Today, Facebook will launch the largest initial public offering in history. Over the course of a few minutes, an eager public will invest $16 billion in Facebook’s 3,000-odd employees. Here in Nairobi, Kenya, where I live, the eye-popping figures produce passive astonishment: A single company will absorb the rough equivalent of half a year’s GDP for Kenya’s 40 million citizens.
Facebook will invest some of its windfall to create growth for its shareholders. But will the investment be productive? Facebook is being forced public by SEC regulations and the desire of some early investors to cash out; founder Mark Zuckerberg has made clear his company doesn’t need the cash. As such, financing growth for Facebook probably means investing in some combination of server racks in Oregon, lobbyists in Washington, and ergonomic keyboards, massage tables, and sushi in the California headquarters.
That contrasts greatly with the landscape in east Africa. As a financial adviser and consultant to small and medium-sized companies in the region, I meet daily with companies that can offer investors attractive returns—and provide market-based solutions to problems in sectors from energy to horticulture. We’re currently supporting a network of health care providers who will offer ordinary Kenyans low-cost, high-quality outpatient care. Most of the other companies we work with have revenue models that are simpler and, perhaps, lower risk than Facebook’s. Yet they can’t raise capital.
Investments in emerging markets like Kenya don’t get funding largely because our capital markets are weak. Entrepreneurs here have little access to the global pool of money—the investors of Silicon Valley or Wall Street, nor the amateur day traders flipping stocks over lunch. Local money tends to chase mega-malls and the slipshod apartment complexes you see rising in cities across the continent.
But those weak markets are the same reason investments in Africa offer such good returns. Companies often can’t finance the second-generation, highly productive investments they need. Imagine a clinic operating without an ultrasound machine, or a barley farm operating without a tractor. The fruit couldn’t be hanging lower. The first ultrasound and the first tractor are astronomically more productive investments than the furniture in the Facebook lobby.
Investing billions in assets that are not highly productive is normal—proof of human progress to be proud of. But it’s hard to make a productive investment in a capital-saturated economy. Financial markets learned this in 2008, when reality bit a generation of investors who binged on unwanted housing in the absence of better ideas. Facebook’s gaudy IPO reinforces this basic problem: The rich world is capital-saturated while the poor world has very little physical capital per member of the labor force.
So why isn’t the world investing in Africa? Part of the answer is that it is. The surprise of the last decade is how much opportunity there has been to invest in Africa, and how well Africa has weathered the recent financial storm. With growth rates around 5 percent annually, Kenya’s economy is expanding significantly faster than Western economies. Last year, private equity investors raised more than $600 million to invest in East Africa’s growth.
On the other hand, we are not past the sense that charity is the best way to send money to Africa. Aid-oriented grants and micro-loans are the world’s conventional offer to African entrepreneurs, and they are literally not taking care of business. The “middle market” in many emerging economies generates most new jobs, yet these small and mid-size enterprises are too big for the lauded microfinance revolution, and too small for traditional banks chasing real estate projects. The companies I work with don’t need $300—they need $300,000.
Another obstacle are continual fears about “risk”— a word often applied to earnest African businesses, but not to JP Morgan. A man I know has built a brand manufacturing lotions and cosmetics from local aloe vera plants, but because he’s based in the much-maligned Democratic Republic of Congo, it’s all but impossible for him to break through to investors and grow. Even companies in east Africa’s comparatively advanced tech scene have a hard time raising smaller amounts of capital. But they deserve the chance to be productive—remember, it only took $18,000 in capital to start Facebook.
Theory tells us capital should flow from capital-saturated countries to poor countries, where it will do more. My hope for the ever-flatter future is that people in rich countries begin to see that the companies who will best use their investment are not listed in New York. Maybe there’s a social network for that.
Illustration by Dylan C. Lathrop