Amid the Covid-19 pandemic, a major worry in African tech startup circles has been a drying up of early-stage funding with investors expected to focus more on established companies.
It’s a reality that will compound the widening gap between seed and growth funding stages across the continent. While the number of deals and the amounts raised in seed funding stages have increased overtime since 2015, the average round size has barely changed, compared with follow-on and growth-stage tickets.
But perhaps the biggest challenge is getting past the idea stage to setting up your startup in the first place, particularly in most African countries where local investors are still fairly risk averse when it comes to startups. Sherpa Ventures, a new Africa-focused venture firm, is aiming to play a role in ensuring that pipeline of investible early stage startups on the continent continues to flow with the launch of a $1 million fund exclusively dedicated to pre-seed funding for African startups.
Sherpa Ventures will initially only back startups in Nigeria, Ghana, Kenya, and South Africa.
Pre-seed funding is typically provided by professional angel investors or “friends and family.” But Sherpa’s partners are positioning themselves to provide more than cash by offering localized, experiential capital to set the fund apart.
The fund’s investors include Grant Brooke, co-founder of Twiga, the Kenya-based food logistics startup, Alaistair Sussock, co-founder of Safeboda, the motorcycle-hailing startup which operates in Uganda and Nigeria as well as Josh Sandler, co-founder of Lori Systems, a pan-African e-logistics platform. Aaron Fu, former managing director at the Meltwater Entrepreneurial School of Technology, an Africa-wide technology entrepreneur training program, leads the Sherpa Ventures team as managing partner.
Given their background as founders of some of the continent’s recent high-profile startups, the partners will be hoping to achieve a decent return in some of the world’s fastest growing tech ecosystems, Lagos, Nairobi and Cape Town. Several recent major transactions—including US-based Stripe’s $200 million acquisition of Lagos-based Paystack—have shown the reality of lucrative exits for early investors in African startups.
“The ability to go pre-seed and make sure even the earliest of founders have capital to start off right and are able to build their companies like growth-stage companies from day one is really important,” Fu tells Quartz Africa. “We hope by injecting capital and expertise early on, they’re able to build as if they are ready for primetime from day one.”
Sherpa Ventures will invest between $25,000 and $50,000 in pre-seed stage startups while targeting an equity holding of 5%. Its team of investors will then work with portfolio companies for up to nine months to fine tune their business model and strategy before deciding on follow-on funding. Around 40% of its initial fund is being reserved for follow-on rounds.
Sherpa Ventures will also look beyond Africa’s shores for capital and expertise as its backers include angels investors based in Southeast Asia who had never previously invested in Africa—a move that further opens up sources of capital for African startups. “It’s important to continue to put African startups on the map and on the radar of all of these guys who have developed great practices investing in markets across the world but have done very little in Africa,” Fu says.
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