Introducing Microtraction

Today we’re announcing the launch of Microtraction, an investment platform that funds Africa’s most remarkable teams with technical founders at the earliest stages of their venture

Before I moved back to Lagos, Nigeria in December 2015, I had been following the ecosystem at arms length from the UK by reading local tech blogs like Techpoint & TechCabal as well as it’s vibrant online community Radar. There was no doubt in my mind that something exciting was happening and I wanted to play a role in enabling the technology ecosystem achieve it’s potential.

Dotun, my managing partner at my previous company Starta put it best, he said “Starting a startup is hard, starting a startup in Africa is harder.”. I joined Starta because I wanted to make it easier for entrepreneurs to build successful startups on the continent by innovating on it’s innovation infrastructure, more popularly called the Technology Ecosystem (aka Techosystem shout out to Oo Nwoye for that one)

The best visual model I have seen for a technology ecosystem is by Christian Hernandez, Managing Partner at White Star Capital, which he shared at 500 Startups PreMoney Miami Conference a few years ago — he highlights necessary interlocking and interdependent components needed for a tech ecosystem to thrive

I would argue that in Africa, we need to add infrastructure as a base layer. At a minimum this means stable power and internet access.

The basic and required base is a healthy supply and access to technical talent. If “software is eating the world” you need founders and team members who can build said software.

Thanks to the combined effort of many, such as Developer Evangelists like Prosper and Aneidi or Ire who meticulously maintains the excellent bits of code and companies like Andela & DevCenter who run the Dev Community Square, Meetups like ForLoop, Laravel Nigeria, Angular Nigeria and founders like Mark Essien and Sheriff Shittu training the next generation of Developers — the quantity and quality of Nigerian developers is increasing by the minute. As a proxy the number of GitHub accounts in Nigeria increased by almost 7x between 2014 and 2017, that’s incredible growth!

Assuming the supply of talent exists, the next building block is a visible and broad set of role models. Successful entrepreneurs that others can look up to aspirationally and whom young entrepreneurs will want to emulate

I clearly remember a friend of mine sending a link to an article that featured Mark Essien on Facebook and how excited I was to learn about a Nigerian founder building a startup in Nigeria that had raised $1.2m. Ten years ago you’ll have been hard pressed to find well known Nigerian and African founders but thanks to technology blogs and the growth of the ecosystem more young technical talent are aware of founders like Jason Njoku, Shola Akinlade, E Aboyeji, Tayo Oviosu, Sim Shagaya and many more. As a result starting or joining a startup rather than joining a bank or taking other traditional career paths are now viable options for ambitious young potential founders.

The next building block is access to risk capital to take a concept from idea to product. This includes a vibrant Angel community but also early stage venture capital funds to allow companies to launch and find product-market fit.

Whilst Venture Capitalists tend to get most of the limelight when it come to venture investing. The real heroes in my opinion are the Angel Investors. Angel Investors play a massive role in enabling technology entrepreneurship as they invest at the earliest stages when a startup is in it’s infancy with little to no data to go by. In Nigeria the most popular angel network is the Lagos Angel Network and my recent favourite is The Rising Tide a group of women angel investors backing female founders.

It is still early days for angel investing in Africa. Capital deployed is marginal (eg Europe reports €9.8 Billion invested by business angels in 2016; USA > $24 Billion in 2015), and the number of deals closed every month are in the ‘tens’ and not in the hundreds or thousands — David Van Dijk, Director General at Africa Business Angels Network (ABAN)

In the United States, the best available estimates are that about 300,000 people made an angel investment in the last two years, with Angels responsible for funding 67,000 startup ventures annually. The availability of angel investment is directly related to the number of of companies that raise a seed round. As a proxy there are currently 7,425 Angels located in the US on AngelList compared to 1,039 Angels in the Europe. Between 2009–2014 there were 6,760 US seed stage deals in relative to Europe’s 2,537.

It will be interesting to see a similar funding funnel for Africa like the one above, but I believe the drop off for Africa at each funding stage will be even steeper. Like any funnel, If you reduce the number of startups at the top you are less probable to have startups that reach the growth stage, a lack of growth stage companies means there is no market for growth stage investors therefore leading to no or a few startups that are valued at $1Bn or exit at $250m.

To illustrate this I built a model based on CBS insights data from their fantastic post on the Venture Capital Funnel in the US. I also assumed that 50% of startups that raise an angel round will raise further funding. Let’s have a look at how the number of companies funded at the Angel Stage affects the number of significant outcomes for startups (i.e. $1Bn+ valuation and $200m+ exits). I have highlighted the cells with significant outcomes in green.

50 Angel funded co = 0 Unicorns, 0 $200m+ Exit
200 Angel funded co = 1 Unicorns, 1 $200m+ Exit
1000 Angel funded co = 5 Unicorns, 14 $200m+ Exit

Based on the model above you’ll need to fund more than 200 companies at the angel stage to produce 1 startup unicorn status, my intuition is that you’ll probably need to fund 2x that number on the continent in other to achieve unicorn status.

One of the negative narratives I hear about the technology ecosystem not just in Nigeria but in Africa as a whole is the lack of significant exits or unicorns. An active exit market is a flywheel for more early stage funding and advisors with expertise, which results in more startups being able to raise growth stage capital, which leads to more exits. This is essentially a positive feedback loop. However when early stage funding is not readily available the inverse is the case and what you get instead is a negative feedback loop, which directly reduces the probabilities of large exits in our local ecosystem.

“I think one thing we often forget in Silicon Valley is that it is often harder for very talented people far away from any startup hub to raise a tiny amount of money to live on while they hack than it is for someone in SV to raise half a million dollars” — Sam Altman, President of Y Combinator

There’s a lack of early financial support and mentorship for young African entrepreneurs who have innovative ideas about how to solve some of Africa’s largest problems. Microtraction is built to solve this problem, one one hand we have a sizeable number of startups in Nigeria and Africa that possess high growth and innovative potentials but often fall short of the investment prerequisite of VC funding, due to the reduced instances of Angels funding & mentors for these startups, this creates a “Pre-Seed Funding Gap” and this is where Microtraction comes in.

Microtraction aims to to bridge these gap and make it easier for African founders to build successful startups by:

  • identifying the best early-stage, growth-driven technology businesses in billion dollar markets via an open application
  • working closely with the startups, providing pre-seed funding, professional and advisory services to them
  • assisting in getting startups to a point where they are substantially impressive enough to raise an institutional round of funding from VCs or join world-class accelerators like Y Combinator, 500 Startups or TechStars
  • helping startups raise venture financing from seed-stage investors
We believe our principal role at Microtraction is to increase the number of venture bankable startups across the continent, creating the market for venture and growth stage capital to follow on and ultimately bridging the pre-seed funding gap that currently exists.

Microtraction will work with founders at the earliest stages of the venture. We won’t consider anyone or project “too early”. We are biased towards technical founders due to our own experience as founders. We will invest in founders with conviction and by large prefer to be the first non “friends and family” money founders raise for their venture.

We consider ourself the “first gear” for African startups. Microtraction will invest a total of $65,000 in two stages. First we invest $15,000 for 7.5% equity stake, followed by an additional $50,000 convertible note at a $1mn valuation cap in companies that show significant progress after our initial investment. We hope to be leverage technology and directly or indirectly fund 1,000 startups a year at scale with this model.

“I want to discuss why a company exists in the first place. In other words, why are we here? I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and and the real reasons for our being.” — David Packard, founder of Hewlett Packard

The above quote is from one of my favourite books “Built to Last”. Jim Collins, the author states that Purpose is the set of fundamental reasons for a company’s existence beyond just making money.

We believe that long term sustainable socio-economic development in Africa will be driven by entrepreneurs and innovations and not by politicians or charity aids and our mission is to accelerate Africa’s economic growth by enabling innovation and supporting technology entrepreneurs.

The “why” behind Microtraction is at the crux of everything that we do, it’s what drives us and why we wake up excited every morning and we hope it will be for the founders we work with as well.

In my next post, I’ll go into specific details about who we are, what we look for in founders, our investment philosophy in service of the entrepreneurs that chose to partner with us and how we expect to add value to companies in our portfolio by building networks that make it easier for companies to scale faster.

Please feel free to reach out to me on twitter @yelebademosi, I would love to hear your feedback and thoughts on Microtraction or about something you are working on even if it’s at the idea stage.

Stay smart,

Yele

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