Early Stage Funding in Africa — A Pulse Check (Webinar)
By Arjuna Costa and Ameya Upadhyay
Entrepreneurs everywhere are dealing with much uncertainty right now, especially in Africa, where capital markets are shallow and collapsing commodity prices pose a double hit to economies dealing with COVID-19. In our discussions with entrepreneurs across the continent, we find that they are understandably anxious about how their companies will emerge from this downturn. And yet, we also hear optimism about the opportunities that will emerge from this time of rapid digital adoption.
To address these concerns and take the pulse of early-stage funding in Africa, we hosted a virtual panel on May 7, 2020, with some of the most eminent Africa-focused investors. We moderated a discussion with about 250 entrepreneurs and investors in attendance and fielded their questions live.
Our panel of Africa-focused VCs included:
- Iyinoluwa Aboyeji, General Partner and Co-Founder, Future Africa
- Justin Stanford, Co-Founding General Partner, 4Di Capital
- ‘Tokunboh Ishmael, Managing Partner and Co-Founder, Alitheia
- Yemi Lalude, Managing Partner for Africa, TPG Growth
The first message from the panel was clear, and echoes what we have asked of Flourish’s portfolio companies: Stay safe. “Your stakeholders are broadly defined as your family, your employees, and your customers. Focus on them,” urged Yemi Lalude, an early investor in many pioneering African startups.
That dovetails with the number-two priority: Do what it takes for your company to survive. Be disciplined about costs, and if you can raise money now, don’t be picky about valuation or terms.
Find the full-length video of the Africa VC panel linked here and embedded below, as well as some highlights from the discussion, lightly edited to improve readability:
Is the worst behind us? When will the economic recovery begin and what shape will it likely take?
Overall, panelists all agree on what recovery won’t be: V-shaped, quick, or (likely) before we have a vaccine. They added that other compounding issues like fluctuating oil prices, restrictions on trade and travel, and existing health issues outside of COVID will delay recovery times in Africa. However, all panelists also spoke about opportunity and optimism.
VC is a long game. We’re looking through the next 2–3 years. It’s a 10-year cycle. — Justin Stanford
Yemi: It’s going to take a couple of years to get back to where we were. For entrepreneurs, the impact of the pandemic is going to be a function of the industry you’re in. For travel and leisure, it’s going to be a long time, but payments, for example, could expect a quicker turnaround. (Time stamp 7:40)
Iyin: At the macro level, this could be one of the greatest challenges our generation will ever witness. But this is an opportunity for innovators. It’s the precise time for us to do what we do best — come out and solve these problems by building businesses that can transform these challenges into opportunities. Innovators have an opportunity to reshape the way our worlds work. (Time stamp 11:20)
Justin: Capital markets right now are in a bit of a holding pattern. We don’t know whether there will be a rally or another downturn. But VC is a long game. We’re looking through the next 2–3 years. It’s a 10-year cycle. (Time stamp 14:15)
Are you open for business, still doing new deals?
Panelists all agreed that there are pockets of opportunity right now. From early-stage investing opportunities to expanding the use of technology in essential sectors, investors would be wise to forge ahead where they see opportunity.
If you weren’t using tech, you are now. So using technology in traditional industries is exciting. — ‘Tokunboh Ishmael
Iyin: What we are experiencing with COVID is a transformation of industries that have remained resistant to change for a very long time. All I’m seeing are opportunities to profitably transform society. Everything that is to come will require deep, scalable technology. (Time stamp 21:45)
‘Tokunboh: We’ve all been catapulted into the 21st century. If you weren’t using tech, you are now. So using technology in traditional industries is exciting. We’re bullish about investing in essential sectors (financial services, education, healthcare, food and agriculture, and energy)… For new transactions, we’re leveraging relationships we have, and networks we know. We’re also providing virtual experiences for international co-investors, serving as the last mile and front line to transactions. (Time stamp 24:50)
Yemi: The uncertainty we see for the next several years argues for doing some early-stage investing. For a newer business, you know you’ll be in for 7–8 years anyway, so it’s easier to do these in this environment. (Time stamp 31:05)
How are you seeing valuations and terms change? Where should founders give and where should they dig in?
Across the board, all agree that valuation and terms are less important right now than a clean deal.
Frankly I would take a lower valuation and a clean deal. — Yemi Lalude
Yemi: We’re starting to see changes in terms. In this market, investors tend to be most concerned about downside protection. But if I were a founder, frankly I would take a lower valuation and a clean deal. (Time stamp 35:10)
Justin: If you can raise cash now, you’re very lucky. Don’t sweat the valuation and terms right now. Rather, get funded, then go and press your advantage. At a time like this, if you can raise money, that will be an advantage. (Time stamp 35:40)
What would you say to entrepreneurs who were planning to launch during this time?
Take a step back and ask: Is there still a need for your business in a post-COVID era? — Iyin Aboyeji
Iyin: Yes, there is money available. But if you were planning to launch a venture, I’d say take a step back and ask: Is there still a need for your business in a post-COVID era? The ways you planned to go to market may no longer be necessary or relevant. Also take the opportunity to get a top-notch team. The market is clear about where it’s going, but if you don’t have a great team, you won’t survive… even if you have all the funding in the world. (Time stamp 40:15)
What’s the top advice you’re giving your portfolio companies?
‘Tokunboh: Build resilience, address near-term funding challenges. Really reexamine your value. (Time stamp 41:55)
Yemi: It’s easy to go heads down during a crisis, but it’s important to stay in touch with your customers. Focus on your stakeholders — family, employees, customers. (Time stamp 42:25)
Justin: Stick around long enough to just be in the game. Re-prioritize your expenditures. Focus on one or two growth areas, and maybe shed other peripheral areas of spending. (Time stamp 43:07)
Iyin: Don’t waste the crisis. Do the most radical version of your business that you know will survive. If you need to cut big expenses like headcount and office space, now is the time. And keep a hefty cash reserve. (Time stamp 43:35)
What consumer behaviors will be permanently changed by the COVID crisis?
‘Tokunboh: We are already embracing a virtual world, and while there will be an uptick in virtual relationships, we will still need to find an in-between. (Time stamp 53:40)
Iyin: The biggest change will be with respect to capital. There will be a lot less trust in financial institutions, and many economies may become fully dollarized. (Time stamp 54:34)
Yemi: Education — specifically e-learning — is an exciting area. There is no way to build enough physical schools; e-learning is the way for Africa to get good-quality education at scale. (Time stamp 55:41)
Justin: A lot of consumers went into this with monthly debts, and they’re sitting with so many liabilities and no end in sight. There’s some psychological scarring there, and people may be less likely to leverage up and take on debts. (Time stamp 56:51)
Our May 7 discussion with these investors was very insightful, and these are just a few highlights. Our sign-up list filled up in two days, so we will be hosting more panels with funders and other experts soon, to help entrepreneurs navigate these unprecedented times.
