Securing early-stage investment in Africa can be a challenging endeavour these days, particularly for those new to the entrepreneurial world. While the continent’s business landscape is developing rapidly, successfully navigating the investment environment requires more than a great idea.
Over the years of working with investors and entrepreneurs, I have recognised some unwritten rules guiding some popular principles. I hope that by the time you finish reading this article, you will be able to rethink your fundraising strategy (if you are looking to raise funds) or have a better understanding of how things work.
Understanding the African Investment Landscape
Before embarking on fundraising efforts, it is essential to understand the current state of early-stage investment in Africa. Funding for African startups saw a 46% decline in 2023 from its impressive USD4.8 billion record in 2022 (Partech: Africa Tech Venture Capital Report). What this means is that raising at any stage has become increasingly hard for a lot of companies since 2023 to date. As a result, it is crucial to understand today’s game and how to ensure your fundraising strategy and effort are being maximised.
The investment landscape in Africa is distinct from that of more established ecosystems such as Silicon Valley. Here are some key points to consider:
Traction is Essential: Unlike in some markets where ideas alone can attract funding, African investors typically expect to see tangible results, even at the pre-seed stage. Venture capitalist Mark Suster advises, “Invest in lines, not dots,” suggesting that investors prefer to see a pattern of progress rather than isolated achievements. With this said it is often misunderstood by entrepreneurs when investors reference traction; traction is not only an increase in revenue but could be a deliberate show of progress which could be something as superficial as getting into an accelerator program.
Local Knowledge is Vital: A thorough understanding of local markets and challenges is highly valued by investors. African markets often present unique regulatory, cultural, and infrastructural challenges that require local expertise to navigate effectively. If you are hoping to build a business in the health sector, be as specific as possible on what area you are looking to bring your solution to and display expertise in how the market itself operates- from regulation to market structure and infrastructure. Avoid being vague!
Networks are Crucial: The African startup ecosystem is relatively close-knit, making personal connections invaluable. Building relationships with key stakeholders can open doors and create opportunities that might not be accessible through formal channels alone. Most entrepreneurs only start building relationships with investors when they are about to raise. While this is not entirely wrong it can only make your fundraising journey harder.
Let us look at some Practical Steps for Raising Early-Stage Capital based on the above:
1. Demonstrate Traction
Even at the pre-seed stage, it is important to show that your idea has potential. This could involve:
– Conducting comprehensive market research
– Running pilot projects
– Securing letters of intent from potential customers
– Developing a minimum viable product (MVP)
– Getting into an accelerator or entrepreneurship program
2. Showcase Local Expertise
Investors want to see that you understand the complexities of operating in African markets. Ensure that you always:
– Highlight team members’ local and industry-specific experience
– Demonstrate understanding of regulatory environments
– Show how you will navigate infrastructure challenges
– Explain your strategy for addressing cultural nuances
For instance, if you are launching a fintech product, often display how you will tackle issues such as low smartphone penetration or regulatory compliance in different African countries. Engage in public conversation that will allow you to display your understanding of the market and its challenges. This is where you leverage social platforms like LinkedIn and X, making it easy for investors to track your display of market understanding over time.
3. Build a Strong, Diverse Team
Investors are not just backing an idea; they are investing in people. Focus on:
– Assembling a team with complementary skills
– Including members with both technical and local market expertise
– Build a team experience with the startup environment
If you are a technical founder, consider partnering with someone with strong business development skills and local market knowledge.
4. Leverage Networks and Programmes
Africa has a close-knit startup ecosystem, who you know can be as important as what you know. To build your network:
– Attend local and regional startup events
– Join accelerator or incubator programmes
– Engage with alumni networks from universities or previous workplaces
– Seek mentorship from experienced entrepreneurs
For example, programmes like Y Combinator or local accelerators like CcHub in Nigeria can provide valuable connections and credibility. Attending events like Gitex Africa, Africa Fintech Summit etc, are also great places to build and expand your network.
5. Address Market Size Realistically
Be honest about your addressable market. Instead of merely quoting population figures:
– Provide a detailed analysis of your target market
– Explain how you will reach and monetise this market
– Be realistic about infrastructure and economic limitations
If you are targeting the Nigerian market, do not just cite the country’s 200 million population. Break down your addressable market based on factors like internet penetration, smartphone usage, or relevant economic indicators. This can be hard to get sometimes, so to have a close estimate, look at the level of economic activity/transaction within the market.
6. Demonstrate Scalability
Show how your business can expand beyond a single market:
– Outline a clear expansion strategy to other African countries
– Explain how your solution is adaptable to different African contexts
– Highlight any early traction in multiple markets
For example, if you have successfully launched in Kenya, outline your plan for expanding to Nigeria or South Africa, considering the unique challenges and opportunities in each market.
7. Diversify Your Funding Sources
Do not rely solely on venture capital. Consider a mix of:
– Angel investors
– Grants
– Accelerator programmes
– Crowdfunding
– Strategic corporate partnerships
Venture capital is not the only source of funds available to entrepreneurs. Alternative sources can be a lot more viable way to raise funds than venture capital.
Research local angel networks, such as the Lagos Angel Network in Nigeria or the African Business Angel Network (ABAN), and explore grant opportunities from organisations like the Tony Elumelu Foundation or the African Development Bank.
Even with the above your fundraising journey will not be a walk in the park but I hope it can be a little less frustrating if you put the above into practice.