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BII eyes full-stack startups, ag marketplaces & embedded financing as it earmarks funds for Africa

February 7, 2023

British International Investment (BII), the UK government’s development finance institution (DFI), is doubling down on its investments in Africa, particularly around agtech.

Formerly known as the Commonwealth Development Corporation, BII invests in financial services, agriculture, health, and climate innovation, amongst other areas. According to a recent article from TechCrunch, BII plans to designate $250 million to African startups by 2026. This could have big implications for Africa’s agtech sector.

Eyeing embedded financing

In Africa, BII is on the lookout for startups providing financing for farmers, Megha Okhai, VC Investment Manager at BII, tells AFN. “We’re seeing this demonstration effect where, because of technology, you suddenly have very different unit economics that demonstrate that farmer financing can work.”

Take Apollo Agriculture, which raised a $40 million Series B last year from a pool of investors including BII. The Kenyan startup provides smallholders with inputs, market access and agronomic advice in addition to financing and climate smart insurance.

“Last year was very exciting for us from a tech-enabled farmer financing proposition,” says Okhai. “We really liked the closed-loop system that locks up the financing into inputs which are productive income-generating items that the farmer can then use on his field and come back to Apollo to make a repayment once harvest has come through. This plus the tech drives scalability on customer acquisition and keeps customer acquisition and servicing costs low.”

And based on its investment into Kenya’s iProcure last year, BII is also looking broadly at startups that are helping not just farmers but other ag players like agro-dealers, in mitigating their working capital issues.

A focus on full-stack startups and marketplaces

BII also looks to back one-stop-shop models that can improve overall farmer productivity. The DFI, according to Okhai, is interested in full stack startups, from various regions, which usually start out as agribusiness marketplaces. One such area is India, which has been a core focus for BII, along with the entire Asian continent.

“I think the full stack model for us, offering everything from seed to sale, is definitely something that we want to take a look at across all geographies. And it’s interesting to see where different startups begin in the value chain,” she says.

“The idea that lots of these businesses will move in the direction of a full stack is definitely the right way forward. So the more you become a one-stop-shop for the farmer, the better it is, from a value-added perspective for your customer and from a stickiness perspective for you as a business.”

India has seen a significant number of these platforms. One notable example is DeHaat, an ag marketplace that offers linkage to inputs, financing, insurance, soil testing and many other services. [Disclosure: AFN’s parent company, AgFunder, is an investor in DeHaat.]

According to Okhai, India’s ag entrepreneurs typically begin by offering ag advisory services before expanding to provide market access, embedded finance and other farmer-aligned services.

Beyond these one-stop-shop marketplaces, Okhai says she observes India is now moving into precision agriculture when it comes to sub segments.

Further criteria for startups

With regions mapped out and financing earmarked, there are still some gaps from the startups that could help them land financing, if filled.

The first is an ability to demonstrate economics early on. Many founders focus on traction, and rightly so, as it helps investors see the need in the market for the startup’s product. Increasing app downloads or a growing subscriber base are also a key signal for user demand and adoption. But while entrepreneurs should be obsessed about this metric, the economics of the business grow increasingly important from an investment perspective.

“Demonstrating product market fit is one thing where you can show customer traction and top line coming through on the back of that,” says Okhai. “But ultimately focusing on your unit economics and your working capital from the early days and showing that your business works is the other thing that we’re seeing investors increasingly push for.”

Another element BII looks for is trust between a startup and its users. When it comes to tech-enabled solutions for farmers, this is key, and a high level of engagement is needed beyond the tech. Time and time again, founders have said that the resistance they faced earlier on and had to address usually with agents on the ground stemmed from a luck of trust from their users. This could be a result of smallholders being bombarded with solutions they do not understand, or that haven’t really taken farmers’ realities into consideration. Okhai says farmer consideration is an obvious bit, but is easily missed.

“That element of trust is key and the trust will always require a high touch, high tech approach. You can’t just come in with tech that’s fantastic that may be out of context. You have to come in with the boots on the ground, and if those boots on the ground are part of the community and embedded and already known to the farmer, even better. That is your key to building trust and educating the farmer on why this new thing that’s being offered makes sense and what value it will add to them as a business,” she says.

Finally, BII looks for startups considering non-dilutive sources of debt. Okhai observes that most businesses use equity to lend onwards and that’s not a very good use from a capital structure perspective of equity. She also observes this more on the African ag ecosystem side.

“Ideally, you’re raising debt to then lend onwards and that’s something that I think is still a bit of a gap. I think Africa has a journey to go and DFIs definitely have a role to play on that front,” she says.

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