Secha Capital: Biomimetic Disruption in African Private Equity
Nature does not use propellers. So why do people?” Using the same type of questioning, Secha Capital set out to employ biomimicry as a framework to innovate private equity in Africa for social impact and financial returns.
“Nature does not use propellers. So why do people?” asked the headline of an 18 December 2021 article in The Economist. Humans use propellers for propulsion in water, but — compared to the fins and flippers used by most sea creatures — propellers are inefficient, rigid and, the larger they get, increasingly restrictive. Modern propulsion design now embraces the lessons of nature rather than upgrading on the retro paddlewheel as, per The Economist, “propellers look like a technology ripe for a bit of biomimetic disruption.”
Biomimicry is a nature-inspired approach that seeks a sustainable solution to human challenges by emulating time-tested patterns and strategies in nature. It’s how velcro was invented after seeing burrs in the wild and why solar panels mimic the energy harvesting design of leaves.
Biomimicry is also applicable to investing and finance. As Putnam Investments’ Katherine Collins writes in “The Nature of Investing: Resilient Investment Strategies Through Biomimicry”, investing is now overshadowed by the complex iterations of modern-day finance. Instead, we should embrace the lessons of biomimicry and approach investing with the end goal of fitting form to function — an investment design that is a) scale agnostic; b) resource efficient; and c) integrates development with growth. After all, things that are complicated need not be complex; and the ultimate solution need not be the fanciest or most scaleable, but must be the most effective.
At Secha Capital, we use biomimicry as a guide to re-think private equity in Africa and bring biomimetic disruption to this important and impactful space in order to achieve financial returns and impact:
Secha’s biomimetic disruption re-designs African private equity funds in order to: write smaller, but more impactful checks to a larger universe of small, growing businesses; complement the financial capital with unique, high-powered local, focused human capital; and bring repeatable, synergistic expertise to help grow the companies.
In order to embody the principles of biomimicry and to ensure that we are a unique fund counter-positioned in African private equity, we asked ourselves the following three questions:
1. Is the fund scale agnostic? Can it be applied at the micro and macro levels?
We have seen that due to fund economics of a two percent management fee, funds are incentivised to raise lots of capital. This thus requires each investment to be a large check. And this limits the pipeline of investable companies. Funds like this are maximised, but not optimised. They may be capital-efficient, but it is less effective.
Secha designed a fund size large enough to invest in 10 to 15 companies, but small enough to write relatively smaller, but more impactful checks into a wider and deeper pipeline of African companies. We’ve tweaked the fund economics to ensure that the bulk of the capital goes to the portfolio company and not to the fund team.
2. Is the fund resource efficient? Does it leverage readily available materials and energy? Does it incorporate diversity to be locally attuned and responsive?
Most funds invest only financial capital. The team is often based outside the market. And they are often older and come from a deal-making background.
Secha’s design principle is to provide young, operational human capital as a complement to financial capital. We created the Operator-Investor model to leverage the naturally recurring local resources that is high-powered human capital.
Thus, our team is younger, diverse and they are operators more than they are deal-makers. This Operator-Investor model enhances the system’s capacity for the long-term as there’s a duality to the additionality — the financial investment and the Operator-Investors support the small, growing businesses to grow, and the experience of this role trains the next generation of leaders, managers, entrepreneurs.
3. Does the fund integrate development with growth? Can it build from the bottom-up and adapt to changing conditions via tight feedback loops, variation and decentralisation?
Many funds are designed with dispersion and the power law in mind: that is, a small proportion of a fund’s portfolio will create the vast majority of the financial returns, while many will go to zero. This is a sustainable model, but not regenerative.
Secha has a different view on portfolio investing and construction: We invest in large, traditional markets and in companies that are profitable, but need growth capital to reach full potential. These businesses are not in winner-take-all sectors and they share costs and capabilities with other companies in the portfolio. Again, the bottom-up, decentralised Operator-Investor model of working side-by-side with the entrepreneurs and management teams generates an expertise flywheel that improves the operations of each portfolio company.
Much like fins in the water, Secha’s biometric disruption is working.
In five years, Secha has made ten investments in sectors as traditional and large as female beauty, healthy food, energy security.
Across the portfolio, the results are impressive: seven companies are founded by women, 200 jobs created, 30% portfolio company revenue CAGR, 18% EBITDA growth per annum; 5x portfolio valuation gain and three return events.
This was done with $8M and ten Operator-Investors, thus proving that this model is replicable, modular and geographically agnostic.
We, therefore, believe that more investors should embrace this biomimetic disruption for private equity in Africa as it will lead to repeatable and significant financial returns as well as economic diversification and development.
Sources:
Nature does not use propellers. So why do people?, Economist, December 2021
Mnisi, Mullen “An Arsenal of Operator-Investors for Africa”, Stanford Social Innovation Review, 2020
Benyus, Biomimicry: Innovation inspired by nature. William Morrow & Company, New York, 1997
Benyus, A biomimicry primer, The Biomimicry Institute and the Biomimicry Guild, 2011
Collins, The Nature of Investing: Resilient Investment Strategies Through Biomimicry, 2014
Strategic Direction, Nature’s inspiration: Solving sustainability challenges, Innovation
Oguntona and Aigbavboa, Capability of Biomimicry for Disruptive and Sustainable Output, Faculty of Engineering and the Built Environment, University of Johannesburg, South Africa, 2016
