Raising funding in Africa is tough, but those that succeed have a big responsibility

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It is a long, hard road to raising funding as a tech entrepreneur in Africa, requiring lots of perseverance, but those that do succeed in doing so have a responsibility not only to their investors but also the next generation of founders.

That is according to startup founders taking part in a panel entitled “How to raise funding in Africa – self-help session for founders” at last week’s Africa Startup Summit, powered by Disrupt Africa at the third edition of Africa Tech Summit Kigali.

Though African startup funding is on the rise annually, lack of capital for tech entrepreneurs remains a serious issue. But according to Jean-Claude Homawoo, co-founder and chief product officer at Lori Systems, one of the continent’s bigger fundraising success stories, that is not the biggest problem.

“There is a gap between the startups and the capital. In the US the founders and the capital reside in the same place and it is easy to connect. That is not the case in Africa,” he said.

“The angels are expat Africans that are coming back to the continent or early-stage funds that don’t have a relationship with the entrepreneurs. There is not enough of a connection for those deals to get done.”

Also hindering African founders is the method through which investors write cheques, said Homawoo. 

“It is really pattern recognition; they see the kind of deals that have happened in the past and they try to mimic that. They look for the same makeup over and over again. So for founders that don’t look like those that have raised in the past there is a hurdle. That’s something that we have to break,” he said.

Abdulaziz Mohamed Omar is chief executive officer (CEO) of Kenyan startup MPost, which raised US$1.9 million in funding last year. The company is an alumnus of the Cape Town-based Startupbootcamp AfriTech accelerator, but though accelerators can help bridge the gap between founders and investors, he said they should not be relied upon. Rather founders that have raised themselves should feed back into the ecosystem.

“We now have a growing ecosystem, and we as entrepreneurs should be able to help other entrepreneurs with connections,” Omar said.

Homawoo agrees.

“Companies that have raised successfully can play a role in bridging that gap,” he said.

Etop Ikpe, CEO of Nigerian company Cars45, another that has successfully raised, said the whole funding process will become easier once more startups see exits and their founders invest back into the ecosystem.

“Across Africa you don’t have a lot of founders that have exited, and that is where we would get a lot of seed funding. That kind of mature founder profile that understands what it takes. VC is driven by people that personally I don’t think know what to look for,” Ikpe said.

In spite of the troubles securing VC funding, equity investment is still the way to go, with Homawoo saying raising debt capital takes too long, with lenders not really understanding what tech startups are doing. It is not a quick or easy process to raise equity investment, however.

“Be clear what you want, and be patient. We got a lot of doors shut in our faces but we raised the money. You have to be extremely patient,” said Omar.

Homawoo said though VC is most accessible, there are nevertheless a lot of companies that are not meant to be VC-funded. 

“VC is relevant for high-growth companies. Taking money from VCs and then not growing very fast is the source of many headaches and grey hairs,” he said.

Ikpe is in agreement on this, saying taking on VC funding is not for the fainthearted. 

“When you take on that money, that money needs returns, and it is a big responsibility. You have to scale the company,” he said.

His advice for those that choose such a route?

“Speak to as many people as you can, and get people to understand the business.  Don’t wait until you need money. That’s a very bad time to start looking for money,” said Ikpe. “Getting some type of financial education is very important.”

Should you succeed in raising, however, the responsibility you take on is not just to your investors, but to all African tech entrepreneurs that will follow.

“It is very early in Africa, the continent needs some success stories. Beyond you building a business there is a responsibility on you to make that business successful so the next guys can raise money as well,” he said.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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