Local venture capital firms: a key instrument for improving access to finance in Lesotho

The Emerging Venture Capital Landscape

Lesotho, a country known for its scenic mountains and rich culture, is also gaining traction as a hub for innovative startups, despite not yet appearing on the Global Startup Ecosystem Index for 2024. Startups like OnePower (providing renewable energy solutions), Chaperone (aiding logistics and transport), and myproperty Lesotho (an online real estate platform) are a testament to the country’s growing entrepreneurial spirit. However, one key ingredient is still missing for these businesses to reach their full potential: venture capital (VC) funding.

While Lesotho’s VC scene is still emerging, some players are beginning to support local innovators. Blaq Ventures, for example, focuses on startups across underrepresented African markets, including Lesotho, offering funding and mentorship in promising sectors like fintech, edtech, and healthtech. Additionally, Basotho Enterprises Development Corporation (BEDCO) has partnered with Enygma Ventures to fund and support small and medium enterprises (SMEs), with a particular emphasis on empowering female entrepreneurs. Through these partnerships, BEDCO and others are bringing critical investment and resources to Lesotho, and platforms like the Innovation Bridge Portal also connect African startups to international investors, such as Seedstars Africa Ventures. Despite its early stage, this environment offers unique opportunities for potential VC investors.

The Funding Gap: A Barrier to Growth

Lesotho’s startups face significant challenges in accessing external funding. A 2014 study[1] reveals that 63.4% of SMEs rely on personal savings as their primary source of capital, with only 50% seeking credit for working capital. According to AfDB[2], only 4.2% of SMEs had access to loans at the end of 2023. The reliance on personal savings and retained earnings underscores a critical funding gap, as traditional financing avenues such as loans and equity investments remain largely inaccessible.

This limited access to capital stifles the growth potential of SMEs, which are crucial for job creation and economic development. Addressing this gap would require innovative financial solutions, including VC, grants, and other alternative financing mechanisms.

Proximity is a key factor

Setting up VC firms in Lesotho could be a groundbreaking endeavor, offering the chance to bridge a funding gap and bring essential support to local startups. With a strong demand for capital among Lesotho’s SMEs and emerging tech ventures, particularly those that struggle to access traditional funding sources, a local VC could play a pivotal role in fostering growth and driving economic development.

Although Lesotho is landlocked within South Africa, one of Africa's "Big Four" venture capital markets, it remains largely excluded from the capital flows directed at South African startups, as these investments predominantly focus on South African businesses. By leveraging geographic and cultural ties, a venture capital firm in Lesotho can closely monitor and manage investments while gaining insights and best practices from the more developed South African VC ecosystem. This cross-border dynamic can facilitate access to experienced mentors, networks, and potential co-investment opportunities.

Proximity often correlates with investment success. For example, between 2014 and 2024[3], Los Angeles-based VC firms directed 56% of their funding to California startups, significantly outpacing regions like Silicon Valley, New York, and Boston, which averaged less than 40% of local investment. This localized approach fosters stronger collaboration, faster decision-making, and better resource allocation, all of which are critical to helping startups scale and thrive. A similar approach in Lesotho could be transformative for its entrepreneurial ecosystem.

Additionally, a local VC firm tailored for Basotho entrepreneurs provides a critical advantage—local knowledge. This proximity allows for in-depth market understanding, which is essential for sourcing, syndicating, and funding portfolio companies. Unlike foreign VCs, which may be hesitant to invest in smaller markets, a local VC can take advantage of the emerging trend of investors focusing on local and underserved markets, tapping into opportunities for both returns and impactful growth. Research even suggests that local bias in venture capital often leads to better oversight and increased chances of success for regional investments. Thus, establishing a local VC in Lesotho is not only a strategic move for economic growth but also a bridge to regional collaboration and development.

Opportunities of Starting a VC

High Potential for Impact: With limited financing options, Lesotho’s SMEs and startups could benefit immensely from local VC support. This approach can accelerate growth, create jobs, and elevate economic development nationwide.

Niche Market Positioning: Lesotho’s relatively unsaturated market presents an opportunity to establish a unique, recognizable presence with limited competition compared to more established ecosystems.

Support for Regional Development Goals: Lesotho’s government, along with BEDCO, emphasizes private sector growth, especially for SMEs. Public-private partnerships could offer a VC additional leverage and resources to support entrepreneurs.

Strengthening the Private Sector: By investing in Lesotho’s private sector, particularly its SMEs, a new VC firm would contribute to job creation, economic diversification, and innovation, aligning with national development goals.

Challenges to Consider

Market Maturity Risks: Lesotho’s undeveloped VC landscape means there are infrastructure and experience gaps that can heighten the risks of early investments. Additionally, ecosystem support, such as accelerators and incubation programs, is still minimal.

Limited Exit Opportunities: With fewer acquisition opportunities and no public stock exchange for smaller companies, liquidating investments may be more challenging than in larger markets.

Capital Constraints: Building and scaling a VC firm in Lesotho will require substantial capital, which may be best achieved through partnerships with larger African VC firms or international investors.

Risk of Failure: High failure rates among small businesses make VC investing inherently risky, requiring thorough due diligence and careful portfolio management.

Infrastructure and Regulation: Limited digital connectivity, inadequate transport networks, and complex bureaucracy increase operational costs and hinder scalability.

Nonetheless, to address the limited exit opportunities in Lesotho’s venture capital landscape, regional integration can broaden exit options by leveraging regional markets like the Johannesburg Stock Exchange (JSE). Additionally, establishing secondary markets or over-the-counter (OTC) platforms could enhance liquidity and facilitate private equity trades. Management buyouts (MBOs) also provide another pathway, allowing the startup’s leadership to acquire the business and ensure continuity. Lastly, focusing on trade sales in high-growth sectors such as technology and renewable energy can attract acquisition interest and create sustainable exit opportunities.

Strategies for Success: Building Strong African Partnerships

Collaboration with Established Regional VCs: Building alliances with African VC firms like Seedstars Africa Ventures, AfricInvest, and Lateral Frontiers can enable resource sharing and offer access to their networks, expertise, and deal flow. Such partnerships not only reduce initial risk but also help establish a presence as part of a larger African VC ecosystem.

Engaging with African Investment Networks: Organizations like the African Venture Capital Association (AVCA) can provide networking opportunities, mentorship, and industry events, enabling one to learn best practices and foster collaboration with other investors and experts across the continent.

Leveraging Local Support: initiatives like BEDCO and the Innovation Bridge Portal can help tap into networks that link investors with local businesses, making it easier to build an investment pipeline. These resources also provide a way to learn more about local markets and access strategic partners.

Forming Cross-border Collaborations: Partnering with South African firms and other Southern African countries for co-investment can provide invaluable insights into regional markets, diversifying investments while also supporting portfolio companies’ expansion efforts.

A Promising Opportunity Awaits

Overall, starting a venture capital firm in Lesotho could be a powerful opportunity to tap into an emerging market with high growth potential. Focusing on sectors like agribusiness, fintech, and tech-driven SMEs, and building a network of strategic partnerships, can create a foundation for success in this unique market. Although risks exist, the rewards of growing the local economy, supporting innovative entrepreneurs, and establishing a VC presence in Lesotho could be transformative. With the right approach, resources, and commitment to building the ecosystem, a VC can help catalyze Lesotho’s journey toward becoming a vibrant, innovation-driven economy.