Investing in Tanzania: Unlocking Value through Patient Capital

By Devang Vussonji and Syakaa William

Early-stage risk capital is essential for emerging markets such as Tanzania. As disposable income grows, millions of consumers are becoming active buyers for the first time. Total African household spending is expected to be worth $2.1 trillion by 2025, a 50% increase from 2015. However, the needs and preferences of these buyers are not well-understood. The products and services that will meet these needs are still evolving, and business models that serve these buyers are still emerging. This is a ripe time for early-stage risk capital to place bets on these emerging businesses.

One popular investment model for early-stage investments is venture capital (VC). The model seeks to find ‘high-growth ventures’ with significant above-market returns (over 30% returns per year), over short time periods of time (typically less than seven years). As a result, it favors business models with exponential growth potential, such as technology businesses, at the expense of others. In 2020, technology companies accounted for 62% of global venture funding. In Tanzania, we also see more traditional forms of capital, such as banks, seeking higher returns from businesses (e.g., 20%+ annual interest rates for businesses in Tanzania) and offering shorter time horizons for businesses to repay their loans.

This high-and-quick-return model is not working well for most businesses, requiring a different approach to meet market needs. Over 40% of small businesses in Tanzania reported access to finance as the most critical constraint to their operations and growth potential. With the current global financial crunch, capital will become even more scarce for growing businesses in Tanzania and other emerging markets. Given the large and growing nature of our consumer markets, businesses will continue to emerge, and investment opportunities will continue to grow.

What type of capital is best positioned to tap into this emerging investment opportunity?

The short answer is: Patient Capital. Patient capital is a more appropriate investment model in emerging markets such as Tanzania. The patient capital model involves making investments that tailor financing to the needs of the business, while at the same time expecting slightly lower returns over a longer time horizon. The model has a higher risk tolerance than traditional financing, enabling entities to build sustainable business models and ensure long-term growth in emerging markets. Such investments result in more substantial, impactful, and lasting returns, not only for shareholders but also for other stakeholders.

Patient Capital is not new to emerging markets or even to Tanzania. Family businesses in emerging markets have achieved sustained global growth and success by leveraging their long-term focus to capitalize on emerging opportunities and invest in promising sectors. In Tanzania, the Bakhresa Group and Mohammed Enterprises Tanzania Limited (MeTL) have followed a similar trajectory, unlocking value through patient investments in underserved markets. As Abubakar, Executive Director at Bakhresa, says, “if you have a very long-term view, your business and your brand will succeed.” These conglomerates grew over many generations by taking a long-term view of their markets. Similar thinking is now required from all forms of capital.

What are the opportunities for Patient Capital in Tanzania? There are numerous opportunities, but one example is in the energy sector. Despite progress in electrification, 36 million Tanzanians (particularly in rural areas) still lack access to reliable electricity due to the challenges of serving disconnected populations with latent demand. This market segment comprises Bottom of the Pyramid (BOP) customers who are low-income, far from infrastructure (the grid), and with limited demand to sustain on-grid investments limiting the serviceable market.?To sustainably activate and serve this market, firms need a different approach focused on customized solutions to meet users’ needs.

It has taken over ten years for ZOLA Electric to tap into this opportunity. ZOLA (Off Grid) Electric was launched in 2011 in Arusha as M-Power to serve rural households lacking access to electricity. This underserved market has supported ZOLA’s growth from 1,000 customers in its first year to its impact on 2.3 million customers today. It deploys over 385,000 energy solutions and prevents emissions of 565,000 tonnes of CO 2 e per year by displacing kerosene lamps and diesel generators. This growth was mainly due to patient capital investments in its solar home system that responded to its customers’ needs by delivering affordable, clean, and reliable energy.?This financing allows ZOLA to lower costs of access to as little as Tshs 500/day on par with kerosene, making it affordable to 80% of Tanzanians. Johnson Kiwango, Managing Director East Africa at ZOLA Electric, commented: “At ZOLA, we take a long-term view of our customers’ needs to achieve our mission.”

The wider opportunity to unlock value through financing and investing for impact is still latent in Tanzania. There are still numerous underserved markets for businesses to tap into that are a result of various divides such as the rural-urban, female-male, informal-formal, and low-high income separations. Business leaders need to embrace a patient capital model based on the needs of their customers to truly unlock value in these markets.

This article is based on themes from the book Scaling Impact: Finance and Investment for a Better World (Palgrave Macmillan, 2023) by Kusi Hornberger, a Partner at Dalberg Advisors . The book discusses six major paradigm shifts that are required for the financial sector to meet future needs, especially in emerging markets.