" ITREALMS: Harnessing startup potentials in Africa - ITREALMS

Wednesday, August 19, 2020

Harnessing startup potentials in Africa - ITREALMS

Startup entrepreneurs are working to harness Africa’s potential. Together they represent a critical pipeline of innovation that is driving high growth high impact solutions on the continent, reports ITREALMS.

A critical juncture for any startup comes at the seed stage, a financing segment that has experienced significant changes these past months. In this article, we delve into the changing dynamics of seed-stage investing and as VC4A works to recruit startups for the 2020 VC4A Venture Showcase - Seed.

At the pre-seed stage, entrepreneurs are going after their first third party investment, raising $50K to $150K. Often Friends, Family, and Fools (FFF) + public funds in some African countries (for example DER in Senegal, Entrepreneurs of Tunisia, and the Technology Innovation Agency in South Africa), are the only investors at this stage. Going on to the seed round, entrepreneurs are expected to be selling the product on the market and testing customer response. This is the moment the company needs to raise their first significant ticket and are looking for professional investors to help grow and scale the business. Overcoming these initial fundraises is a challenging test for any entrepreneur.

Tomi Davies, President of ABAN, explains, “Seed stage investment is when a startup has proven its Minimum Viable Product (MVP) and is in the process of finding product-market fit. In Africa, they will typically have revenues in the tens if not hundreds of thousands of USD.”

Overall, seed-stage investment on the continent is still growing (see Partech figures) and expanding across more ecosystems in Africa. All active players on the continent see a better quality of startup/entrepreneurs due to A) better mentoring programs in most countries B) an increase of Business Angel networks and C) a new generation of entrepreneurs very open to technologies, with a pan African vision and a willingness to scale fast. That said, seed funding is still insufficient on the continent and concentrated on just a few ecosystems (predominantly Anglophone).

In Africa, the maturity of a startup raising seed funds is arguably higher than in other continents due to the scarcity of capital. For example, a team fundraising pre-seed would be expected to have already built a prototype or even have launched a product or service. GrĂ©goire de Padirac from Orange Ventures adds, “It is nearly impossible to raise with only PowerPoint presentations in emerging countries.” And for all right and wrong, most seed-stage startups on the continent have to demonstrate their resilience (low cash burn), show clear traction, and be generating revenues. Tomi expands, “The expected revenue levels continue to increase and it is unlikely for a startup with less than $100K in revenues to get seed investment nowadays.”

These realities result in a higher threshold for the continent’s entrepreneurs and might also be contributing to the local vs. foreign founder dynamic, where management teams do better when they have their own resources and better access to networks at the earliest stages of venture building. 

At the same time, incubators and accelerators that have the mandate to prepare startups for their first pre-seed investment, the single most significant KPI, are too often concerned with their own financial sustainability. In reality, many of the incubators and accelerators are playing a numbers game focused on the number of cohorts and the number of companies graduated vs. the quality of support delivered and resources secured. Khaled Ismail of HiM Angels explains, ‘Too many incubators and accelerators fail to provide the mentorship and guidance the startups need at such early stages of formation and when they need it the most’. 

These are additional pressures on the startups when the road to funding is in actuality longer and more difficult to attain.

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