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· Jan 5, 2018

7 considerations to be made when coming up with Uganda’s Youth Venture Capital Fund 3.0

Ladies wearing t-shirts from Avarc Apparel. A Ugandan clothing startup. Such ventures find it hard to access funding from the Youth Venture Capital Fund as it's currently structured.

Ladies wearing t-shirts from Avarc Apparel. A Ugandan clothing startup. Such ventures find it hard to access funding from the Youth Venture Capital Fund as it's currently structured. [Photo: Avarc Apparel]

To date, Uganda has had the youth venture capital fund in different forms and guises. This is to try and kick-start youth employment by providing funding to entrepreneurial youth. The fund has taken the form of a debt fund ie loans. Disbursed through commercial banks to groups of youths. Though it is on the basis of ideas that have not gone through a typical venture cycle.

In the same period, there have been examples of successful funds and models elsewhere. I thought I should draw on these lessons of failure and success from Uganda’s youth venture capital fund and elsewhere to present a structure for the youth venture fund 3.0.

1. Debt no, equity yes: By their very nature, youth ventures are usually in the early stage. With little to no revenues and needing patient risk capital. Imposing debt with strict repayment terms and steady cash flow requirements is not suited to early-stage ventures with unstable cash-flow at best.

2. Capacity building: Financing for early-stage ventures to youth with limited business experience is likely to fail unless they are supported by a capacity building, business development and mentor support. Any youth venture fund should have a capacity-building component. Which you can call an accelerator program.

3. Targeted sectors, regions: Not every business idea will thrive in every locale. To drive intentional innovation and growth in targeted sectors and regions, there may be a need to focus venture funding for targeted sectors or ideas in targeted regions of the country. This will encourage and nurture region specific and appropriate ventures and drive economies of scale for market linkages, financing, agglomerated supply.

4. Minimum ticket size: Think about the minimum funding size required for a venture. While youth venture funds have distributed UGX. 5million for some ventures, such amounts will not cover registration of the company or even patenting of an idea. Minimum ticket sizes have to be enough to encourage venture opportunities.

Related: KENNETH LEGESI takes a Look at the Alternative Sources of Funding for Ugandan Startups

5. Match fund and blended finance: Structuring a venture fund on the basis of government capital alone does not optimize the available funding sources. The government should tap into institutional capital. Especially catalysing local capital. A way is to use the government funding as a first lost protection or anchor investor capital. This is to crowd in private sector capital and also help nurture and build a local angel/seed investor base.

For example, the government may offer its funding as a guarantee for first loss to encourage other institutional and local investors including investment clubs, retirement benefit schemes, pension schemes, angel investors to participate in startup investment.

6. Tap into mentor networks: By doing #5 above, government works with and taps into the mentor network available to investors and professionals.

7. Private sector fund managers: Lastly, running a fund requires competent qualified fund managers. Through supporting programmes for building the capacity of local fund managers such as Capria VC, CDC Accelerator, GIIN Fund Manager Masterclass, there is a support network to build and grow local fund managers who can manage a venture fund.

The building blocks for a successful local venture fund have been outlined and are already being tried separately either through previous programmes or with existing players in the ecosystem albeit disjointedly.

Kenneth Legesi is a Management Consultant and Corporate Finance Advisor. He is also passionate about catalyzing financing for startups and SMEs in Africa