Startups in Africa: this thorny question of financing. - Eagles Investors

If the idea conception followed by its implementation is the most difficult phase for a startup, their financing is a constant problem.

Startups are not only for dreamers but also for doers. More and more young graduates are undressing fast to put on the entrepreneurial costume. In Africa, young people have the same dreams and opportunities to seize than those in Europe. The digital tool makes it possible to meet and create based on the specific needs of the continent and to find adapted solutions. This offers the opportunity for young entrepreneurs to have a professional project and those startups will be focused mainly to serve their continent.

“Scalable startups in the field of e-commerce and finance end up reducing the cost of investing in Africa. These are also the first ones to benefit from venture capital investments. The more these startups are born, the more it awakes some people’s place and interest (connection to solar energy of the most remote populations, e-health, e-education, etc.),” says Grégory Clemente, CEO of Proparco. He talks about this subject in its editorial, issue of the private review and development of Proparco dedicated to the financing of startups in Africa.

Financing in Startups

The numbers are exhilarating. In 2017, 124 African startups in the new technology sector raised $ 560 million in the capital. Those numbers represent an increase of 53% compared to 2016 and 14 times more since 2012. The number of beneficiary companies has increased from 74 to 124 over the same period.

These encouraging figures conceal a more contrasting reality, according to a study published by Partech Ventures. Funding remains concentrated in a few countries: South Africa, Kenya, Nigeria being monitored by Rwanda. Three sectors – off-grid energy, finance, and e-commerce – also mobilize around 61% of investments. Admittedly, the situation is changing fast.

The Partech Ventures study also proposes the rapid diversification of these investments. Especially in online services or via mobile applications +74% for e-commerce (electronic commerce), and there can not help but think of Jumia, already nicknamed the New Amazon, but also + 120% for education technologies and + 125% for health-related technologies. Diversification is also played out geographically. Rwanda, Morocco, Senegal are hosting more and more startups every year.

Still, if we compare against fundraising startups in Europe (15 billion euros), the gaps are abysmal.

The critical moment

The most difficult is the start. For a startup, it is necessary to pass the stage of the idea to that of concretization and validation by the market. The money needed in the market is between zero and 350,000 euros. This patch is difficult to pass. After asking for the money for his entourage, what are the solutions? Alternative financing options such as crowdfunding, business angels and venture capital and seed capital funds remain limited and involve very few projects. In fact, access to finance remains a major reason: 87% of project leaders in Africa consider this access very difficult. The supply of risk capital in Africa is in fact positioned on development capital, targeting mainly established SMEs.

It is important to identify the right financing vehicle, especially in relation to the stage of development. Clearly, knocking on the door of a bank is not a solution. They do not have suitable tools. In a startup, the demand from an investment fund is often not very successful. The latter does not finance a lot of projects “on paper”. They often intervene when the Startup team launches their project. The banks might fund a company further once the company already exists.

Pitfalls to avoid 

Difficulties also come from the fact that companies have not worked well on their governance. In Africa, often, they tend to develop at least their structure and play hide and seek with taxes, the tax burden is often very heavy. As a result, this leads to non-transparency, biased financial histories and very complicated to read for an outsider, including a potential investor. Obviously, to raise funds, entrepreneurs must put cards on the table, give their figures, their forecasts, in two words: their business plan. The good governance of the company and its tools must be integrated and tamed within the startup. Incubators would be a good solution. It favors structuring when the company is in its infancy.

The lack of support

In many cases, the lack of structures, particularly incubators and even accelerators and support systems, is a handicap to the development of African startups. These support structures, like coworking spaces, are gradually emerging on the African continent. Even though it also points to the lack of support from public authorities and the private sector.

For their part, large groups are looking more and more at these young shoots, at the heart of innovation. It seems that innovation is the key to survival for an African startup. Major groups, especially telecoms, involved themselves in training and supporting startups. The Orange Group launched in 2017, its Orange Digital Ventures Africa fund, with 50 million euros to finance innovative start-ups.

 

Cheer Up and think outside the box!

 

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