Venture capital emerged from Silicon Valley and became global by default, reflecting the industry that receives most of its attention: technology.
Fund managers in the US and Europe proceed to dominate the headlines, but quietly (or fairly increasingly loudly) other investors in emerging markets are honing their craft in contrasting circumstances.
Just approximately 1% of worldwide enterprise capital is currently being rolled out in Africa, which raises an interesting query: How should the growing variety of tech founders on the continent approach raising capital in a illiquid market?
Drawing on my 10 years of experience raising capital for my very own startup and advising a portfolio of technology startups in East Africa, I try to supply my view on the best way to best raise funds in difficult market conditions.
Early stage competition
From 2024, there might be more liquidity in the continent’s enterprise capital space (particularly funds locked in Africa-focused funds) than ever before. In this context, I imagine that the recent increase in fund utilization following the capital market downturn is growing surprisingly slowly.
I see investors looking for a recent generation of “cutting edge” African technology solutions in favor of already “tried and tested” business models and less desire to “rescue” firms currently in the growth stage and struggling. As a result, several mature firms in East Africa have recently needed to go out of business, highlighting the urgent have to develop recent success stories.
Unsurprisingly for the emerging VC market, competition is particularly intense in the earlier stages. Series A deals are currently hotly controversial, although pre-seed and seed funding is still lacking attributable to investors’ reduced appetite for risk.
Sources of capital
On Shovelwhen I counsel founders who review our funding cohorts, I tell them to think of customer revenue as the most cost-effective source of capital. When there is less money in circulation, founders must focus on pursuing business models with strong unit economics and a relatively quick path to profitability. This includes the fundamentals of fine business practices versus the hype-driven decision-making seen in some US tech hubs and even Africa during the 2021-2022 capital boom.
Bootstrapping is one other approach to describe this approach to building firms – an approach that experienced a renaissance in Europe and the US during the VC funding drought. I at all times encourage African founders to first adopt a mindset focused on stability and long-term growth, which can allow them to think about experimenting later when the first revenues come in and with less runway risk. It is also price considering alternative sources of capital, reminiscent of grants.
Building trust
East Africa is a lower trust environment and transaction execution could also be harder than in other markets. If you are a recent founder, ask for a warm introduction to an investor from one other founder who has more experience than you.
Investor circles in markets with lower liquidity are normally smaller, so face-to-face meetings can be of great importance when presenting offers. In my experience investing in East Africa, seed funding rounds often take a very long time to shut, as much as six to nine months. These timelines should be worked around so that founders don’t get stuck.
An example is the use of Simple Future Equity Agreements, or SAFEs, which permit founders to shut and receive smaller checks “one by one” in line with investor commitments.
Another hack is to ask an international investor to your round; sometimes they set a more ambitious pace, which local investors then follow.
And if you have a startup advisor, why not see if they can change into your first business angel if they imagine in your vision?
In 2021 BCG evaluation representatives of the African VC scene stated that almost all deals didn’t make it beyond the second stage (keep in mind that this is a yr that individuals in Europe and North America fondly remember as the golden era of low cost money in technology).
This context requires African founders to be disciplined and resilient, which can help them reveal the long-term viability of their firms to investors. Most conventional wisdom about fundraising mainly applies to more mature markets. In this era – especially on this continent – it is extremely necessary to obviously understand the market context and adapt quickly. This approach will help ensure your startup not only survives, but also thrives in the face of low liquidity.