Seed stage investing and why it matters for Africa’s startup

In Africa, the maturity of a startup raising seed funds is arguably higher than in other continents due to the scarcity of capital

Startup entrepreneurs are working to harness Africa’s potential. Together they represent a critical pipeline of innovation that is driving high growth high impact solutions on the continent. A critical juncture for any startup comes at the seed stage, a financing segment that has experienced significant changes these past months. In this article, we delve into the changing dynamics of seed-stage investing and as VC4A (https://VC4A.com) works to recruit startups for the 2020 VC4A Venture Showcase – Seed (https://bit.ly/2PZy8N0).

At the pre-seed stage, entrepreneurs are going after their first third party investment, raising $50K to $150K. Often Friends, Family, and Fools (FFF) + public funds in some African countries (for example DER in Senegal, Entrepreneurs of Tunisia, and the Technology Innovation Agency in South Africa), are the only investors at this stage. Going on to the seed round, entrepreneurs are expected to be selling the product on the market and testing customer response. This is the moment the company needs to raise their first significant ticket and are looking for professional investors to help grow and scale the business. Overcoming these initial fundraises is a challenging test for any entrepreneur.

Tomi Davies, President of ABAN, explains, “Seed stage investment is when a startup has proven its Minimum Viable Product (MVP) and is in the process of finding product-market fit. In Africa, they will typically have revenues in the tens if not hundreds of thousands of USD.”

Overall, seed-stage investment on the continent is still growing (see Partech figures (https://bit.ly/3iSf4MU)) and expanding across more ecosystems in Africa. All active players on the continent see a better quality of startup/entrepreneurs due to A) better mentoring programs in most countries B) an increase of Business Angel networks and C) a new generation of entrepreneurs very open to technologies, with a pan African vision and a willingness to scale fast. That said, seed funding is still insufficient on the continent and concentrated on just a few ecosystems (predominantly Anglophone).

In Africa, the maturity of a startup raising seed funds is arguably higher than in other continents due to the scarcity of capital. For example, a team fundraising pre-seed would be expected to have already built a prototype or even have launched a product or service. Grégoire de Padirac from Orange Ventures adds, “It is nearly impossible to raise with only PowerPoint presentations in emerging countries.” And for all right and wrong, most seed-stage startups on the continent have to demonstrate their resilience (low cash burn), show clear traction, and be generating revenues. Tomi expands, “The expected revenue levels continue to increase and it is unlikely for a startup with less than $100K in revenues to get seed investment nowadays.”

These realities result in a higher threshold for the continent’s entrepreneurs and might also be contributing to the local vs. foreign founder dynamic, where management teams do better when they have their own resources and better access to networks at the earliest stages of venture building. At the same time, incubators and accelerators that have the mandate to prepare startups for their first pre-seed investment, the single most significant KPI, are too often concerned with their own financial sustainability. In reality, many of the incubators and accelerators are playing a numbers game focused on the number of cohorts and the number of companies graduated vs. the quality of support delivered and resources secured. Khaled Ismail of HiM Angels explains, ‘Too many incubators and accelerators fail to provide the mentorship and guidance the startups need at such early stages of formation and when they need it the most’. These are additional pressures on the startups when the road to funding is in actuality longer and more difficult to attain.

Grégoire expands, “the more mature the ecosystems are, the sooner the startup receives funding. In more advanced sectors such as Fintech, startups scale fast and so the valuation and level of maturity are getting close to the European standards.”

Khaled adds, “I still believe that the amount of money available for investment at Seed stage on the Continent is very low in absolute terms and as a % of the money invested in Series A and B. That is causing a distortion to the market and is depriving some good potential startups from growing at an early stage.”

These constraints need to be addressed, given that in every country, there is a growing pipeline with a clearly improving quality year on year. 2019 was by all accounts impressive, where in many ecosystems we saw a wave of new startups and entrepreneurs. For example, the Orange Ventures seed challenge received more than 600 applications from 7 target countries (Cameroon, Ivory Coast, Senegal, Morocco, Tunisia, Egypt Jordan). The good quality of the applications was a testament to the tenacity of the continent’s entrepreneurs and their continued efforts to build world-class companies.

With this mind, to harness this entrepreneurial talent more can be done:

• More Government/DFI support to invest in seed capital instruments and programs (like the DER in Senegal and Entrepreneurs of Tunisia (EOT)) or as investment backing for local seed funds managed by local investors;
• Better regulation such as Startup Acts to support local entrepreneurs and investors, where regulation needs to be open and conducive to innovation. Specifically to adjust legislation for startups when looking at issues like Company Registration, Employment Law, Taxation, Intellectual Property Protection and Capital Import/Export rules;
• Review government procurement policies to see if they are friendly to startups. Encourage local institutions and corporations to be more active locally (with funding, programs, partnerships, and supply/sourcing contracts) and to open the markets for local startups;
• Strengthen local accelerators and incubators, and further train and capacitate the teams in charge of startup programs. Support these programs with a stronger community of mentors and angel investors that can engage with their network, expertise and capital.

At the same time, competition for Series A & B is growing on the continent among VCs. It is key for African focused funds to be more active in Seed or Pre Series A investments to secure their access to the best deals and to maximize their financial return. This is good news for the ecosystem as we continue to see a growing number of investors moving downstream.

In this context, true to its mission to connect entrepreneurs with the knowledge, network, and funding they require to succeed, VC4A adds Seed as a category to the 2020 Venture Showcase. We are calling for 10 African startups looking to raise between $150K and $1M in collaboration with technical partner AWS Activate (https://amzn.to/3hl5GkR) and network partners Afrilabs (www.Afrilabs.com) and ABAN (www.ABANangels.org). The funding/investment range may seem large to many, but reflects the variety of definitions being used across the continent, the growing diversity oft investors themselves, and the ever growing range in ticket sizes. As a consequence, and to be fair with the applicants, the Seed ventures, assessed by an independent jury of investors, will be put into two different buckets: those seeking to raise less than $350K and those looking to raise more than $350K.

The 10 selected startups will get:

• To participate in the VC4A Venture Showcase deal room, including 150+ early-stage investment firms
• Professional edited 3-minute virtual pitch videos
• 30-minute deep-dive sessions with investors in a private room
• Mentorship and pitch training by early-stage investor organizations
• Amazon Web Services credits from AWS Activate (https://amzn.to/3kPgY2R) worth $10,000, as well as tools, resources, and more to get started quickly on AWS
• To join the Showcase alumni network and gain exclusive access to fundraising opportunities

With this Seed track, VC4A rallies resources and funding for a new generation of startups coming up across the continent. We encourage entrepreneurs to apply (https://bit.ly/2PZy8N0) before 11 September and investors to refer innovative ventures to Thomas van Halen thomas[at]vc4a[dot]com.