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How to get funding for your Africa-focused tech start-up
Tue, 14 Feb 2012 08:58
By Mbwana Alliy

Mbwana Alliy, Associate at i/o ventures

Over the last few years, I have observed quite a few entrepreneurs in Africa trying to raise seed investments for technology start-ups. Two years ago I raised $150 000 for Tanzania's first e-commerce travel portal. I have also seen start-ups in Silicon Valley raise money as part of my work at i/o ventures. And yes, I was at Pivot25 last year and realised that there is a significant gap for angel investment, as most investors present said they invest less than $1-million, and had little to no relevant tech experience.

Impact investors are also showing interest in Africa but they don't seem to be taking any real risk with early stage tech start-ups. Yet technology probably offers the most impactful and scalable change in Africa. But let's face it folks, raising seed funding is hard enough for any type of start-up, and I would add it's twice as hard in Africa, even though the continent is uniquely positioned with many international investors recognising the real growth investment opportunities. I see both sides: Africa-originated start-ups coming to Silicon Valley to find tech-savvy angel investors, and foreigners (mostly Americans) trying to raise money for a new market in Africa.

I will start each point with generic advice that is applicable to any start-up, and then hone in on issues relevant to Africa. I hope this will help start-ups navigate a difficult but necessary process if we are to see more entrepreneurial activity and to grow the ecosystem in Africa.

1. Make sure you are ready - checklist

Entrepreneurs think they deserve financing when the idea is just in their heads, and all the way up to start-ups showing significant progress. But they are probably stalling and actually need significant technical/business help and capital infusion to grow their venture. Fundraising takes a significant amount of time and if the team is small, it might harm the business if key individuals spend more than six months pitching to investors. It is important to appoint someone in the team to focus on this (usually the CEO). A start-up with a single founder is disadvantaged compared to a well-rounded team. It is important to ensure you have hit key milestones before putting your start-up at risk by spending valuable time looking for funding, as you are likely talk to more than 50 potential investors before you get results.

Next, having a product or service out in the marketplace with early customers/users and even revenue is extremely important. I underlined and bolded that for a reason. Investors have many options for investing and they need to see your company making traction. During the 500 start-ups demo day held in Silicon Valley in January 2012, the batch of 34 start-ups not only proved to me that the bar is getting higher, but that it is also getting more international, with strong representation from Brazil. With the cost of launching internet start-ups continuing to drop the world-over, we will continue to have more quality start-ups surfacing and competing for investors' attention. Therefore, traction is a real currency. The only exception is if you are already an accomplished entrepreneur and have proven that you can make investors money - then funds might be chasing you. But, companies like Color in Silicon Valley that burn millions of dollars with no traction still exist based on founder reputation. Past success is not indicative of future performance, but it certainly helps.

Reality in Africa

Being ready for seed investment in Africa is definitely different from the situation in western markets. It is harder to show revenue for a consumer mobile/Internet start-up - ad networks are just developing, significant scale on internet or mobile users is harder to achieve, and payment ecosystems and trust on the Internet (different on mobile) is not mature. But this is changing fast. On the enterprise buyer side, most in Africa do not understand technology well enough to decide between the different offerings. However, if a technology solution solves a unique problem and is adopted by a mainstream customer, being first to market has a huge advantage. From what I have also seen in Africa, start-ups overplay their intellectual property advantage - "my mobile money solution is proprietary" and so has been in stealth and not launched. First, enforcing intellectual property is hard considering the legal systems. Second, if you do not share your idea with others, how will you grow your team and add value? IP is not useless - many companies do very well on this - but just do not think your web or mobile start-up, which is built with open source technologies, has IP that is more valuable than getting real customers and revenue. Many African start-up founders also downplay their previous successes; if you ran a successful tech development firm for many years, talk about that experience because it shows that you have what it takes to recruit local staff and to build a business. If raising money from Silicon Valley, traction has to be very high in order for a start-up to be attractive and competitive, and also because of the unfamiliarity of the market at this stage.

2. Create a clean and short deck and put start-up on Angel List and VC4Africa. However, this is not a substitute for business planning, deep analysis and connecting face to face with potential investors. A great deck communicates the problem and solution and creates an emotional connection, inspiring whoever is looking at it to want to learn more. The deck is emailed to investors who peruse for five minutes and then decide whether to follow up and learn more. Remember that the deck is not a full business plan.

Below are some guidelines:

Don't put too many figures and statistics. Limit to three per slide and select the most important ones.

Use strong visuals that show the product and screenshots of the service in action.

Focus on the team, achievements, and why you are unique to address this problem.

Make sure the deck flows and tells a story about how you came across the problem, who you are and how you are best positioned to provide the solution.

Keep to no more than 10 to 12 slides, shorter is better. Supporting data can be put in an Appendix.

To create a great deck with the requirements above is difficult because it's a continuous process, which requires feedback and knowledge of the audience. Getting a designer to polish up the deck may be needed. A one or two page brief may also be a good idea. Don't be afraid to be creative and show off relevant skills, for instance, check out this great HTML5 deck by DressRush (now renamed Tailored, a graduate of 500 start-ups) that is both easy to go through and got a lot of buzz online because the team gets how to market and promote.

This brings me to Angel List. This has become the "LinkedIn for start-ups" and although right now it mostly comprises of Silicon Valley start-ups and angel investors, it has scope for international use. It is useful if you are targeting Silicon Valley investors. Some of the features that are great on Angel list include newsfeed notification of progress in your start-up; you can put advisors, early investors, etc. In short, it becomes a place where investors can discover and track your progress.

Be sure you have solid business analysis of your start-up and industry. Investors will ask for this during a second or third meeting. Showing that you have done the work rather than dismissing the questions as irrelevant is the way to go. However, if investors ask for data that doesn't exit or is impossible to predict in an early stage start-up, it might be a sign that they are just looking for an excuse to say no as part of their "due diligence process", or they just don't understand technology.

Reality of Africa

The deck for African start-ups needs much focus on the problem being solved and traction (users or revenue) that the business has achieved more than in western markets. Given that cutting edge engineering skills are often lacking in Africa, highlighting the previous programming accomplishments of the development teams will go a long way to ensure that the product risk is minimal. A good design is also a big differentiator, and so is a complementary mix of local and foreign talent especially for a business with significant on-the-ground-presence. Can anyone in the team speak fluent Kiswahili when operating and trying to address the bottom of the pyramid market in Tanzania? Also note that a deck targeted at social impact investors will look very different from one targeted at traditional investors in terms of content and what is important. This leads to the next point. What sorts of investors are ideal for your venture? First, a word on analysis. Focus on key assumptions.

Why did you choose Kenya over Nigeria or South Africa? Does Africa really need another mobile money online solution, and what problem are you really trying to solve? Will people find and download your application? There is currently a lot of data on the growth of technology in Africa - for instance, this deck that came out recently and curated presentation of stats, data, graphs, analysis and insights on the mobile telecommunications sector prepared by Jon Hoehler and Andrew McHenry. How do these numbers help support your start-up? Also, be sure to outline how the funding you are seeking to raise will help you achieve your future goals, a factor that is often overlooked. Will this get you to revenue, scale, launch a new product or are you just topping off funding because you are out of money to fund operations?

3. Identify a short list of relevant investors - key criteria for Africa

Start-ups can waste lot of time pitching to the wrong investor audience. At the same time you never know whether an investor is interested in your space or not - it is a balance in time management so it's key to think thoughtfully about whom you may want to target. Start with your closest connections then move on from there. Don't forget to include friends and family in this since they know your character best and can provide moral support.

Reality in Africa

Unlike Silicon Valley and other parts of the world, this list is likely short. There are just not many active angel investors in Africa who understand technology, and there are not enough rich uncles to support all entrepreneurial endeavours of friends and families. But this is slowly changing althouhg not many investors are accessible or even know how to angel invest. Significant networking help is required to reach them. The African diaspora has significant capital that they could mobilise for your venture while the Indus Entrepreneurs (TIE) network of Indian diaspora has links to Silicon Valley, which includes angel investors who might tap into the Indian population in East Africa. In Silicon Valley, a connection to The African Network (TAN) might also be able to help. The Middle East is another option, for instance, UAE and Oman are heavyweight investors in East Africa.

A word on impact investors - they started in microfinance where they realised you could profitably serve the poor in India, Bangladesh, Latin American and Africa, and have now moved into other sectors such as health and education. It is a new industry and as a result, many change their investment strategy often. Impact investors are also less likely to ask about high financial returns and how you will exit your company. They mainly care about what "impact" you would be making.

4. Connect and educate with potential investors

Ask for advice and you might get money. Update progress on Angel list. Draft and test your e-mail pitches. Find investors at conferences and use your social skills well - how you interact and reach investors is a key skill. It's like dating…It also communicates what you might be like to work with. Networked people do better in business than just being smart and savvy.

Before you proceed, go over points one to three again - otherwise known as "creating a company", you will be repeating these points often during further rounds of funding so learn to present them well. Four becomes your point to start talking to people and working your way to investors.

Reality of Africa

Foreign investors have preconceived notions of Africa despite the growing interest. As a result, they might be risk averse until they get more familiar with the continent. Avoid the "drive by investors" who might not add much value apart from their money. For local investors, it means focusing on how the technology works. Even after foreign investors "get Africa", it's really hard to anchor themselves around the needs of Africa since they are not living and breathing the problem you are trying to solve. People in Silicon Valley are only now recognising the progress in Africa's mobile banking, which means it takes more time to raise money from this group of investors. European investors might take less time on education but they might not get the technology aspects as much as the investors in Silicon Valley. Their risk appetite and familiarity with tech angel investing is also likely to be different.

5. Practice the pitch and work up to your favourite investor(s)

Know the toughest questions upfront and address them intelligently and honestly. You might have to go through "gatekeepers" who have the connection to the high profile investor. Understand their position and treat them well. Their job is not to refer every start-up because it would defeat their purpose. Note the common questions (not many are technology-related. No one cares if you built it in php vs ruby!). Sometimes you will get questions that don't have good answers. Don't be afraid to say "I don't know" - it is a mark of maturity, but be sure to convey that you will find out or are actively working to solve that problem, and that you are a fast learner.

Reality of Africa

For African entrepreneurs, the pitch delivery needs to be practiced to perfection. Being able to pitch in six to 10 minutes is daunting for most entrepreneurs, but it should be an opportunity to distil your start-up into the key elements. In Silicon Valley, you never know when you might have to talk about your start-up. It could be in a conference, bar or in an elevator (hence the elevator pitch!). If you have to talk too long see point four on education. You might need to follow-up or prepare with the person introducing (referring) the investor.

Below is a checklist of questions you should watch out for and have good answers ready:

  • Africa is the dark continent. It is unstable, right?
  • Do Africans have real money to spend?
  • There is serious currency risk, check out the inflation in Kenya and Uganda. How will your business handle it?
  • Nigeria is the best place to do a start-up, right? It's a big market! Why are you in Tanzania?
  • Can you hire the technical and managerial talent to grow your venture? 
  • How will I get my money back via exit?

    6. Scoring an anchor and influential investor can significantly boost your chances but be careful who this is

    Refer to point three. Accelerators and incubators act a lot for this "stamp of approval" and also make it efficient for investors coming to visit a region in Africa. In Silicon Valley, getting vouched can get you a long way to closing your funding round. The angel list is another way to make this process more efficient but it is not asubstitute for face-to-face interaction, if you can get it. Sometimes you are better off preparing really well and scoring an introduction from someone influential than trying to talk to a mass of investors who don't understand you (at least in the beginning).

    Reality for Africa

    Incubators and accelerators that are popping up in Africa are helping to solve this. Accelerators like the Umbono in South Africa or Meltwater in Ghana can be a fast track to get to this step. it might take you six months to get to this step on your own and three months if your join the "right accelerator". Be sure to evaluate them properly. The founders can have significant connections to real tech investors while others may have different intentions all together. Who is the Ron Conway of Africa? The person might exist but they might not be as publicly visible as the Silicon Valley equivalent. Try to get yourself into the regional pitch contest - for example, Pivot East in Kenya, which is organised by the iHub and sponsored by many other start-up-friendly organisations that provide proven regional and global visibility.

    7. Be wary of terms and make sure you have a clean cap table - but don't overly negotiate.

    You are getting married but it's one of many spouses on the long road to success. Term sheets for start-ups are becoming increasingly standardised across the world. Some venture capitalists are even providing their standard ones on their website, which you can customise. For example, passion capital in the UK (I wish more African VC funds would do this!).

    Reality of Africa

    African investors are not familiar with start-up term sheets, a country's legal framework on concepts such as employee stock pools (setting aside shares in your company to motivate new employees with success in the company), and convertible note (a hybrid debt/equity investment instrument common in early stage start-up). They might harm a start-up by demanding unreasonable terms, and not ensuring the risk and reward of the start-up team and investors are adequately balanced. The advice here is to find a lawyer that understands both sides and can educate appropriately. Do your research - the links above from sites like Quora can help you get educated fast.

    Finally, remember the old investment cliché "we invest in people not ideas", is actually true. Treat your angel/seed investor the same.

    Mbwana Alliy is passionate about product development and launching new ventures in technology. He is an experienced product manager within consumer web, enterprise Software & SaaS. Alliy has a bachelor's engineering degree from Bristol University and an MBA from Stanford Graduate school of Business.

    This article was first published by Afrinnovator.