STARTUPS and small businesses in Tanzania often struggle to find the necessary funding to grow their businesses. Many are unaware of the concept of venture capital, a key source of funding for businesses looking to scale.

In this article, we aim to shed light on the importance of venture capital in Tanzania and highlight some of the key players in the industry. We will also discuss the challenges and opportunities that exist for venture capital in the country, providing valuable insights for entrepreneurs looking to take their businesses to the next level. 

What is venture capital?

Venture capital is a form of financing that provides funding to startups and small businesses with high growth potential. This type of financing is usually provided by investors or venture capital firms that are willing to take on the risks associated with investing in early-stage companies. In exchange for their investment, these investors receive an ownership stake in the company.

Legal framework for venture capital

The legal framework for venture capital in the country is governed by various laws and regulations such as The Companies Act, (Act No. 12 of 2002, Cap 212), which provides for the regulation of companies in Tanzania. It sets out the requirements for the incorporation and management of companies, including venture capital firms.

There is also The Investment Act (No. 10 of 2022), which provides for the regulation of foreign investments in Tanzania. It sets out the requirements for foreign investors, including venture capital firms, to register their investments with the Tanzania Investment Centre.

On the other hand, The Capital Markets and Securities Act, Cap 79, R.E 2002 also play a vital role as it provides for the regulation of securities and capital markets in Tanzania. It sets out the requirements for venture capital firms to register with the Capital Markets and Securities Authority and comply with securities laws and regulations.

Legal challenges facing venture capital firms

Despite the existence of laws and regulations governing venture capital in Tanzania, there are still several legal challenges facing venture capital firms. Some of these challenges include the following;

Limited legal and regulatory frameworks

The legal and regulatory frameworks governing venture capital in Tanzania are still relatively new and underdeveloped. This can create uncertainty for both investors and investee companies.

Contract enforcement

Contract enforcement in Tanzania can be challenging, particularly for foreign investors. This can create risks for venture capital firms and discourage investment.

Intellectual property protection

Intellectual property protection in Tanzania is still developing. This can make it challenging for venture capital firms to protect their investments and the intellectual property of investee companies.

How does venture capital operate?

Venture capital in Tanzania operates similarly to other countries. The process typically involves the following steps:

Sourcing potential investment opportunities

Venture capital firms in Tanzania source potential investment opportunities through various channels such as referrals, industry events, and business plan competitions. They usually look for startups and small businesses with high growth potential in sectors such as technology, healthcare, and agriculture.

Conducting due diligence

Once a potential investment opportunity is identified, the venture capital firm conducts due diligence to assess the viability of the investment. This process involves analyzing the financials, management team, market potential, and scalability of the company.

Negotiating terms of investment

If the investment opportunity is deemed viable, the venture capital firm negotiates the terms of the investment with the company. The terms usually include the amount of investment, equity ownership percentage, and expected return on investment.

Providing ongoing support

Once the investment is made, the venture capital firm provides ongoing support to the company. This support includes providing access to networks, resources, and expertise to help the company grow and achieve its potential.

Key players in Tanzania’s venture capital

There are several venture capital firms operating in Tanzania, both domestic and international. Some of the key players in the industry include GroFin Tanzania, a venture capital firm that provides financing and support to small and medium-sized enterprises in Tanzania. They focus on sectors such as healthcare, education, and agribusiness.

Another key player includes Savannah Fund, an Africa-focused venture capital firm that invests in early-stage technology startups. The fund has made several investments in Tanzania, including in companies such as JUMO and Mkopa.

Tanzanian Venture Capital Network is also a player in the field, it is a network of venture capital firms and investors in Tanzania. It aims to promote the growth of venture capital in the country by providing support and resources to members.

Challenges and opportunities

Despite the potential benefits of venture capital, there are several challenges facing its development in Tanzania. Some of these challenges include a limited pool of capital available for investment in Tanzania, which limits the number of investment opportunities available to venture capital firms.

Another challenge is related to underdeveloped legal and regulatory frameworks, whereby it still relatively new and underdeveloped, hence create uncertainty for both investors and investee companies.

Venture capital I Tanzania also face shortage of high-quality investment opportunities; this makes it challenging for venture capital firms to find viable investment opportunities.

Despite these challenges, there are several opportunities for the growth and development of venture capital in the country which include increased investment in domestic venture capital firms, the development of appropriate legal and regulatory frameworks, and collaboration between government, private sector, and international organizations.

With increased investment in domestic venture capital firms, the development of appropriate legal and regulatory frameworks, and collaboration between government, private sector, and international organizations, venture capital can contribute to the growth and success of Tanzania's entrepreneurial ecosystem.

The potential benefits of venture capital in Tanzania include job creation, increased economic growth, and the development of innovative solutions to local and regional challenges.

Irene Gunze is an Advocate and Head of Corporate Services from Rive & Co, a law firm known for its commitment to trust, credibility, and innovation in providing top-tier legal services. This article is for informational purposes only. For personalized legal advice, consult a qualified professional.