Pule Taukobong, founder of the Africa Angels Network (AAN), looks at the startup funding landscape in Africa and the challenging facing African entrepreneurs if they are to fund and scale their ventures.
There has been much written recently about the various challenges faced by African startups as they seek to raise capital. To describe the process as one that is difficult would be to grossly understate the trials and tribulations faced by even the most promising of startups as they navigate an ecosystem that is still, essentially, in its infancy.
When I founded Africa Angels Network last year, my ambition was to raise millions of dollars, which I would then invest in startups across Africa. I met with investors in New York, Washington DC, Boston, San Francisco, London, Nairobi, Cape Town and Johannesburg over a period of around four months, and only managed to raise US$20,000 (from a good friend of mine). I probably spent US$25,000 to raise that US$20,000!
Part of the challenge lay in the fact that I was approaching too broad a spectrum of investors. I was pitching to high net-worth individuals, social impact funds, VC funds, PE firms, corporations, aid organisations, pension funds, endowments, foundations etc. If it had money, I reached out to it! Without exaggeration, I would say that I pitched AAN over 200 times, with 70 per cent of those pitches being in-person.
The whole process ended up consuming an inordinate amount of time and effort. I had even spoken with investors who had never been to Africa, yet alone invested in Africa! Some did not know whether Johannesburg was in Kenya or South Africa. I had not adequately researched their investment mandates – regional focus, investment stage, sectors etc.
However, I would liken my initial fundraising experience to running at full speed on a treadmill for sixteen hours a day, every day, for four months – although I never really got anywhere, I became extremely fit!
Having now invested in 17 startups across 8 African countries, and having raised a fair amount of capital (still not nearly the full amount that AAN needs), I thought I would share my 2-cents-worth on what the funding landscape is like in Africa, and share a few suggestions for African startups.
A good place to start is to figure out what stage you are at, and how much you are looking to raise. Don’t be vague. Know precisely what your funding requirements will be, and be able to articulate to investors what exactly it is that you will be offering them. You should also be able to relay to investors the rationale behind your proposed valuation and why you believe it is fair. Based on that, this is where you’ll probably find yourself:
Raising a US$10,000-US$50,000 round
So you have a great idea and need some capital to get it going. In Africa, your best bet for funding at this stage is friends and family, accelerators and incubators.
Raising a US$50,000-US$500,000 round, aka Cliff 1
So you’ve graduated from your accelerator/incubator, passed with flying colours, and built up a great product and need to scale it. You may have even managed to do this without an accelerator or incubator (I’m seeing more and more of this in Africa). Now, of course, you need cash to scale. Right now kunzima (“it’s TOUGH” in Zulu) to get this money for African startups at this stage.
The majority of startups I come across are at this stage, yet this stage has, by far, the least amount of capital available! Correction, in theory the capital is there, but there is not much angel capital. As a result, many African startups fail and die a premature death at this stage.
Some try going from startup competition to startup competition (at times across countries) in a desperate attempt to raise capital. Some even venture overseas to do this. But more often than not, the result is the same… They end up spending more than they raise.
Technically, this is where angels are meant to plug in to the ecosystem, and I believe there will be a growing number of angels and angel networks in time, but they are still few and far between in Africa, which is something I touched on in my previous post. However, in this space you will find a few of what I call “trangels” (pronounced tray-ngels), i.e. angel investors that will back you once you have proven out your model. These are angels that are willing to now start writing those US$10,000-US$50,000 checks, but want to see that people (customers) want/like/use your product. In other words, they want to see traction.
So my advice is as follows: create some form of traction in your business before you speak with any of these trangels, or risk wasting a lot of time and effort. There are also some VC funds that fund startups in this stage, but not without any traction. Based on my experience with startups at this stage of development, I recommend budgeting at least six months for your capital raise.
Raising a US$500,000-US$2.5 million round
There are a couple of legitimate VC funds in this space now. Be aware though, they rarely take up an entire round, so you will need to talk to quite a few of them. Again, the more traction you have here, the better! You will need far more traction than you needed for trangels. Here too, budget six to eight months to close your round.
Raising a US$2.5 million-US$10 million round, aka Cliff 2
I have found there is a bit of a funding gap here too, though not as much as there is with Cliff 1. We are starting to see some “growth stage funds” appear in this space. Given that you are usually doing quite well as a startup here, but capital is also a bit scarce, expect your raise to take about six months.
Raising a US$10 million+ round
I have not waded through these waters yet, but some of our startups are getting there, so watch this space!
Some general suggestions
- Know what stage you are at as a startup – this will allow you to target specific, relevant investors
- Conduct as much research/due diligence as possible when deciding which investors to approach – know your target audience
- Your chances of getting an investor’s attention greatly improves if you get a “warm” intro to them, i.e. via a common connection
- Speak to startups that have been funded by these investors
- Be ready for investment – have your term legal docs ready, shareholder/subscription agreements, cap tables etc. I was once highly impressed with a startup that took the initiative to send me a term sheet, not waiting for me to send one
- Always leave an investor meeting with something – cash/cash committed or knowledge. It is really quite a waste to have a meeting from which you, the entrepreneur, gain nothing. At least learn something new from every meeting. Ask the investor for other investor intros, any advice they have for you etc.
- Watch the How to Start a startup videos hosted by Sam Altman from Y Combinator. However, don’t forget that the African ecosystem is very different from Silicon Valley, so do your best to “Africanise” these lessons so that they make sense in the context of your market
- Finally, keep in mind that raising capital is only the beginning of another epic and exciting journey – showing investors that you are capable of rewarding them with good returns by growing your startup.