Investor Propositions

“We are at an evolutionary point where now VCs are much happier to share deals. If I see a good deal that isn’t the right fit for us, I'll share it with other VCs. There is a lot more collaboration happening now. And hopefully people can have longer term views rather than just short term gains. ‘A rising tide lifts all ships’, as they say.” - interviewee

 Inventing the future of funding

Syndicates - meaning, in the startup context, special purpose vehicles used by investors wishing to co-invest in a venture - have the advantage of reducing risk through portfolio diversification. This ensures more players are around to help fund companies when they raise subsequent rounds. Syndication is also correlated with increased likelihood of exits at higher valuations. 

“A lot more syndicate groups are coming together which pull in both individual investors as well as institutional investors. It's definitely a model that's picked up.” - interviewee

The Future Africa Collective is a great example of a well-structured syndicate model with a $1,000 annual (or $300 quarterly) membership subscription, and a minimum investment of $2,500. 

The investment scope for syndicates is mainly pre-seed, seed, and early-stage startups. 

There are, however, also opportunities to use syndicate models to invest in high-growth scaling firms as well, particularly in sectors beyond fintech. There are opportunities to develop new forms of syndicated investment where multiple (public and private) partners join forces and develop funds-of- funds, with investments made across a diverse pool of promising scale-up ventures.

Platform models can accelerate investment in these sectors, which would provide investors with market insights, vetted deals, due diligence support and access to co-investors. Equally, these models should support founders with investment readiness, pitching support, and more. 

This investment practice is more entrenched in Asia, and there are general and thematic learnings from that continent which could be tweaked and applied in the African context.  

A positive sign of a maturing investment ecosystem, broader models for deal curation and investor collaboration are being imagined.

“Curated deals for VCs would be highly valuable: the ability for tailor made and curated deals to be sent to us as VCs on a regular basis. That is something that I would imagine a lot of VCs would pay for. (Although we've seen this movie several times, and it hasn't had a good ending.) There needs to be an angel list of some sorts for Africa, for lack of a better term.” - interviewee

“And people have been thinking about a financing or matching platform, and I've seen so many iterations of it. But the reality is that a lot of VCs aren't very clear and direct about what their mandate is.” - interviewee

Creating an effective curation platform for early-stage startups would definitely be a challenge in such a nascent ecosystem. We believe, however, that this is much easier to do for African scale-ups, as there are far fewer of them, and the ventures less likely to scale have already been filtered out through market dynamics.

“I'd say the number one gap is a credible database of publicly available data/ research (whether free or paid) on privately traded companies on the African continent. Like a Bloomberg for private companies, but specifically focused in Africa.” - interviewee

The lack of accurate African investment data, as indicated in the previous section in Figure 51 (ecosystem data discrepancies), means that, in effect, the entire investment framework is a metaphorical house of cards, built on unstable foundations, thus requiring some new data intelligence support pillars.  

For most scale-up ventures it is attractive to have a capital partner who, on the one hand, gives a high degree of autonomy to the founder team and, on the other hand, is knowledgeable and capable of advising on challenges in the scaling phase. This latter aspect is the ‘plus’ in the ‘Capital Plus’ model.

We heard repeatedly from investors, entrepreneurs and leading accelerators that scaling ventures in Africa perform better if investors provide a range of non-financial support to their portfolio ventures, especially if that support is pulled (by the entrepreneur) rather than pushed (by the investor). 

New approaches to supporting (and valuing) scale-ups will better focus support and deliver improved returns, especially for local investors. Marsha Wulff, principal and managing partner of LoftyInc Capital Management, says: 

“Experienced startup investors have also developed different valuation methods, including: stage-based values, team composition, founder execution and product-market fit. These methods clearly favour investors who have local market expertise and background knowledge of local founder teams. They are most effective in the hands of investors with experience building African ventures themselves, who can advise African startup founders. When founders find such value-adding investors, they tell their peers, which drives more deal flow to those investors. Similarly, when founders have investors that impede their growth, they also share that news on the grapevine. One way or the other, the terms, strategies and capacity for value-addition that investors offer inevitably affect their deal flow.” 

Zach George, managing partner of one of Africa’s most active VCs, Launch Africa, says that "any VC fund can write a cheque. But it takes a really special VC to truly create value for their portfolio." He has indicated 10 ways in which investors should be continually evaluating themselves as regards support to the founding teams of their portfolio companies, and says that VCs should be doing at least 6 of them as a matter of course, if they want to create meaningful value.  

Some investors, especially smaller funds, have limited budgets, hence say they cannot provide the range of support envisioned by the Capital Plus model. This viewpoint is short-sighted though, given how much the fund and its LPs are likely to benefit from the improved longer term financial returns accruing from the additional investment. 

There are also some creative options for collaboration amongst smaller funds to reduce the cost per venture by pooling portfolios for the purposes of specialist support. Furthermore, much of the support envisioned simply requires the VC’s time, rather than outsourcing or hiring in-house specialists. 

A number of knowledge, access, and fundraising gaps exist. During our workshop for investors in March 2022, various issues were raised by participants, including the following:  

• Founders don’t always understand how the cap table works, especially as regards dilution, resulting in much of the founder equity being lost by Series A.

• Founders don't understand the different types of financing. Working capital financing is not the same as raising to expand the team.

• Founders are raising too many SAFEs and convertible notes, and not understanding the consequences of these actions until it’s too late.

• Founders need support in determining when to go for the funding. They shouldn’t just go for it because it is available, but rather when it is needed. Similarly, they must be strategic and selective in deciding who they partner with, rather than jumping into bed with whomever offers them money. 

• Hiring finance/ accounting staff should be a priority, especially for a scaling venture. An investor participant gave an example of a $10m venture without a bookkeeper. Others said that founders often don’t understand how to manage burn rates for their businesses, nor do they understand P&L. These are all knowledge gaps that can be remedied easily with the right team members and upskilling of leadership teams.

• Ventures need to be disciplined and astute in managing cash, and avoid the blitzscaling approach unless the circumstances actually warrant it. This will ensure a safety net.

These issues were validated in our interviews.

“Startup businesses always say they need funding, but when you unearth the business, it doesn't make financial or business sense. They should fix their business instead. On the other hand, the investor says, ‘there are no fundable or bankable deals’, but they haven't looked enough; go slightly deeper; or to look elsewhere. How do we bridge that gap - that is the million or billion dollar question. It’s not an easy thing to solve. It requires a system-level solution, and for people to come and work together. It’s not a quick fix.” - interviewee

“A lot of startups leave accelerators unable to raise capital, and need support in navigating that bridge period, through introductions to investors, helping them get investment-ready, helping them package and position the business in the right way, with the right proof points in the right strategy to be able to effectively reach the next milestone.” - interviewee

“There needs to be a portion on how to fundraise and on how to pitch properly, done by people who've actually raised money. Proper pitching training, structuring understanding of their business.” - interviewee

“More education is needed for those on the periphery of the ecosystem. E.g. often lawyers don’t know about valuation caps, clawback rights, SAFE notes etc. This is an emerging market problem, not just Africa. The VC system is moving fast, and they need to keep up with it.” - interviewee

Commendable efforts have been made by the African Business Angel Network (ABAN) to build networks and support partners. Catalytic Africa is a high impact co-investment platform operated by ABAN in partnership with AfriLabs, which provides matching funding to angel investor investments in startups from innovation hubs. 

Dream VC is an investor accelerator and community-driven educational platform that provides rigorous remote programmes centred specifically around venture capital across Africa's startup ecosystems, as well as specific resource hubs. There are a plethora of both free online courses available, such as this resource from Duke University, not to mention paid ones, like this resource from Udemy. 

We recommend that investors assess fundraising, deal structure and financial competency of leadership teams as part of their due diligence process, and ensure that the right individuals complete self-directed online learning modules to fill gaps in knowledge, as required.

Until relatively recently, whatever little VC existed in Africa was very much siloed. Silos create a notion that ownership equals value. And that the larger the piece of a pie you have, the more valuable it is. This is, of course, not the case.

A number of interviewees have commented to us on seed round practices in Africa, and the need for best practice standards. As we have pointed out elsewhere in this report, some early stage investors take way too much equity at this early stage, causing severe dilution, and limiting the ability of startups to raise in later rounds. Deal flow, generally, remains fairly unstructured and organic. This can be addressed fairly easily, if stakeholders act collaboratively.

“You need to actually set a benchmark: if someone says, here's the benchmark we need to give attention to, for the different rounds. Here's the benchmark for valuation based on normal accepted global benchmarks. Here are the performance metrics you should be able to achieve. And this is what real money and real performance looks like.” - interviewee

“We need to normalise round sizes. We’re in the dark ages.” - interviewee

“All the bad actors within the ecosystem are trying to get the best deal for themselves. Possibly this is human nature, but it is also destructive. If it is to shake the tree and set standards - be very vocal and very public. With multiple publications saying ‘here are the standard round sizes for ideas in pre-seed, Series A etc; here is an absolutely clean term-sheet. and anything less, you may be dealing with an asshole”. You almost shame people so we can set a standard, and you must keep setting that standard, publishing that standard.” - interviewee

Deal terms are another weak area. We heard from multiple investors and founders that founders are being exploited with unfair term sheets. This can and should change. Again, there are relatively painless interventions that can address these issues.

“It's also about having a standardised term sheet. SAFE, with no discount, is probably what the entry-level agreement should look like. But ideally, just a normal, clean term sheet.” - interviewee

We recommend the development of best practice standards and benchmarks for deal flow and term sheets, which are co-created by ecosystem stakeholders from the bottom up. Representative ecosystem entities, like the African Private Equity and Venture Capital Association (AVCA), are best placed to lead such interventions.

“Evaluate companies as people.” - interviewee

To maximise their scale-up investments, VCs and investors must properly assess the competencies and capabilities of both founders and their leadership teams. Julius Bachmann, co-founder of JRNY and executive coach working with entrepreneurs, acknowledges that their strength has a direct influence on the success of the enterprises they lead. Therefore, assessing and evaluating founders and their teams is an important aspect of the VC due diligence process. 

“I think a clear assessment of the capabilities, the talent and the resources of the leaders is critical - if they haven’t got the right capabilities, they should be told so, and then they can be coached or helped. It could also be done by putting in the right team in, like where you need industry deep expertise, especially on the tech side. Or deep market expertise - understanding how you're going to get into that specific space, then the local knowledge becomes critical. So they are all multi-disciplinary.” - interviewee

“Founders may see commercialisation and scalability potential, but without an understanding of what those key strategic drivers and enablers are. If they don't understand it, they can’t provide it, so there is a gap.” - interviewee

Some VCs apply personality tests, like Myers-Briggs. Bachmann acknowledges though that founders are starkly different animals compared to corporate executives, hence such tests may not be applicable in entrepreneurship. Rigid definitions of personality types can be dangerous, with VCs potentially ending up selecting exactly the kind of ‘fixed mindset’ they are trying to select against. Even the best personality tests have little to no reliable data on high-growth entrepreneurs. 

In his book, The Founder’s Dilemma, best-selling author and Harvard Business School Professor, Noam Wasserman, claims that 65 percent of high-potential startups fail due to conflict among co-founders. This makes alignment between founders and their leadership teams so very crucial - from vision through to execution. As we have said repeatedly in this report, when startups transition to scale-ups, in order to manage risk more effectively, the focus must shift from founder to leadership team, and that shift should be acknowledged in the due diligence process. 

Scale Up Nation identifies four leadership skills which are assessed during the scale-up audit process, as indicated in Figure 54.

VCs also observe teams and individuals throughout the due diligence period. Amongst other things, they observe how they interact, both with the VC and each other, and how they respond to questions, especially provocative ones. Some VCs conduct detailed evaluations, which can be done via interviews and diagnostic tools, and which can be both structured or unstructured. However, most of the evaluation methods used by VCs that we have seen are imprecise and overly simplistic, making it nearly impossible to tease out generic but accurate profiles of African entrepreneurs. 

Proactive and forward-thinking VCs have to come up with evaluations tailored to their unique requirements. We believe this bespoke approach is the most appropriate one, until such time that there is sufficient baseline data from which patterns and trends can be observed and documented.

As is the case globally, especially in emerging markets, female-led African startups have historically raised much less funding than their male counterparts. A dive into the investment data shows female CEOs raised about 7 percent of 2021 tech investments in Africa. 2019 and 2020 saw much lower figures at 4 percent and 2 percent respectively. 

Gender inequality in the African context must of course be considered through a cultural lens. Efforts to narrow the equality gap must be sensitive to local cultural norms (which can differ wildly within one country), and with input from local female role models and leaders. Failure to do so is likely to result in low adoption levels and little meaningful impact or progress in the medium- to long-term.

“On the supply side, there are the obvious things around gender biases, gender roles and the cultural expectations of women needing to be more at home and doing those domestic type duties, whilst men are expected to be out in industry. There are definite gender biases that still exist.” - interviewee

“African women feel that their safe space is in community work - working with churches and as teachers and nurses. African women understand how to navigate grassroots politics and culture. The new generation of women have stronger role models and feel more empowered.” - interviewee 

Women-founded, women-focused angel and VC funds, like FirstCheck Africa and Alitheia Capital, bode well for female tech empowerment. Dedicated programmatic support for female entrepreneurs, such as the GreenHouse Lab, also helps tackle the (large) gaps. Yet there remains a lot of room for growth.

Systemic issues are well-articulated and are eloquently labelled as a ‘triple dissonance problem’:   

1. The status quo ‘norm’ of ‘how private equity works’. Investors assign certain tags or labels to female fund managers as soon as they mention a gender lens.

2. These tags trigger stereotypes. Female fund managers are subsequently all put into the same silo, or ‘pink ghetto’, irrespective of their investment strategy.

3. Investors assign labels to gender-lens funds. They spend less time in the conversation focusing on the business case and the numbers, and therefore quickly dismiss the investment strategy altogether.

Investor spaces are male-dominated, tend to be closed circles, and are often in the form of social gatherings and online networks, which only insiders know of or are invited to. Ultimately, the gatekeepers of change at scale are the fund investors (LPs) who allocate capital to fund managers who, in turn, invest in entrepreneurs. It is at this level where female fund managers see the greatest need for transformation. 

A 2020 report by Women Entrepreneurs Finance Initiative, IFC and Village Capital found that the persistent gender financing gap cannot be easily attributed to differences in the quality of the startups, suggesting that investor bias and risk perception may play a role. Statistical analysis did not explain the gap by any quantifiable aspect of either startup or founder differences, including founder characteristics, such as education level or experience, and startup characteristics, such as intellectual property, sector of operation, geography, or revenue generated. Building on a growing body of research, this analysis suggests that the gender makeup of the founding team is strongly influencing the disparity in capital raised, suggesting a potential bias in investor decision-making or a higher perceived risk for female-led startups. 

Briter Bridges and World Bank Gender Innovation Lab have laid the groundwork for future research via their report In Search of Equity, which identifies drivers, explores the role of investor bias, and zooms in on sub-regions or countries within Africa. Recommendations include more flexible financial innovative financing instruments, and a more inclusive entrepreneurial culture, amongst other sensible proposals. 

Community-driven, tailored training programmes and networks for early-stage, gender-lensed investment need to be elevated. Forums should be established for values-aligned investors to connect and collaborate to overcome the challenges of cross-border investing to scale the impact of ventures focused on empowering women and girls. ANDE too have initiated a collective Gender Equality Initiative as a platform to support women as leaders, employees, and consumers. 

Katherine Owens, Head of R&D at Kenyan microfinance scale-up M-KOPA, says that the key challenge in determining how to scale gender impact in fintech is understanding how best to design and deliver a solution that suits the majority to close the gender ownership and equity gap.

“As a company on the pathway to scale, that’s a large, untapped market – but we can’t spark that change without clearly understanding the purchasing influences (positive and negative) that are top of mind for women, as well as challenges to their agency. Therefore, we’re relooking at our metrics to counter the ‘one-size-fits-all’ bias (especially where the one is, by default, male) and bring to the forefront women’s considerations of a ‘good’ digital financial service… With support from African Development Bank’s Africa Digital Financial Inclusion, M-KOPA is rewriting its human-centred design playbook to listen loud and clear to women with an aim to innovate new products and delivery methods to see more women own their financial futures – by designing with women, for women, and by women.”

The ecosystem needs to urgently double down and turn these aspirations into concerted actions.