Healthcare Venture Capital for Africa

Abstract

In their Policy Forum “Stagnant Health technologies in Africa” (10 December 2010, p. [1483][1]), K. Simiyu et al. argue that what is truly needed is a venture capital fund (VC fund) to provide capital for promising ideas that are currently stagnating in research institutions. As academics focused on private equity and venture capital in emerging markets, we agree that more funding is required to move “stagnant technologies” from universities to the marketplace. However, it may still be premature for an early-stage life sciences–based VC fund in Africa, at least in the conventional sense of a freestanding, sector-focused, geographically diffuse structure. Successful venture capital efforts presuppose many conditions, ranging from the readiness of entrepreneurs to policies and laws that allow enforceable structuring of often elaborate transactions. VC funds also depend on a critical mass of technologies within a geographically limited area in order to leverage the networks and expertise of the venture capitalists. Although Simiyu et al. have identified 25 technologies with potential as products, many of these technologies remain far away from validation. In established markets, venture capitalists generally make only one or two investments for every 100 opportunities identified and evaluated. With the high attrition rates associated with even well-established technologies, the viability of a private-sector VC fund would be in doubt. Indeed, BioVentures, the only dedicated life sciences fund in sub-Saharan Africa (as noted by Simiyu et al. ), was unable to raise a follow-on fund. The trajectory of life sciences industries in leading emerging markets such as China, India, and Brazil suggests the importance of an existing manufacturing base in order to build a critical mass of infrastructure and talent. Domestically grown technologies and startups are unlikely to scale without this existing base of supporting industries in services and manufacturing. Even in South Africa, almost 90% of pharmaceutical and medical devices are imported, which makes the necessary scientific equipment unaffordable. Furthermore, the primary mechanism of exit for early-stage funds is to out-license technologies to—or to be acquired outright by—larger, well-established life sciences funds and firms. This is unlikely to happen with the suite of “stagnant technologies” identified. A market mechanism allowing for positive returns upon exiting is still in the future. There have been venture capital programs in many industrialized countries, as well as states and provinces, that were put into action before conditions were ready, thus souring the milk for years to come. Prematurely launching an early-stage VC fund compounds the ordinary risks and increases the odds of failure. In such a case, funders would only reinforce the prevailing negative investor perceptions in Africa, as well as reduce government enthusiasm for innovation. Simiyu et al. 's points are a clarion call, to be sure. They demonstrate capacity for health innovation in Africa that merits risk capital. Our concern is that the inherent lack of diversification of a specialty life science VC fund poses an overwhelming risk of failure. Alternative approaches to a free-standing VC fund are worth considering. Multinationals seek access to countries beyond India and China to drive growth, and African countries are among the new frontiers. Investors can anticipate this interest by investing in high-tech manufacturing activity with the intention of exiting to multinationals, and in the process, they can also acquire early-stage technologies, combine them with these late-stage manufacturing investments, and build R&D capability. One such approach is used by our colleagues at the Investment Fund for Health in Africa (IFHA), a private equity fund that has raised $100 million as of October 2010 from development banks and multinationals focused on private healthcare. IFHA has allocated 10% of its capital toward such an early-stage approach. This provides a seamless funding mechanism not only to validate, but scale up technologies. Hybrid VC/private equity funds such as the IFHA allow an entire innovation ecosystem to emerge, and can induce the large generics manufacturers to pursue R&D related to locally endemic diseases, similar to what has occurred in the Indian biotechnology industry. In this way, Africa can tackle its indigenous health needs and drive self-sustaining economic growth. [1]: /lookup/doi/10.1126/science.1195401