**This original JP article has been translated, edited, and reposted here for viewing purposes only. The original interview can be accessed here.
**This interview was conducted before the establishment of EMURGO Kepple Ventures, a new joint venture between EMURGO Africa and Kepple Africa Ventures, Inc. announced in March 2023.
By Satoshi Shinada
(Interviewer: Ryo Hasegawa)
Part 2 of our interview with Yosuke Yoshida, EMURGO Middle East & Africa co-CEO, addresses topics regarding Web3 in Africa such as:
- How to identify Web3 projects in Africa to invest in
- The challenges African startups must overcome
- The future of Web3 in Africa
Part 1 of this interview is also available at the bottom.
Sourcing and due diligence in Africa
Q: What is the structure of project sourcing in Africa?
Yoshida: Some projects come directly to us. On the other hand, our basic strategy is to leverage and expand our network with partners who have strengths in sourcing and the industry. So far, we have focused on investment. But in operating in Africa to drive Cardano adoption, we are not only investing, but also focusing on networking and increasing our presence.
For example, we have met the Minister of Digital in an African country, and in another country, we have been invited to government meetings and review panels. Although not directly related to investment, we believe that this could lead to use cases at the national level, such as use in government systems in the medium to long term, so we are broadly promoting relationship building from a broad perspective.
Shinada (Kepple Africa Ventures): In our case, we have more than 100 existing investments, so basically most of our introductions are by word of mouth. In the end, our trusted founders are connected to other trusted founders. So 90% of our sourcing comes from within our trusted network.
Q: In the entire process, from sourcing and due diligence to investment execution, what are the key points that you keep in mind from a local perspective?
Shinada: First of all, it is important to deal with regulations, so we always try to find out in advance what issues are likely to arise. Of course, not everything can be dealt with immediately, but it is necessary to anticipate in advance what problems are likely to arise.
In particular, as areas such as Web3 and crypto are new, the overall rules are often unclear. So it is essential to confirm local regulations.
There are many cases of people trying to do business with just nice-sounding slogans such as “We want to solve a social problem.” For example, it is common for areas that are essentially public services, such as providing safety nets or improving the efficiency of water and electricity supply, to not have the mindset that people will pay for them in the first place. Investors also tend to sympathize with the cause, but we should ask if it makes sense from an investment perspective. This area is more like business due diligence, but it is very important in investment to thoroughly ask yourself these questions.
Yoshida: As you say, in addition to legal due diligence, it is no exaggeration to say that business due diligence accounts for almost everything. In addition, in our case, we also take into account aspects such as whether the blockchain is being used appropriately and whether any sort of tokenomics works.
Q: Let’s say you have done the business due diligence and there is still some gray legal area. How would you proceed?
Yoshida: It depends on how much gray remains. We first try to find out if there is a way around it within the regulations, or if it can be solved by changing the place where the company is registered. As mentioned above, regulations are not uniform from country to country, even in Africa. We have to deal with them on a case-by-case basis, but so far we haven’t encountered any cases that we haven’t been able to solve.
Challenges currently faced by African startups
Q: Apart from legal due diligence, are there any other difficulties or challenges that you feel you need to overcome in the future?
Yoshida: One of the challenges of the Web3 or crypto industry is that the market fluctuates up and down like a rollercoaster. When the market is booming, too much money is gathered and there is a glut of it. This leads to valuations that are many times higher than the original fair value. On the other hand, when there is a “crypto winter,” companies have a more difficult time raising capital at a fair valuation. This unhealthy situation remains a challenge for the industry. It is my view that while these trends will eventually gradually converge in the future, they will continue for some time to come.
The solution will require integration with the real world, as I mentioned earlier. The existing financial industry is operating on a different market trend to Web3. So if funds from the traditional financial industry flow into the Web3 industry as well, the extreme ups and downs of the market will be mitigated and the overall situation will become more balanced and create a healthy investment and startup environment.
Shinada: We often invest from the early stage. So after a company starts to grow, there are times when it becomes difficult to support the growth stage with just the vision and capabilities of the founders. Naturally, the team will need to change in line with their development, and the support required will also change. It is also not uncommon for problems to arise as a result of founders who may lose focus once they have received funding. They may choose to invest in unprofitable projects, conflicts may arise, and loose governance associated with growth is a common problem. As these issues become more significant, investors can come under pressure to respond. Some take a more drastic approach by joining boards of projects, while others take a milder approach.
The future of Web3 in Africa
Q: Lastly, please tell us about the future of Web3, especially in Africa.
Yoshida: Once we look at blockchain from a global macro perspective, I think it is still difficult to say that it is being fully utilized in the real world due to its infancy. In other words, I believe that blockchain is still in its beginning phase in terms of its practical use in real society. The world I see is that more useful use cases of blockchain will emerge from Africa, and the world will realize its true value as examples of blockchain helping real people’s lives are generated, starting from Africa. This will lead to a world where the blockchain is imported back into the developed world from Africa. We believe that over the next few years, the day will come when Africa will lead the blockchain and Web3 on a global scale.
Shinada: From our perspective, there are three types of startups in Africa. One is startups who will continue to work with Web2 as before. The second is startups who will grow their business by updating their Web2 structure to Web3, and the third is those who will be on the side of enablers or those that empower traditional businesses by providing Web3 solutions.
If you look at investors across Africa, there are still very few investor teams where Web3 and Web2 have joined forces. We are the pioneers and we take pride in this part of the world. So we have a big role to play. On the other hand, we are also going to provide more support to our existing portfolio companies that need to transition from Web2 to Web3, but don’t know how to do it. In this sense, the significance of this partnership is also great. In the future, we would like to promote the connection between Web2 and Web3, while contributing to the expansion of business models that emerge from this connection.
Read more: Interview with EMURGO Middle East & Africa CEO Yosuke Yoshida (Part 1)
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