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“How much did you want…?”
SHOW ME THE MONEY

Debunking the myth that there is not enough money for African startups

By Marcello Schermer

While traveling with Seedstars World I meet startups across the continent and closely watch a dozen of different ecosystems, I talk to many entrepreneurs and read a lot of local tech media. One of the major things I hear and read over and over again is the claim that there is not enough funding for startups in Africa and that we need more investors and capital on the continent.

VC4Africa recorded over $26 million invested in startups in 2014 and this year alone, we have seen companies like Paga raising $13 millionAndela raising reportedly over $10 millionHotels.ng raising $1.2 millionSafemotos in Rwanda raising $131KTotohealth in Kenya raising $140k and so many more. At the same time, new angel investors, angel networks and VC funds are popping up every week who want a slice of the African startup cake and are putting together millions to be part of the ecosystem. I have no doubt that raising funds in Africa is not an easy feat, but with all these numbers it’s quite hard to believe that the amount of money available to startups is the real problem.

After talking to many entrepreneurs, investors and government officials across the continent I have come to believe that the problem much rather lies in the relative illiquidity of the available capital rather than in the amount itself.

“Startup funding is already here, it’s just unevenly distributed”

In easier words: It is too complicated, risky and burdensome to invest capital in startups which results in long due diligence processes, unhappy stakeholders and the impression that there is not enough money for entrepreneurs. This ultimately creates two problems: Entrepreneurs are left with little to no investment and investors are stuck with funds they can’t spend. There are a few reasons for this:

  1. Both investors and entrepreneurs are relatively inexperienced in the fundraising process: Techinvestors and entrepreneurs have only been around for a few years, which means that both are relatively inexperienced in the fundraising process, especially when it is cross-border. This means that there are no standardized legal frameworks, contracts, term sheets and agreements and everything needs to be drafted from scratch. Also, awareness of the different investment methods and their relative advantages and disadvantages are not well understood and applied.
  1. Government regulations and tax laws still make it hard to invest. Foreign investors are insecure as to whether they can take the money out of the country after a liquidity event and local investors face insecurities in terms of legal and tax frameworks.
  2. There is a lack of competition among VCs and Angels. VCs and Angels are still relatively few compared to the number of entrepreneurs looking for funding. This means that there is no fierce competition among investors, which gives them more negotiating power while fundraising and in turn drags out the decision making process and puts downward pressure on valuation.
  1. Other investment opportunities compete for investor’s money. Wealthy people still prefer to invest in traditional industries such as oil and gas or real estate. These are industries that provide mediocre, but stable returns which is why people chose those instead of more risky, but also potentially more rewarding opportunities such as startups and entrepreneurs
  1. There is no standardized due diligence process and term sheet. Every investor has a different due diligence process that requires startups to invest a lot of time and energy into providing different information to different investors to comply with their request. This means that a due diligence process can take anything from weeks to months. Lastly, even when an investment offer is made, every investor uses different term sheets, making it hard for entrepreneurs to compare different offers and decide for what’s best for them

From my experience, these are the main factors that make fundraising for African entrepreneurs incredibly time consuming and frustrating and create the impression that there is a lack of money on the continent. But it doesn’t have to be that way:

Silicon Valley investors fighting for deals

To see how it can be done differently, we can have a look at Silicon Valley. Fundraising in Silicon Valley is a highly competitive sport for VCs, who consistently fight over being part of the best deals in the valley. This competition reduces time from pitch to term sheet to about half a day and to money in the bank to maybe a week, making it incredibly easy for founders to access the available capital in an efficient way. In addition, the legal and tax framework for investments is relatively clear in the US, removing ambiguity and risk from the process and increasing willingness to invest. Lastly, both entrepreneurs and investors have a longer track record and experience in fundraising and are therefore much more professional, using standard term sheets, contracts and legal structures that have shown to be best practice for a number of years.

Investor and entrepreneur education

I am not saying that we don’t need more investor money for African startups but I believe we need to change the way investments are made and make the process easier, faster and more standardized before we can even handle more money. Right now the bottleneck is not the amount of money, but the process with which it is invested. The best way to get there, is educating investors, governments, corporates and entrepreneurs. Let’s fix this first before calling for more money we can’t even invest.

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