Venture Capital in Pursuit of African Startups
If a startup is a miracle then a promising African startup is an even greater wonder. The African tapestry is woven with threads of migration, colonialism, liberation and dyed in multiculturalism and ethnic diversity. The continent is a legacy of advanced civilizations connected through a network of ancient global trade routes. Great empires like Mutapa in the South, Abyssinia in the North East, Mali and Benin to the west, and Egypt in the North. Here the cities are pulsating, the rhythm intoxicating, the smiles are big, horizons endless, and life is lived every day to its fullest. Out of this a vibrant, industrious, entrepreneurial spirit emerges. One born with a survival instinct and an unshakable determination to navigate the circumstances that conspire against it. This spirit and its swagger must be nurtured.
African startups are born in her heady cities, in the shadow of spiritualism, superstition, and closeness to the soil. They are nursed in challenging infrastructure where life, often, is not according to plan. This is their playground. Driven by the struggles of the past and present they constantly rise above the ‘chaos’. African startup DNA is wound with optimism, resourcefulness, perseverance, generosity and a lust for life.
The venture capital ships have landed on these shores. Laden with promise in exchange for equity and authenticity. Bartering unicorns in return for the shackles of scale. Venture capital is key to support the continent’s startup ecosystem but is also a double-edged sword. Beware of its pitfalls:
Authenticity
Authenticity is that mystical spice that makes an entrepreneur moulded on this continent unique. In a world of globalisation undergoing a digital metamorphosis, where executive safari trips to Silicon Valley is common, it is easy for African startups to blend in with the crowd of grey suits. In this world of commoditised innovation hubs and play by the western rule book venture capital(VC) firms, the biggest risk for startups on the continent is to sacrifice their authenticity. Turning west for inspiration is necessary but the roots that run deep here must never be overlooked. Solutions to unique problems are created here every day. The world will turn to Africa (as it always does) when it runs out of ideas, profit and a purpose.
The Marginal-Dollar Problem
African startups must be very clear on the amount of cash required and for what purpose they intend to raise it during early stage funding. Avoid the temptation to use it for anything other than its intended purpose. Too much capital is a bad thing. It also means giving up a greater equity stake by the founders which gets further diluted during subsequent funding rounds. An unrealistic (high) valuation also sets one up for failure as the pressure down the road to show growth in multiples becomes increasingly difficult to achieve. Venture capital demands exponential growth. The marginal-dollar problem, as described by Eric Paley of Founder Collective, is encountered by startups who raise external funding. As a consequence they are driven into chasing unrealistic revenue targets despite the exponential costs required to drive that growth. Existing flaws in the business model and inefficient processes are tolerated in pursuit of rapid growth and eventually snowball out of control. The marginal return on investment, per dollar spent, continues on a downward spiral until the cash in the bank has run out and the VC grim reaper comes knocking on the door. Much like a broiler chicken that belies its age with legs that can barely support its weight, a super-charged startup on VC jet fuel may end up in the ocean if not prudent.
Pattern Recognition
Birds of a feather, flock together. In a 2017 report sponsored by the Gates foundation, titled “Breaking the Pattern: Getting Digital Financial Services Entrepreneurs to Scale in India and East Africa”, VillageCapital identified The Pattern-Recognition Problem as one of the barriers facing African startups in their drive to raise capital. Foreign VC firms are more likely to fund ventures co-founded by their North American or European compatriots rather than by local founders. Reasons given included the perceived notion that western expats went to more prestigious schools, may have access to better networks and sources of funding. Local investors also favour co-founders of a similar social status or ethnicity. VC firms conducting expeditions in due diligence may lead to a false sense of grasping the challenges in unfamiliar territory. In times of uncertainty, even with the best intentions, VCs turn to a familiar face.
In this courtship dance of African startups and VCs, founders must embrace their authenticity and call upon it during tough times. They must protect themselves from a growth at any cost strategy and except that VCs do not have all the answers or the best intentions always. In search of that elusive billion-dollar market cap at the end of the rainbow, homegrown funding is key. Early stage investors like the African Business Angel Network and other in country examples like Lagos Angel Network, Cairo Angels, Jozi Angels and Newtown Partners are well positioned to guide local entrepreneurs into the future. It is in the interest of African economies that governments, together with big business, back startups through setting of supportive policy and opening doors for easier access to local funding. In the face of a double-edged sword it is comforting to know that there are options.
In the words of Femi Kuti’s relentless Can’t Buy Me, “He want to buy my loyalty…but…can’t buy me.” Don’t exchange your Agbada for a grey suit just yet.
