Hurdles African startups face in attracting capital

The inaugural Jack Ma Foundation led Africa Netpreneur Initiative grant award took place in Accra, Ghana, on November 16, 2019 with a total of $1.0 million shared between ten entrepreneurs who pitched their businesses before four judges.

The grand prize of $250,000 (Sh25.4 million) went to Nigeria’s Temie Giwa-Tubosun who is the founder and CEO of LifeBank, a social impact venture whose core business is the distribution of critical medical supplies to hospitals in Nigeria. Egypt’s Nawah-Scientific, a private bio-medical research centre founded by Dr Omar Shoukry Sakr, which offers analytical services online and on demand, won the first runner-up grant of $150,000 (Sh15.3 million). Christelle Kwizera’s Water Access Rwanda, a business venture looking to plug in the deficit of accessibility and affordability of safe water in Rwanda, took the second runner up position with a grant award of $ 100,000 (Sh10.2 million).

As the firms received their awards for the impact they have made in the societry, it emerged during the event that African startups face a set of hurdles in attracting funds to boost their businesses and for expansion.

According to financial data and software company PitchBook, which tracks and aggregates data on deals across the globe, out of an estimated 530 transactions which took place in Africa in 2018 and whose ticket size was disclosed, 222 were below $1.0 million in size. Of note is that 81.5 percent of these 222 transactions were below $250,000 in size, an indication of the concentration of small ticket size deals within the continent. With investors keen on ploughing capital into companies with established track records, however, deals of this size tend to attract very little appetite for investment.

“At less than $1.0 million, you are likely looking at companies which are in the pre-seed stage. In other markets where the private capital ecosystem is well developed, these businesses would typically be funded by angel investors,” says Eva Warigia, Executive Director at the East Africa Private Equity and Venture Capital Association (EAVCA).

“In Africa, however, the angel investor landscape is still very young and left to entities which are deliberate in playing in the pre-seed stage funding space.”

Fred Murimi, the Managing Partner of Centum Capital Partners, argues that the depressed appetite for small ticket size deals reflects the chase for efficiency in portfolio administration and unlocking value for investors.

“If a fund manager has a sizeable fund to deploy, they can either invest in many small enterprises which require significant attention or fewer large enterprises which would require extensive portfolio management. This presents a challenge given the competing priorities of each of the assets in the fund,” Mr Murimi says.

He, however, argues that the landscape should not be painted using a broad brush since there are bright spots which merit the attention of yield-chasing investors.

“There are small ticket size transactions which are not as attractive since they require a lot of work and fairly ambitious value creation plans in order to achieve meaningful scale and win their markets. However, there are assets which have room for exponential organic growth at relatively low valuations,” he says.

Stakeholders involved in organising the inaugural Africa Netpreneur Initiative are banking on the grants extended to help de-risk small and medium sized businesses and create opportunity for follow-on funding by way of either debt or equity.

“It’s good for promising small and medium sized businesses to access some patient capital. $250,000 of free money with no one asking you for returns over the next three or so months allows the businesses to get started and hopefully opens the door for additional funding going forward”, said Sam Gichuru who is the founder and CEO of Nairobi-based accelerator, NaiLab, which was the Jack Ma Foundation’s lead partner for the Africa Netpreneur Initiative.

It is a view shared by Eva Warigia of EAVCA: “The funding value chain appreciates and sees grant providers such as Jack Ma as critical to the success of the entire chain. They not only help de-risk the concepts but also with institutionalisation to make them viable businesses,” she says.

Through the Africa Netpreneur Initiative, the Jack Ma Foundation has committed to deploy $ 10 million worth of grant funding to African small and medium sized businesses between 2019 and 2028 with a target of 100 beneficiaries over the said period. The initiative brings to the fore the need for greater efforts towards bridging the gap of investors with appetite for small ticket size deals in Kenya and Africa at large.

Already, the presence of small and medium sized targeted funds such as Vested World and Chandaria Capital signal that appetite for this segment is gaining traction.