Towards a business model for funding African Startups

By Brian Laung Aoaeh

Africa is experiencing a boom in entrepreneurship due to proliferating Internet and mobile computing technologies. Simultaneously African startups face the often life-threatening impediment of inadequate access to seed and early stage venture capital. Fortunately, a number of developments in other parts of the world point to the contours of an approach to solving that problem in a manner that necessarily starts out small, but that can eventually be scaled in a meaningful way.

Various recent discussions about the environment for African startups suggest that they operate in an environment characterized by an acute lack of access to local and international angel and venture capital investors, a severe scarcity of local and international venture capital, and the presence of a large number of aid organizations focused on supporting an even larger number of technology enabled social change efforts that usually do not create financial wealth.

The Pieces of The Puzzle

The first piece of the puzzle presents itself in the form of remittances. The World Bank estimates that Nigeria alone received US$21 billion of remittances in 2012. World Bank estimates show remittances to sub-Saharan Africa growing from US$28 billion in 2009 to US$31 billion in 2012. Growth plateaued between 2011 and 2012, but will resume in 2013, 2014 and 2015 respectively with estimates of US$33 billion, US$36 billion and US$39 billion.

The second piece of the puzzle presents itself in the form of crowdfunding. Crowdfunding is an effort by a “crowd” of individuals who form a social network on the Internet and pool their monetary resources in order to support efforts by other people or organizations in which they have an interest but with which they did not necessarily share a pre-existing formal affiliation. Crowdfunding has matured since the first recorded instances of crowdfunding in the music industry. Today Kickstarter, IndieGoGo, RocketHub and numerous other crowdfunding websites have created a platform that makes it possible to crowd-fund nearly any kind of activity in any part of the world. The most successful crowd funding campaigns raise millions of dollars from people who support the causes that the campaigns champion.

The third piece of the puzzle presents itself in the form of a segment of the Jumpstart Our Business Startups Act or JOBS Act, which was signed into law by President Barack Obama on 5 April 2012.

The JOBS Act contains a section that contemplates an expanded role for crowdfunding in giving small individual investors access to early stage investment opportunities as well as giving startup companies increased access to sources of capital through online capital raising activities.