Why I left San Francisco for Somaliland (not just for camel meat)

In early 2022, my wife and I, a Texan and a New Yorker, decided to leave our tech jobs in San Francisco to move to Somaliland.

It felt like a natural, even obvious career move for both of us.

She became the president of Barwaaqo University, the country’s first residential women’s university. She was the best candidate for the job. She’d be great at running a university in the US too. But nobody was about to let her do that because she’s 29, and American universities don’t usually put 29-year-olds in charge.

As for me, I came to Somaliland to build a venture capital fund. I could have started a fund in San Francisco, but SF doesn’t really need more VC funds. A fund in Somaliland is more useful, more interesting, and it’s going to produce much better returns. That last part surprises some people.

VC in San Francisco vs. VC in Somaliland

The returns of a VC fund are based on two inputs – entry price and exit price.

If you’re a fund investing in pre-seed companies in the US, the average valuation of a company you invest in is $10M. That’s as of Q3 2022, after a big market downturn.

A pre-seed company in the US typically doesn’t have revenue, a team, or a product. It’s usually just a deck with a founder or founders attached. US investors have decided, on average, that promising founders with an interesting idea are worth $10M.

Most of the time, these companies go to zero. It sounds crazy to make this kind of investment. But it makes sense because sometimes – in around one out of every twenty companies – the two founders with a pitch deck wind up building a huge business. The returns from that one company can be large enough to create a successful portfolio, even if all the other investments went to zero or returned a very small amount of money. Virtually all early-stage VC funds operate on this logic. Most companies will fail, and one or two will succeed in a big way.

Average returns for a VC fund are a little bit less than 2x the size of the fund (typically over a 10-year life of the fund). A very good VC fund returns 3x or more.

When a pre-seed fund in the US invests in a bunch of companies at $10M valuations, their condition for a successful fund is that one of those companies gets acquired or goes public at a valuation north of $1B. (This is oversimplified, but a useful rule of thumb.)

Now let’s compare this to Somaliland.

In Somaliland, instead of valuing a pre-seed company that’s just two founders and a deck at $10M, we value that company at $100,000 or $200,000. (Actually, we sometimes value operating, profitable companies at those valuations.)

Because our entry prices are 50 to 100 times lower than in the US, our exit prices can also be 50 to 100 times lower and still produce the same level of return as the pre-seed fund in the US.

In other words, where a US pre-seed fund needs one of their companies to have a $1B exit for the fund to be successful, we would only need one of our companies to have an exit of $10M or $20M. The second one is much easier!

If one of our companies gets to a $1B exit – or even 20% of that – then our fund is massively successful.

Sidebar - can Somalilanders really build big companies, though?

Yes, they can.

There are multiple billion-dollar businesses that are headquartered in Somaliland or were built by Somalilanders. Just last year, WorldRemit, founded by Somalilander Ismail Ahmed, was valued at $5B.

Thanks to the internet, billion dollar companies are built in every part of the world.

Cargo loading at the Port of Berbera

The reality of internet penetration in emerging markets

I think the idea of “internet penetration in emerging markets” feels a little abstract to most people.

One thing it means for founders is that the barriers to entry and scale are rapidly shrinking. The tools and knowledge that management teams need to build their companies are all right there on the internet, and they’re free or very close to it.

It’s also easier to access customers than it’s ever been. Internet platforms enable low-cost distribution and product discoverability, and not just locally. Somalilanders can and do sell products to people all over the world.

For most of our companies, Somaliland will be the first market, and then the company will expand to East Africa (300 million people) and the Gulf States (65 million people, $2.5T in GDP).

Here’s the reality of how Somalilanders use the internet: Everybody is on Facebook. Everybody communicates through WhatsApp, including businesses. Every young person is on Instagram and TikTok.

Maybe you’ve heard about mobile payments in Africa “leapfrogging” wealthy nations?

I’ve lived in Somaliland for more than two years, and every payment I’ve made since the first week I was here has been through my phone. If you have someone’s phone number, you can pay them in 20 seconds, they’ll receive it instantly, and there’s no fee on either side. There are a few beggars on the street, and they ask for money by holding up a cardboard sign with their phone number written on it.

Now combine the way Somalilanders use internet platforms with the ease of mobile payments. Somalilanders are already living in Facebook, Instagram, and WhatsApp. That’s where they’re getting news and entertainment and communicating with friends and family. How much do you think it costs to put an ad on Facebook or Instagram in Somaliland, compared to the US? Once a customer clicks through, they can easily start communicating with the company on WhatsApp, through text, links, images, videos, and voice. When they’re ready to buy, they can pay through their phones like they do with virtually every other transaction in their lives.

Residential neighborhood in Hargeisa

VC as sales vs. VC as company-building

Back to how VC is different in SF than Somaliland.

The actual performance of venture capital – excluding the role played by LPs – has four parts.

  1. Sourcing : when you meet founders who are raising money for their companies and get them to pitch you
  2. Winning : when you convince a founder to let you invest money in their company
  3. Picking : when you think about all the companies that you could invest in and decide which ones to actually invest in
  4. Helping : Once you’ve invested, this is when you actually help the founders build a successful business

The San Francisco Bay Area is lousy with venture capitalists. It’s an oversaturated, very competitive market.

One consequence of that is that the sourcing and winning wind up being disproportionately important. If you’re a Bay Area VC, there are 500 other VCs who invest in the same things you do. Your biggest fear is that they’re seeing companies that you’re not seeing. Your second biggest fear is that when you do see a company that you like, one of the 15 other VCs who saw the company is going to win it away from you.

The more saturated a market is with VCs, the more each VC is incentivized to pour their resources into sourcing and winning – in other words, marketing and sales. The more they focus on sales and marketing, the worse they are at every other part of the business.

The incentives for VCs to focus on sales have gotten so out of control that a lot of VCs are now explicitly ignoring the other parts of the business as a strategy. Why waste time diligencing and helping companies when that only makes it harder to source and win new deals?

Things are different in Somaliland.

There are no other venture capital funds in the country. I hope someday soon there will be, but right now we’re the only one.

Having no competition comes with a lot of advantages.

For one, we don’t have to obsess over sales the way VCs in the US do. We barely have to think about it at all. We just have to hang out our shingle and tell a few well connected people we know, and it’s enough to help us see and win basically every viable VC deal in the country.

We don’t have to waste time and resources worrying about deal access, and we don’t have to rush into investments because we’re afraid of missing out.

Instead, we can spend time getting to know founders, studying their business and their market, and watching them build the company over time. We can make informed investment decisions on our own schedule. And once we invest, we don’t have to scramble back to the sales floor. We can spend time with our portfolio companies, helping them build their teams and scale their businesses.

Pictured: more new construction than SF had in 2021

Geopolitical risk vs. Deal access risk

Fundamentally, we’re playing a different game than other VCs.

Because of our environment, we have massive advantages in access to companies and talent, in deal structure and diligence, and in pricing.

For most VCs, the core risk is deal access.

Our core risk is geopolitical.

At first glance, investing in Somaliland sounds very risky . But that’s because most people don’t know anything about Somaliland. (I certainly didn’t before I first came here in 2017.)

People don’t know that despite its unrecognized status, Somaliland has been democratic and independent since its founding in 1991. It has an independent government, legal system, military, and currency, which is pegged to the dollar. It’s considered by Western observers to be the strongest democracy in East Africa. It’s a stable, investor-friendly nation with strong legal protections and tax incentives for foreign investors.

The fund is partnered with Abaarso Network, an international entity that’s been running Abaarso School, the top educational institution in the country, for a decade and a half. I taught there, and I’m well plugged into the alumni network, which is one of the most talent-dense ecosystems in the country. The fund’s network of advisors includes senior leaders at Somaliland’s leading financial institutions and businesses and influential cultural figures across local communities.

There’s a long list of things we’ve done to feel comfortable in our protections as investors. The most essential is our mission. We’re investing exclusively in Somaliland companies. The only way we can succeed is by helping Somalilanders build huge businesses.

VC that matters vs. VC that doesn’t

Most VCs in the US want to invest in companies that other VCs want to invest in. That’s an essential signal for them.

Andreessen Horowitz GP Alex Rampell explained the rationale for this in a podcast he did last year, and it’s pretty straightforward.

Venture-backed companies in the US are built to grow fast and unprofitably. In the US, 70-80% of companies are unprofitable at the time of IPO.

The way venture-backed companies fuel fast, unprofitable growth is by raising new rounds of venture capital every couple of years. So if you’re an early-stage investor, one of the most important factors in your investment decision is whether you think other VCs will continue to invest in your unprofitable company. That means VC investors are heavily selecting for consensus deals when they make investment decisions.

Consensus companies by definition don’t need more champions, and they’re usually not solving important societal problems. They’re usually enterprise software companies with well known sales motions that can produce predictable recurring revenues.

If we take a step back and look at the incentive structure for a VC in San Francisco, all that you’re left with is “find the deals that everyone wants to do and then win the right to invest in them.” The marginal utility of another VC in this structure is close to zero.

There’s a reason people invest in boring enterprise software companies with predictable revenues. It’s because they’re good businesses! We’re going to invest in those in Somaliland too! And we’ll feel good about it because a) if we don’t invest in and help build them, nobody will, and b) those successful companies will generate wealth, employment, and ecosystem growth that are far more impactful in Somaliland than they would be in San Francisco.

But there are opportunities in Somaliland that go well beyond boring enterprise software. Emerging markets have huge categories that are still untouched. By investing in these spaces, we get to have an enormous positive impact on the country while generating much greater returns than funds in SF.

If you’re interested in what we’re doing…

Email me at [email protected]. I’d be happy to share more about what we’re working on!

Goat mom and baby (center) and a suspicious goat (left)

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What we’re investing in

notes on what we look for in companies

Jesse Clain

42 min ago

We’re a new fund, and venture capital in general is new to Somaliland, so I want to explain how venture capital works and how we’re planning to work with founders and companies.

At the core, what we’re doing is finding companies that we think have a high growth potential and giving them money and operational assistance in exchange for a percentage of ownership. Typically, we’ll seek between 10% and 29% ownership in companies with an initial investment.

Venture capital is very different from loans. While loans in Somaliland can typically only be used to purchase physical equipment, venture capital can be used for whatever the business needs – whether that’s equipment, employee salary, variable infrastructure costs, marketing spend, or something else. And while loans have to be paid back, venture capital doesn’t. It’s pure fuel to help companies grow.

Another important difference is that venture capital aligns the capital provider with the business operator, while loans don’t. If a business owner gets a loan, all that the lender cares about is whether the loan gets paid back. The lender doesn’t care if the borrower’s business struggles for the next year, or if it stays exactly the same, or if it doubles year over year. All the lender cares about is whether the borrower pays back the principal plus 15%.

When you accept a loan, what you get in return is a debt. When you accept venture capital, what you get in return is a partner – a partner who only succeeds when you succeed, and who maximizes their success by maximizing your success.

A good VC is another lion joining the pride

There are downsides to taking venture capital. If you take venture capital, you’re reducing your ownership of the company and allowing a new part-owner to join your team. It’s not an easy decision to reverse, so you better be sure it’s the right thing for you and your company.

At Abaarso Ventures, we want to be minority shareholders. That way, the founder(s) can maintain significant ownership of the company and can manage the company day-to-day operations as they see fit. However, there are certain decisions in which we require approval rights – like the hiring of executives, executive salary, and sale of the company. It’s important for us to have these rights in order to protect the health of the company and our success as shareholders. For example, many companies have gotten into trouble because the founder, who had good intentions, hired a close family member to an important executive position when that family member wasn’t really the best person for the job. By providing input in those kinds of decisions, we can help the company stay on the right track.

Investing for growth

We generally want to invest in early-stage companies that we think can grow 100x from their current value.

Let’s say Abaarso Ventures invests $25,000 in a company in exchange for 25% ownership.

Essentially, this is Abaarso Ventures saying the company is worth $100,000 before our investment. In most or all cases, the founders wouldn’t actually be able to sell the company for $100,000 at that point. There just aren’t a lot of buyers who are looking to spend that kind of money on an early-stage company. And if somebody did want to buy the company from you outright, it would be worth a lot less, because a lot of the value of the company comes from the founders and their desire to continue working on the company.

So why are we willing to say the company’s worth $100,000?

It’s because we believe that by providing the company with money, connections, and know-how, and by working together with the founder for years, we can help the company be worth $10M or more. In this example, we’re trying to turn our $25K into (at least) $2.5M, and we’re trying to turn the founders’ vision and hard work into (at least) $7.5M.

That’s a hard hill to climb, and we won’t succeed in every case. So we try to improve our odds by picking founders, companies, and markets that we think have a lot of room to grow.

What kind of companies/markets are we looking for?

VC funds often characterize their target companies according to three filters – geography, stage, and sector.

We have a narrow geographic focus: Somaliland. We’re in the process of thinking through whether that only includes companies headquartered in Somaliland, or whether we should invest under some conditions (e.g. offices/employees in Somaliland) in companies founded by Somalilander diaspora outside of Somaliland.

Our stage focus is pretty narrow. We’re primarily interested in early-stage companies. In many cases, we will be the company’s first external investor. Using conventional VC terms, we’re investing in pre-seed and seed companies, with a smaller number of dollars going selectively towards Series A companies or more mature businesses.

In other words, we will invest in some companies before the founders have even built a product. In order to justify that kind of investment (often called a pre-seed investment), we need to believe that the company is solving a compelling problem and the founders have relevant experience and expertise. And always, no matter the stage, we only want to invest in founders with high integrity.

A seed investment is typically in a company that has put a product in market, and has learned enough from that experience to justify further investment – even though the company may not be profitable or may not have fully figured out their product or distribution yet.

A company that we’d consider “Series A” or “mature” often has figured out a repeatable way to reach and sell to interested buyers. We’ll invest in these sorts of companies if we think we can help them find an inflection point in their growth.

Because we’re reasonably constrained in stage and very constrained in geography, we think it’s important to have flexibility in sector. There simply aren’t enough early-stage companies and investors in Somaliland for it to be practical to substantially limit what sectors we target.

However, we do have several important ethical restrictions in what kinds of companies we’ll invest in. We won’t invest in any companies that are not Sharia-compliant or that are involved in the cultivation or trade of qat. While we might invest in companies that facilitate extraction of natural resources – like a business that helps oil drilling teams do their work more efficiently – we won’t invest in any companies that actually take ownership of non-renewable natural resources like oil and rare earth minerals.

Another reason why we’re flexible on sector is that we have a lot to learn. We have plenty of ideas about what kinds of markets and business models are conducive to breakout growth, but we need to be humble about what we don’t know. Somaliland founders have already taught us a lot about the market, and that will continue to happen over the coming years. We may narrow our sector focus as we work with more founders and get a better sense of what kinds of companies are most likely to succeed in Somaliland.

About the founders…

In an upcoming post, I’ll give more detail about how we evaluate founders. Especially at the earliest stages, our investment decisions will often be more about the qualities of the founders than about their company or the market they’re attacking.

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We made our first investment!

Jesse Clain

General Partner at The Takeoff Fund

Published May 2, 2023

We’re investing in a $110K seed round in Caafisom, a healthtech company based in Somaliland. We’re investing alongside American VC fund Tofino Capital.

As far as I can tell, this is the first time international VC funds have ever invested in a company in the Somali region – the first of many!

Caafisom is on a mission to transform healthcare in Somaliland and East Africa.

The company is live in about 40 hospitals in the region and has served about 8,000 patients. Through its free mobile app, Caafisom helps patients, doctors, and hospitals streamline care delivery by managing patient records, appointment scheduling, and medication information in a simple, transparent way.

The company also makes it 10x easier for patients to travel abroad for essential care by coordinating with overseas hospitals on patients’ behalf and arranging visas, transportation, and accommodation for patients and their families.

Caafisom is already making lives better for people in the Somali region. We’re thrilled to partner with them as they continue to grow and serve patients and care providers in Somaliland and East Africa.

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Why don’t DFIs provide the funding that early-stage entrepreneurs so desperately need?

AWKWARD QUESTIONS: Development finance institutions make a lot of noise about addressing the needs of small and growing businesses and ‘investing where others will not’. Yet they’ve set up investment standards that all but guarantee that their dollars flow to megafunds and big, profitable companies that don’t really need their help, rather than the ‘missing middle’, says VC investor Jesse Clain.

In the fight to accelerate economic development in the poorest parts of the world, development investors aren’t using the most powerful tool at their disposal: venture capital.

Last year I moved from San Francisco to Somaliland (one of about 30 countries classified as low income) in order to start a VC fund. I’d been working in VC in Silicon Valley, and before that I was a high school teacher in Somaliland. I knew that there were massive opportunities in Somaliland that were being ignored.

One story I couldn’t get out of my head was the story of a Somalilander who got two computer science degrees from MIT, then went back to Somaliland to start a tech company. In the Bay Area, VCs would have thrown money at him. But there was zero VC investing in Somaliland and Somalia, so he couldn’t start his business here.

The lack of availability of venture capital in low-income countries is exactly the kind of problem DFIs are supposed to solve

What makes venture capital special is not the financial returns it produces for investors – which are higher risk but on average roughly equal to more conservative forms of investment, like debt – but what it unlocks for entrepreneurs and their communities.

Why can’t DFI contribute to the ‘missing middle’?

Venture capital changes the scope of what entrepreneurs can build. Instead of being restricted to what’s proven to work in the past, VC-backed founders can envision a better future, produce evidence that shows that that future is possible, and then get an investment from a VC that allows them to quit their jobs and work full-time on building that future. Venture capital is a key ingredient for virtually every transformative company that’s been created in the last 30 years – from Tesla to Tencent to Nubank.

But in most low-income countries, venture capital is basically non-existent.

Entrepreneurship is common, to be sure. In fact, entrepreneurship rates tend to be higher in low-income countries than in wealthier countries. That sounds like a good thing, but it probably isn’t. Many people in low-income countries are entrepreneurs by necessity, because there are so few opportunities for formal employment. In order to make enough money to feed their families, people start small shops that sell the same goods as all the other shops on the street, and they make just enough money to stay afloat. Without venture capital, it’s hard to build the kinds of ambitious, scalable businesses that produce a significant number of jobs.

It’s nearly impossible for an entrepreneur in a low-income country who’s not independently wealthy to found and build a scalable startup

The lack of availability of venture capital in low-income countries is exactly the kind of problem development finance institutions (DFIs) are supposed to solve. (See, for example, how Norway’s Norfund describes itself.) But even though DFIs provide billions of dollars of capital every year to underinvested parts of the world, they do almost nothing to support early-stage entrepreneurs in need of venture capital. This is a large component of a financing gap that development investors often call “the missing middle”.

They call it that because DFIs and other institutional impact investors are good at providing capital on the low end – usually by funding financial intermediaries who provide small loans for non-scaling SMEs with solid track records and collateral.

And they’re good on the high end, where they invest US$5-50M in mature private funds, or in profitable large businesses, or in joint infrastructure projects with multinational companies.

But they do almost nothing in the middle – especially in the realm of venture capital. There’s a huge financing hole for companies seeking between $20k and $3m.

DFC, the DFI of the United States, is a stark example of this problem. DFC has invested $18.8b in the last three years. Yet going back to 2015, DFC has made equity investments or fund investments of less than $3m only three times for a combined total of $4.75m. Over that same period, they’ve made 16 equity and fund investments that were between $50m and $100m, for a combined total of $884.8m dollars.

The result of the missing middle is that it’s nearly impossible for an entrepreneur in a low-income country who’s not independently wealthy to found and build a scalable startup.

Capacity constraints

So why don’t DFIs fund these things?

The short, unsatisfactory answer is “capacity constraints”. The longer answer is this.

Large DFIs have hundreds of millions or billions of dollars that they have to invest every year. They employ a small number of investors, mostly in relatively wealthy cities like Nairobi and Johannesburg.

It’s a long, difficult process for DFIs to make any kind of investment. Before an investment is made, companies have to go through impact scoring, ESG consultations, and multiple rounds of presentations before large investment committees. From my conversations with current and former DFI employees, fund managers, investors, and service providers for DFIs, the process tends to take 12-26 months. One fund manager operating in East Africa for five years was told by a DFI that it would take them nine months to review his deck.

This timeline comes with heavy penalties. Let’s say an early-stage startup from Ethiopia approaches a DFI investor seeking capital. Even if the investor wants to make the investment – and many of them do – they can’t do it because of capacity constraints. It’s simply not feasible under current conditions for a DFI employee to go through their intensely burdensome 18-month investment process to maybe one day write a $50k or $100k cheque.

The current incentives imposed by DFI policies all but force Africa-focused investors to concentrate capital in chunks of $5k+ to mature companies and funds clustered around Nairobi, Cairo, Lagos, Johannesburg, and Cape Town.

That’s a big problem. Funding startups in low-income countries is probably the most important and neglected thing we can do in development finance. We shouldn’t give up on it just because DFIs find it easier to invest $20m in a mature megafund in Lagos than to invest smaller amounts in startups in Malawi and Ethiopia. And we can’t give up on DFIs – they’re by far the largest providers of development finance. So what can we do to change them?

We need to dramatically reduce the diligence thresholds and minimum cheque sizes of major development finance providers

The public isn’t privy to most discussions that happen at the executive level of large DFIs or in the government bodies who oversee them. Each DFI has different governing dynamics and different ways of defining their risk tolerance in spending public funds. But there are solutions from the world of private investing that we can implement.

The primary solution is to dramatically reduce investment timelines and diligence requirements for prospective investees.

This is challenging, because it’s easy to say “let’s have higher hurdles for impact measurement” and it’s hard to say “let’s have lower hurdles for impact measurement”. But however well intentioned, DFIs’ gruelling diligence process has the effect of crowding out startups and outsiders, and crowding in wealthy, connected, bureaucratically savvy companies who don’t really need DFI money anyway.

By enabling DFIs to make investment decisions in days or weeks (as private investors do) instead of quarters or years, we can bring down the cost of making an investment, which allows DFIs to reduce their cheque sizes. If they can make an investment in three weeks instead of 15 months, a $100k investment in an early-stage startup is no longer a colossal waste of time. Suddenly it’s viable.

Another practice DFI investors can take from private investors is to invest in more fund managers as a way to increase coverage. Rather than restricting themselves to the relatively wealthy cities where their employees live, investing in fund managers focused on low-income countries in need of capital gives DFIs the tools to make a difference in the places that most need development finance.

If we want to solve the problem of the missing middle, the path forward is clear: we need to dramatically reduce the diligence thresholds and minimum cheque sizes of major development finance providers, which make it nearly impossible to invest in early-stage companies and low-income countries. Development finance institutions are meant to be high-risk, high-impact investors. Let’s help them fulfil their mandate.

  • Jesse Clain is a general partner at The Takeoff Fund, and is based in Somaliland.