process concentrates power among a privileged few.
MIT, where I studied, offers an example of this process. The institute’s rich entrepreneurial ecosystem helps build connections between students and venture capital funds through acceleration programs, scholarships and networking events. Participating students and their ideas become more visible, significantly improving their chances of securing funding by actively exploiting these opportunities. Like other elite institutions, MIT's African student population has always been comprised primarily of students from the Big Four countries. Therefore, they capture a greater share of these signaling opportunities compared to their African counterparts. As a result, capital providers gradually become familiar with these markets and strengthen their social capital ties.
While studying at MIT, I personally demonstrated the power of elite networks on funding outcomes. I come from a non-big four country, the Democratic Republic of Congo, but I was able to create a strong signal for my business by leveraging the school's network. As a result, I gained substantial financial support for my idea. My own story provides anecdotal support for my argument that ties to elite universities are positive for start-up funding. However, I wanted to scientifically demonstrate the extent to which African venture capital trends can be explained by elite university networks.
I adopted a multi-method approach to empirically examine my theory. I conducted semi-structured interviews to determine the role that networks may have played in shaping investment outcomes for various stakeholders, including venture capitalists, African entrepreneurs, and African students. I also interviewed researchers and ecosystem builders to probe their beliefs about investment concentration drivers and identify controlling variables. Additionally, I collected statistical data on African students enrolled in elite American universities. To study their post-graduate start-up funding performance, I used a unique database from Africa The Big Deal, which lists all reported funding deals over $100,000 secured by startups in Africa since 2019. I extracted the full results for deals funded from the US and created a database. After excluding all U.S. schools that weren't in the top 20, I was left with 180 investments to study. I compared these operations with the entire data set to determine whether entrepreneurs who graduated from elite schools obtained better results than others. I also collected data on the total flow of venture capital investments into Africa since 2017 from Partech, a Silicon Valley investment platform.
When looking at the nationalities of African students enrolled in the top 20 American universities, the over-representation of Nigeria, Kenya, South Africa and Egypt is striking. To put things in perspective, they represent 32% of the African population, but 60% of students at elite American universities and 54% of venture capital funding. This confirms my intuition that venture capital funds are more comfortable investing their money with founders who graduated from these elite schools.
The dominant narratives about Africa at elite universities are those of entrepreneurs and start-ups from the “big four”. The cultural content of conferences relating to Africa is almost exclusively Nigerian. American university officials reinforce this effect by concentrating study trips and visits to these countries with “familiar faces” who, to their credit, play a facilitating role. Recruitment trips for admission teams take place mainly in the four major countries. For example, this summer the Sloan School of Management will travel to Nigeria, South Africa, Kenya and Ghana (the fifth most represented country).
By focusing on the big four countries, these networks reinforce the lack of visibility of other parts of the continent, particularly French-speaking Africa. French-speaking students who have the language skills and academic aptitude needed to succeed at elite American universities are simply not applying due to lack of network. I interviewed several African students from MIT and Harvard who told me stories about their paths that led them straight to an elite university in France or the United Kingdom, until a member from their network encourages them to consider an elite university in the United States. These students are exceptions in that they received information that changed the course of their journey at a crucial time, as well as the support to act on it, often in the form of mentoring from alumni of an elite American institution. The work of Eric Pignot within the framework of “Enko Education” is an example of this. An alumnus of MIT's Sloan School of Management (MBA '13), Mr. Pignot launched Enko Education with the mission of improving access for African students, particularly those from French-speaking Africa, to elite universities in the world through high-quality international education. Its network of schools today successfully places students at elite universities around the world, including top U.S. institutions such as Yale, the University of Pennsylvania, and Columbia University. Most capable students who do not benefit from such networks do not consistently receive important signals and the support that comes with them.
In seed funding, which is currently the predominant stage in Africa, venture capital firms rely heavily on referrals and social media. In boardrooms from San Francisco to Cambridge, this often means following people who graduate from top American universities. These graduates enjoy greater confidence and are mainly found in English-speaking countries.
Venture capital tends to flow to entrepreneurs from the trusted circle of elite American universities. These founders are mainly from Nigeria, Kenya, South Africa and Egypt. Existing linkages reinforce the predominance of these countries as recipients of venture capital in Africa. However, there are ways out of this situation and create equal opportunities for the rest of the continent.
In the United States, it is important to become aware of the current imbalance of African representation in American academic institutions and to develop concrete strategies to correct this imbalance in subtle ways. Much like the diversity visa that opened the door to the United States to immigrants from underrepresented countries, universities could signal their intention to recruit more qualified students from non-Big Four African countries.
Another strategy to mitigate this situation is to partner with American universities by sending students on a meritocratic basis, but with the option of returning to their home country once their studies are completed. In addition, exchange programs other than those with the big four countries should be put in place so that other African countries can benefit from the reversal of the brain drain. Where possible, the creation of satellite campuses of top US universities and research institutes should also be considered.
However, it is up to individuals, especially those in less well-connected countries, to change the status quo and refocus attention on their country. This is what I tried to do when I was a student at MIT. I received the Legatum scholarship, qualified for the Fuse and Delta V accelerators sponsored by the Martin Trust Center for entrepreneurship (MTC), participated in pitch competitions, collaborated with the D-lab and my company have been the subject of several articles in MIT News. In short, I created a signal for the Democratic Republic of Congo.
Technology can also help. One solution could be to create a digital social network that connects African innovators around the world with Africans at elite U.S. universities, putting them on equal footing. In the digital domain, there is no need to obtain a visa to connect with future board members or potential partners, who are key drivers of efficiency. Such a solution could eliminate friction, particularly when it comes to the speed of creating new networks. African students at MIT, regardless of country, could spearhead this effort and demonstrate their commitment to Pan-Africanism.
In conclusion, this research contributes to the literature on social capital and networks by providing a first insight into the structural foundations of twenty-first century African network capitalism. While scholars have traditionally focused their research on foreign aid, international development agencies, and the role of multinational corporations, I have brought a new perspective to the literature on center-periphery relations by focusing on the new asset class of venture capital.
