60 Venture Funding Applications: Insights on African Entrepreneurship
We often speak to investors about the entrepreneurial ecosystem in our markets (East and West Africa), and, since many of these investors are in the United States, we often get questions about “What’s different? The same?” as they try to relate what we are telling them to something they are more familiar with.
One thing that dawned on me recently is how much time we, as investors (and especially in the context of Africa), “steal the mic” from the entrepreneurs and tell their stories for them — whether it be to the media, in authorship of thought-leadership papers, or to potential limited partners. At best, these stories can motivate and educate potential stakeholders about the opportunities (both economic and impact-oriented) abroad, and stir them to action. At worst, though, we risk misappropriating those stories and, more often than not, proselytizing to others about the “problems” in the ecosystem, the “challenges” they are facing, who the entrepreneurs are, and what their businesses need.
This post will try to address both the first question (“what’s different/same?”) and the second issue by directly relating aggregated information from our intake questionnaire. Over the past several months, ~60 companies have completed the questionnaire, providing details about who they are, where the opportunity lies, and what their challenges are. Before we move to the data, though, I want to put out a call for entrepreneurs in Africa to grab the mic from me — if you have a story to tell that might help a fellow entrepreneur (e.g., “How did you navigate a founder breakup? How did you convince a local bank to provide you working capital? Why did you focus on imports, or exports, or both? How do you deal with corruption, if at all? What did you learn from your fundraising process?” etc.), reach out to us and we’ll figure out how to get it on the blog and get it circulated to those who need it most.
Now to the data…
I lied — first a disclaimer. The following data are most certainly distorted by selection bias. We invest at an early stage (we target an initial check size of $500,000), primarily in Ghana, Nigeria and Kenya, and we are vocally and specifically in the market for technology-enabled businesses in core sectors (agribusiness, consumer products, processing, logistics, business services, etc.). We do not claim this to be a representative sample of the early-stage businesses in our markets, so caveat emptor. The sample includes 60 firms, raising between $50,000 and $3.5 million, who self-selected themselves into our fundraising process by filling out our intake questionnaire.
Anecdotally, we’ve found the entrepreneurs looking for our funding are more experienced, and have been running their firms longer, than their U.S. counterparts. While the “PowerPoint”-entrepreneur archetype is perhaps overplayed in the United States, the opposite couldn’t be more true in our markets. The average firm age of the sample is 4 years old, with a significant percentage over 6 years in age. Most notably, as these firms are “pre” Series A, this compares with an average firm age of 3.4 years for startups landing a Series A financing round in the U.S. and E.U. For those U.S. investors who daydream lovingly of the years of entrepreneurs scrappily building their business in their garage (a la Bill Gates) look no further than places like Nairobi, Lagos, Accra, and the second-tier cities surrounding them.
Much has been made of this topic as of late — and very rightly so. The Kauffman Foundation’s 2016 Startup Activity Report indicates that ~41% of new ventures in the United States are run by women, while a Babson College study reported that only 2.7% of venture funding goes to ventures with a female CEO. We don’t have that kind of fidelity of data in our markets, so I hesitate to say this, but our sample suggests women may be getting more exposure to venture funding: ~50% of the applications in our sample came from a founding team with at least one woman. In our portfolio, we are 2 for 6 — more work to be done (if all goes well, though, keep an eye out for our next announcement!).
I’ll admit, we don’t often run into companies growing their revenues 50% month-over-month (at least for any sustained period of time). While some of this is due to market-specific difficulties with distribution, ability to pay and market acceptance, we’d argue that the primary culprit is that these businesses are different in nature, and less reliant on massive initial outlay to secure market share and prevent competitive entry, as with a SaaS-like product. In this part of the questionnaire, we ask the entrepreneur to divulge last month’s revenue alongside this month’s expected revenue. We find that the average revenue growth of the sample is ~20%, and that growth appears to modestly accelerate as the companies increase in scale.
Much has been written about the difficulties in starting a business, and, more recently, some of this writing has touched on the particular challenges faced by emerging market entrepreneurs. Reports by Omidyar Network (such as here and here), Chatham House (here), and GALI (mentioned elsewhere in this post but also here), come immediately to mind.
While it is important for investors to read and digest these well-done reports, it’s also important to just stop, step back and listen to what the entrepreneurs are telling us in their own words. The next part of our questionnaire addresses this by asking entrepreneurs to delineate their three greatest perceived risks to success. Not surprisingly (from our point of view), we find that over 35% of entrepreneurs find access to capital a major obstacle to their continued growth. Other major obstacles were supply chain or distribution issues (~31%), competition (~29% of survey respondents), and regulation (~28%). Perhaps more surprising, though, is what respondents DIDN’T indicate: less than 10% of respondents reported a major hurdle being the development/implementation/product-market fit of their technology. Similarly, less than 20% reported political instability as a major factor, and less than 14% mentioned macroeconomic conditions.
PRIOR STARTUP EXPERIENCE
The number one misconception we find among the passive investors we speak to is a misunderstanding of the pedigree of the entrepreneurs whom we interact with every day. The report “Accelerating Startups in Emerging Markets: Insights from 43 Programs” is dead clear on this topic: emerging-market entrepreneurs are not only more experienced (on average) than their peers in developed markets, but they also have as much, or more, skin in the game. We found that 3/4 of respondents in this sample had someone on the founding or management team with startup experience, including 17% with experience in successfully building a company. Though these experiences are self-reported (we don’t confirm this until later in our pipeline), we think it’s enough to, at a minimum, change the pre-conceived notion that emerging-market entrepreneurs are amateurs.
Without a doubt, diversity is an important aspect of entrepreneurship. However, investors rightfully focus on founders’ experience in the markets they are operating in. We’ve found that being local to, or, at a minimum, having significant recent experience in, a market is critical in understanding the pain points that are being solved. Anecdotally, having this local experience also seems to have a negative correlation with the approach of throwing technology at the wall to see what sticks (if we had to choose between technology and execution, we’d choose execution nearly every time). Over 90% of our sample has this experience.
Market sizing is notoriously fickle (and usually wrong), and perhaps even more so in emerging markets where there is simply less data. However, another way to look at the responses from this question is entrepreneur optimism, and the tendency to “think big.” The same report mentioned earlier about accelerating entrepreneurship in emerging markets found that, on average, entrepreneurs in emerging markets may be less optimistic than their developed-market peers. This results from this particular sample would seem to indicate otherwise — over 1/3 of the companies believe they are tackling what is or will become a billion-dollar market.
As we discussed in the “Risks” section, raising capital in an emerging market is difficult — very difficult. It’s part of why VestedWorld exists. It’s no surprise, then, that entrepreneurs are looking to significantly extend their runway when they come to us: 36% requested a funding amount that would help them grow and operate for the next 24 months (or longer), and another 17% were looking out 18 months. From one perspective, given the interplay between valuations, entrepreneur dilution, shallow capital markets, and desire for security, it is not wholly unsurprising that a sub-optimal amount of capital is being put to work in our markets.
I’ve already expressed our experience with the “less is more” mindset that our prototypical entrepreneur demonstrates — but the results from the sample are perhaps more striking than we would initially expect. About 60% of our respondents had raised less than $50,000 each, prior to reaching out to us. Just 20% had raised $250,000 or more externally to support their initial growth.
While this is just a small sample of the thousands of SMEs in our markets, we’ll double down on the selection bias by saying some of the insights we’ve highlighted here are highly reflective of what we’ve seen across other application cohorts, and what we’ve heard from our discussions with hundreds of other entrepreneurs. As more and more investors get excited about the startup ecosystems in Africa, including those who have traditionally played in more-developed markets, we hope that this information is interesting and useful as a primer on what to expect — even anecdotal as it may be.
 Three firms over 20 years in age were removed as outliers in this summary statistic.
 Pitchbook. Sample of 750 companies drawn from 2016/2017.