7 steps to raising Seed Investment for Africa focused Tech Startups - Afrinnovator
I have observed quite a few entrepreneurs trying to raise seed investments for tech startups in Africa over the last few years. I myself raised $150k for Tanzania’s first e-commerce travel portal 2 years ago. I have also seen startups here in Silicon Valley raise money as part of my work at i/o ventures. And yes, I was at Pivot25 last year and saw the significant angel investment gap that exists when most investors present were saying they don’t put in less than $1M and had little to no relevant tech experience. Impact investors are also showing interest in Africa but they don’t seem to be taking any real risk with early stage tech startups, when technology probably offers the most impactful and scalable change in Africa. But let’s face it folks, raising seed funding is hard enough for normal start-ups- I would say its at least twice as hard in Africa- even though Africa is uniquely positioned and there is rising curiosity and recognition of real growth investment opportunities outside of BRIC countries. I see both sides, Africa originated start-ups coming to Silicon Valley to find tech savvy angel investors, to foreigners (mostly Americans) trying to raise money everywhere for a new market as they bring their pioneering spirit like Africa is the last gold rush.
I will start each point with generic advice applicable to any start-up and then I hone in on Africa relevant issues-“Reality of Africa”. I hope this helps start-ups navigate a difficult but necessary process if we are to see more entrepreneurial activity and to grow the ecosystem in Africa.
1. Make sure you are ready – Checklist
This first step is actually common everywhere, entrepreneurs think they deserve financing when its just an idea in their head all the way up to startups showing significant progress but are probably stalling and need significant technical/business help and capital infusion to grow their venture. Also fundraising takes a significant amount of time and if the team is small, it might actually harm the business for key individual founders or CEO to spend 6+ months pitching to investors. Its important to appoint someone in the team to focus on this more (usually the CEO)- poorly prepared startups on the funding road doesn’t help either side. A startup with a single founder is disadvantaged vs a well rounded team that compliments each other. So its key to make sure you have hit key milestones before putting your startup at more risk by spending time on the road searching for funding- you might talk to 50+ potential investors before you get anywhere.
Next, having a product or service out in the marketplace with early customers/users and even revenue is extremely important, I underlined and bolded that for a reason. Investors have many choices to invest and they need to see your company making traction. Last week at 500 Startups demo day here in Silicon Valley, the batch of 34 startups not only proved to me that the bar is getting higher, but its also getting more international as well with significant strong representation from Brazil. India and China which are already hot. With the cost of launching internet startups continuing to drop wherever you are, we will only continue to have more quality startups surface and compete for investors attention- traction is a real currency. The only exception is if you are already an accomplished entrepreneur and have proven to make investors money- then money might be chasing you vs the other way around. But even then, companies like Color here in Silicon Valley that burn millions of dollars with no traction still exists based on founder reputation. Past success is not indicative of future performance, but it certainly helps.
REALITY OF AFRICA: Being ready in Africa for seed investment is definitely different from western markets. Its harder to show revenue for a consumer mobile/Internet start-up- ad networks are just developing, significant scale on internet or mobile users is harder to achieve, and payment ecosystems and trust on the Internet in Africa (different on mobile) is not mature- but this is changing fast. On the enterprise buyer side, most in Africa don’t understand technology that much to decide between different offerings- however, if a technology solution solves a unique problem and gets adopted by a mainstream customer, being first to market has a huge advantage. What I have also seen in Africa is how much startups overplay their intellectual property advantage “my mobile money solution is proprietary” and so have been in stealth and not launched. First of all, enforcing intellectual property is hard in Africa given the legal system, second if you don’t share your idea with others how will you grow your team and add value? The point is that it’s not that IP is useless, many companies do very well on this- but just don’t think your web or mobile startup built with open source technologies has IP that is more valuable than getting real customers and revenue. Many African startup founders also downplay their previous success too much, if you ran a successful tech development firm for many years talk up the experience, it shows that you have what it takes to recruit local staff and build a business. If raising money from Silicon Valley, traction for Africa startups has to be very high to generate interest and compete against what other options angel investors have and because of the unfamiliarity of the market at this stage. What becomes hard is companies that can’t bootstrap to show enough traction, its hard to do a energy/clean tech startup without raising significant capital vs a mobile/web internet startup.
2. Create a clean and short deck + put startup on Angel List and VC4Africa- but it’s no substitute for business planning and deep analysis and connecting face to face with potential Investors
A great deck not only communicates the problem and solution- it also creates an emotional connection and inspires whoever who is looking at it to want to learn more. The deck is often e-mailed to investors, they take a look for 5 mins and then they decide whether to follow up and learn more. Treat the deck that way- its not a full business plan. Here are some guidelines:
- Don’t put too many figures/statistics – limit to 3 per slide- be selective of the most important ones
- Use strong visuals showing the product and screenshots of the service in action
- Focus on the team, achievements and why you are unique to address this problem.
- Make sure the deck flows and tells a story about how you came across the problem, who you are and how you are best positioned to provide the solution
- Keep to no more than 10-12 slides, shorter is better. Other supporting data can be put in an Appendix.
Its harder than one thinks to create a great deck with the requirements above- its a continuous process whilst getting feedback and knowing who the audience is also key- getting a designer to polish up the deck may even be needed. A 1-2 page brief may also be a good idea. Also don’t be afraid to be creative and show off relevant skills- for instance, check out this great HTML5 deck by DressRush (now renamed Tailored, a graduate of 500 Startups) that is both easy to go through and got a lot of buzz online- it shows the team gets how to market and promote.
This brings me onto Angel List. This has become the “LinkedIn for Startups” and although right now it’s heavily Silicon Valley startups and angel investors it has scope for international use if both startups and investors abroad use it – so right now its useful if you are targeting Silicon Valley investors. Some of the features that are great on Angel list including newsfeed notification of progress in your startup, you can put advisors, early investors etc… In short it becomes a place where investors can discover and track your progress.
However, you should also be sure to have solid business analysis behind your startup and industry. When investors dig deeper in a 2nd or 3rd meeting they’ll ask for this- showing that you’ve done the work rather than dismiss the questions as irrelevant is the way to go. But if investors ask for data that doesn’t exit or impossible to predict in an early stage startups, it might be a sign that they are just looking for an excuse to say no as part of their “due diligence process” or just don’t get technology in Africa.
REALITY OF AFRICA: The deck for an African start-ups needs to focus a lot on the problem being solved and traction (users or revenue) the business has achieved more so than in western markets. Given that cutting edge engineering skills are often lacking in Africa, highlighting the development teams previous programming accomplishments will go a long way to ensure that the product risk is minimal- good design is also a big differentiator. A good mix of local and foreign talent that compliments each other especially for a business with significant on the ground presence- can anyone in the team speak fluent Swahili when operating in Tanzania and trying to address the bottom of the pyramid market? Also note, a deck targeted at social impact investors will look very different from one targeted at traditional investors in terms of content and what is important- this leads onto the next point- what sort of investors are ideal for your venture? But first, a word on analysis- focus on key assumptions- why did you chose Kenya over Nigeria or South Africa? Does Africa really need another mobile money online solution and what problem are you really trying to solve? Will people really find and download your application? There is a lot of data on the growth of Africa tech these days- take this deck that came out last week curated presentation of stats, data, graphs, analysis and insights on the mobile telecoms sector prepared by Jon Hoehler and Andrew McHenry . How do these numbers help support your startup? Next also be sure to outline how the funding you are seeking to raise will help you achieve your next goals (something often overlooked)- will this get you to revenue, scale, launch a new product or are you just topping off funding because you are out of money to fund operations?
3. Identify a short list of relevant investors- key criteria for Africa.
Startups can waste lot of time pitching to the wrong investor audience- at the same time you never know whether an investor is interested in your space or not- it’s a balance in time management so it’s key to think thoughtfully about who you may want to target. Start with you closest connections then move out from there. Don’t forget to include friends and family in this- since they know your character best and can provide moral support.
- Do they have any money (obvious I know) AND a connection or interest in your space.
- Do they understand technology like the delicate balance between growth and profitability?
- Do they provide value add knowledge, networks and mentoring? What is their expertise?
- Do they treat their investment like putting money in the bank and getting interest or is it a risky bet at the casino but they learn and have fun. Is this a “feel good” or “impact investment”- make sure you line up on this. Sometimes their investment is just a way for them to “learn about the space”.
- Are they investing for a small stake in a big pie of big stake in a small pie?
- Do they have the bandwidth to help you based on other investments and their day job? Remember a savvy angel investor has many options and some like to get really involved, others more hands off. Are you the best option right now and why?
REALITY OF AFRICA: Unlike Silicon Valley and other parts of the world- this list is likely really short- there are just not many active angel investors in Africa who understand technology, start-ups and pass this list- and there are not enough rich uncles in Africa to go around and support all entrepreneurial endeavors of friends and families (but this is slowly changing as success stories realize they can give back to the ecosystem and also make money). And even then, not many investors are accessible or even know how to angel invest- significant networking help is needed to reach them and get above the noise. African Diaspora living abroad have significant capital they could mobilize for your venture- there are many Kenyans, Nigerians, South Africans etc.. living abroad who might be looking to invest back home. Extending further, the Indus Entrepreneurs (TIE )network of indian diaspora has links to silicon valley that inc. tons of angel investors might overlap with the Indian population that may have resided out of East Africa. They might be eyeing Africa as an attractive investment in technology especially if India has becoming increasingly competitive, saturated or too corrupt and bureaucratic. In Silicon Valley, a connection to The African Network (TAN), might also be able to help. The middle east is another option- UAE, Oman are heavy investors in East Africa for instance.
A word on impact investors- they started in microfinance where they realized you could profitably serve the poor in India, Bangladesh, Latin American and in Africa and have now moved into other areas (health, education etc…), its a new industry and as a result many change their investment strategy as much as the wind in the Sahara or Indian ocean changes direction! Some are more stable than others and clearly state (or can be deduced from their investment portfolio). Impact investors are also less likely to ask about high financial returns and how you will exit your company by selling to tech multinational as they mainly care about what “impact” you are making- such as no. of jobs created, reduction of malaria prevalence, serving an under-served population etc…
4. Connect and educate with potential investors- ask for advice and you might get money. Update progress on Angel list. Draft and test your e-mail pitches, find investors at conferences, use your social skills well- how you interact and reach investors is a key skill. It’s like dating… It also communicates what you might be like to work with. The most networked people do better in business than just being smart and savvy- this is doubly as important when it comes to getting angel investment- it is about who you know and who can refer and vouch for you.
STOP! Before you proceed- go through 1-3 a few times. 4 becomes your point to start talking to people and work your way to investors. Oh and 1-3 is called “creating a company”- you’ll be repeating it again and again for further rounds of funding. No shortcuts, learn to do it once because you’ll be doing it again.
REALITY OF AFRICA: Africa needs tons of education to foreign investors due to preconceived notions of Africa despite growing interest- as a result they might be risk averse right now until they get more familiar with the continent- try avoid the “driveby investors” who might not add much value apart from their money. For local investors it means focusing on how the technology works. Even after foreign investors “get Africa” its really hard to anchor themselves around the needs of Africa since they are not living and breathing the problem you are trying to solve. An American team pitching to a traditional American investor who has never been to Africa would need a lot of education- they might even need to come with you to Africa to see the problem you are trying to solve first hand. People are just waking up here in Silicon Valley to the wonders of Africa mobile banking about 2-3 years late even though M-PESA is already a tired story. This means increasing the time it takes to raise money from this group of investors. European investors might take less time on education but they might not get the technology aspects as much as a Silicon Valley investors- also their risk appetite and familiarity with tech angel investing is likely to be different. An ideal investor would be some foreign expertise that brings tech and management discipline/experience and a local investor who can provide local context and connections.
5. Practice the pitch and work up to your favorite investor(s)- Know the toughest questions upfront and address them intelligently and honestly. You might have to go through “Gatekeepers” who have the connection to the high profile investor, understand their position, don’t assume they will just make an e-mail intro out of the blue. Treat them well- their job is not to refer every start-up, it defeats the point of a gatekeeper. Note the common questions (note: not many are technology related- no one cares if you built it in php vs ruby!). Sometimes you’ll get questions to which there are not good answers- don’t be afraid to say “I don’t know”- its a mark of maturity, but be sure to convey that you will find out or are actively working to solve that problem and you are a fast learner.
REALITY OF AFRICA: For entrepreneurs originating from Africa, the pitch delivery needs to practiced to perfection. Being able to pitch in 6-10 minutes is daunting for most entrepreneurs, but it should be an opportunity to distill your startup into the key elements- In Silicon Valley, you never know when you might have to talk about your startup, could be in conference, in a bar or in an elevator (hence the elevator pitch!) So most startup founders can talk about their startups really succinctly.
If you have to talk too long- see point 4 on education. You might need to follow up or prepare with the person introducing “referring” you the investor. Here is a checklist of questions you should watch out for and have good answers ready:
- Africa is the dark continent- its unstable right?
- Do Africans have real money to spend?
- There is serious currency risk, check out the inflation in Kenya and Uganda? How will your business handle it?
- Nigeria is the best place to do a start-up right? It’s a big market! Why are you in Tanzania?
- Can you hire the technical and managerial talent to grow your venture?
- How will I get my money back via- Exit?
6. Scoring an anchor and influential investor can significantly boost your chances but be careful who this is? Refer to point 3. Accelerators and incubators act a lot for this a “stamp of approval” but also make it efficient for investors coming to visit a region in Africa. In Silicon Valley, getting vouched and having influential personalities such as Ron Conway or Dave McClure can get you a long way to closing your funding round. Angel-list again is another way to make this process more efficient, but it is no substitute for face to face interaction if you can get it. Sometimes you are better off preparing really well and scoring an introduction from someone influential than trying to talk to a mass of investors who don’t understand you (at least in the beginning).
REALITY OF AFRICA: Incubators and Accelerators popping up in Africa are helping to solve this. Accelerators like the Umbono in South Africa or Meltwater in Ghana can be a fast track to get to this step- it might take you 6 months to get to this step on your own or 3 months if your join the “right accelerator”. Be sure to evaluate them properly, the founders can have significant connections to real tech investors, others may have different intentions all together- who is the Ron Conway of Africa? The person might exist but they might not be as publicly visible as the Silicon Valley equivalent. Try get yourself into the regional pitch contest in Africa- for example Pivot East in Kenya that is organized by the iHub and sponsored by many other startup friendly organizations that provide proven regional and global visitbility.
7. Be wary of terms and make sure you have a clean cap table- but don’t overly negotiate. You are getting married but it’s one of many spouses on the long road to success. Term sheets for startups are becoming increasingly standardized across the world. Some VCs are even providing their standard ones on their website you can customize For example, passion capital in the UK (wish more African VC funds would do this!).
REALITY OF AFRICA: African investors not familiar with start-up term sheets and a country’s legal framework around concepts such as employee stock pools (setting aside shares in your company to motivate new employees with success in the company) and convertible note (a hybrid debt/equity investment instrument common in early stage start-up) might harm a start-up by demanding unreasonable terms and not ensuring the risk and reward of start-up team and investors are adequately balanced. This can kill a start-up. The big advice here is to find a lawyer that understands both sides and can educate appropriately. Do your research- the links above from sites like Quora can help you get educated fast.
Finally- remember the old investment cliche- “we invest in people not ideas”- its actually true. Treat your angel/seed investor the same