Business
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.
A business model designed to solve the problem
The business model I am proposing rests on certain key activities that will be performed by an Africa-focused early stage venture capital fund established specifically to implement this idea.
The fund will raise capital from a group of limited partners that wish to invest in early stage startups, and in particular seek exposure to startups originating from Africa.
The fund will select African startups in which to invest sufficient capital to reach the next funding milestone, but generally between US$50,000 and US$250,000.
The fund will seek additional capital from a crowd of large and small investors with a goal towards raising financing for the startups’ follow-on financings. Africans in the diaspora will be one group of constituents targeted by the fund’s fundraising outreach efforts in a bid to steer a portion of the annual remittance flows to Africa away from consumption and towards investing.
During this period the fund will be intimately involved in accelerating the startups in its portfolio with support that spans every area in which the startup might need assistance and help in order to ensure its ultimate success from the investors’ point of view.
The fund’s value proposition stated simply would be this: provide the most promising African startups with access to seed and early stage capital and a partner committed to their ultimate success, and provide investors from around the world with an opportunity to earn attractive monetary and financial returns.
This will not be an easy effort. The experience of an effort called the Startup Africa Fund proves instructive for the individual or team that seeks to implement this.
The idea of scaling the solution described above comes by way of competition – many more funds set up by other individuals specifically to copy and implement this model, and an increasing interest in investing in African startups from the global community of angel and venture capital investors currently unassociated with this effort. The durability of this approach is closely tied to successful outreach to the African diaspora aimed at steering a portion of remittances, and eventually foreign direct investments (FDI) towards early stage African startups.
An Africa-focused seed and early stage venture capital fund that invests in technology startups and generates outsized returns for its investors is the surest way to get more investors paying attention to, and investing in African startups. Such a fund would generate jobs, create wealth for its various stakeholders and increase economic prosperity within the communities in which startups in its portfolio operate. In addition, some of the startups this fund would invest in would undoubtedly improve the lives of many people in Africa and elsewhere. With hard work and a little luck, a number among them might even change the world in the process.
This article has been sourced from a discussion by the author (Brian Laung Aoaeh) under the same title that was published at Tekedia on 7 January 2013.
Brian Laung Aoaeh is an investment research analyst at KEC Holdings LLC, a venture focused investment fund based in the state of New Jersey, in the United States. He spends the majority of his time assessing potential early stage venture capital investments and monitoring startups already in KEC’s portfolio.