More local investors are needed to fill the early-stage funding gap for African tech startups, but there are not enough of them just yet.
Speaking on an investor panel at the AfricaCom event in Cape Town last month, panellists touched upon a number of topics, key amongst the shortage of seed-stage funding in Africa and the problems this creates in terms of pipeline for bigger-ticket investors.
“We need local investors investing in seed to create the pipeline for those investing Series A, B and C. You need the bricks,” said Gregoire de Padirac, investment manager at Orange Digital Ventures.
Danai Musandu, investment associate at Goodwell Investments, said it was taking time to get those “bricks” in place, however.
“If you are talking about really local investors I think we are a while away from that,” she said.
“We need African entrepreneurs that have the mindset to be the next generation of investors. Some executives in more established startups are starting to put some tickets into startups, but we don’t have enough of them yet.”
The funding issues went beyond the lack of seed-stage investors, Musandu said.
“A lot of funds actually can’t follow on. And fundraising for African funds is actually quite a difficult thing. There are a lot of funds on the continent that have only been able to raise one fund, or they have been raising that fund for three years,” she said.
“We’re talking about seed, Series A, Series B, but we don’t really know what those mean on this continent. The understanding of the funding sequence is really a bit arbitrary on this continent.”
Aside from coming up with more money, investors in African tech also needed to be more imaginative in terms of where they put that money. Disrupt Africa research has found that fintech is the most popular sector for investors, but Musandu said investors should look elsewhere too.
“There’s this hype around fintech. Investors have some very silly herding behaviour,” she said.
“We need investors that are not going to look at something that is shiny. Not everything that glitters is gold. What is needed is investors that have real guts, who take real risks, that can give money to the guys that really need it. The quality of the pipeline has really improved. The problem is that investors exhibit herding behaviour, and are not diverse within their own investment teams. The pipeline exists, and we need to challenge ourselves and take that early risk, and take that journey with the entrepreneur. And that means follow on.”
de Padirac agrees fintech is hyped.
“If you are an investor and you are looking for a startup that might get acquired, you pick fintech. Plus it is easy to understand. But there are so many other areas where you can find opportunities,” he said.
AfricInvest director Yassine Oussaifi said what investors could bring to African startups went beyond simply finance.
“You need investors that can bring value to the companies on the ground. They are not just sat in an office in New York. We also need investors who can connect African ecosystems with other ecosystems. It is important to give entrepreneurs the opportunities to connect with the world,” he said.