Part 2: Investment and Funding
Africa’s economic forecast for the coming years looks promising; it is projected to reach 29 billion dollars by 2050, which could lead to much prosperity on the continent. And this could be how we eradicate poverty on the continent by helping the people benefit from this economic shift? By investing in African startups, you do not only contribute to the economic growth of the continent but also stand to gain significant returns on your investment as these startups grow and succeed.
While many entrepreneurs in Asia and America benefited from their economic growth, only some African entrepreneurs may have a fighting chance if funding, especially seed funding, is not made available early for these entrepreneurs. Seed funding, which is the initial capital used to start a business, is crucial for African entrepreneurs to turn their ideas into reality. There are many reasons why African entrepreneurs cannot pursue their ideas and have the opportunity to materialize their business ambitions in Africa. Some of the outstanding hindrances could be the need for business acumen, the yet-to-be-developed managerial skills, the need for more supportive measures and policies, etc.
However, the biggest issue that stands out for me and I will spend most of my life working on is funding support for entrepreneurship in Africa. The main question is, how can anyone make it in business without the initial capital? Funding is one of many barriers to enter into business. Still, without starting capital, it is almost impossible to break through the levels of business success.
I know an entrepreneur in Ghana who didn’t have the initial seed funding to launch his idea, we supported him and after 6-months he had over 10 – 15 market women distributing his products in one region, and the demand kept growing; most of the distributors wanted more products, and more suppliers were signing up. However, due to the lack of additional funding to scale the business, he could not grow as quickly as demanded and saw other newcomers start to participate in the market share once they saw the success of his product. And who were the newcomers? In what capacity did they come? They come with enough resources to send the small-scale business out of business because, above all else, they are well-funded compared to the local entrepreneurs.
I want to advocate for more funding to follow the local entrepreneurs without overly dissecting them to the bare bones building on the first part of this article but to offer them an opportunity to collaborate, elevate their business skills, and bring people out of poverty by achieving success. And let’s make this straight: Investors from Europe, America, and some parts of Asia, including the African diaspora, you have the money stacked in banks, and we need it in Africa. Take advantage of the opportunity to rewrite history as it should. Today, Africa is not the Africa of yesteryears; Africa is on the rise, and the Trains have already left the station. It is time to put trust and money back into the continent as to what used to be the opposite in years gone by.
The Investment Trends
Before diving deeper into the two main financing trends I see on the continent. Another question is, can Africa produce home-grown multi-billion companies that are not raw-material vending companies? And what will it take to create such companies? Suppose Asians, Americans, and Europeans can build multi-million and billion companies. Why can’t Kofi from Africa, who has an idea to solve a local problem for millions of Africans and the world, become successful at creating a company that does that and, of course, get the financial support needed? Elon Musk is not Kofi, by the way.
I have seen the content’s two main financial investment trends evolve: the diversified funding type, which I call sandwich-basket funding, and the concentrated funding, which is the loaf-of-bread-basket financial support.
What investment strategy is helpful for an early-stage venture, and which is suitable for a more advanced venture? I have some frustrations and dilemmas with how funders fund projects because, depending on the stage of your enterprise, you need one of the baskets or the other.
However, entrepreneurs can aim at more than one basket of funding. Whether it is a small amount shared among many early-stage entrepreneurs or a more significant amount shared among a few selected businesses, to the entrepreneur, this could be a welcomed push to jump ahead.
The startup investment world is exciting for investors, offering the potential for high returns. But with that potential comes risk. One key question for any investor is how to allocate their capital: should they focus on a few promising ventures or spread it out among a wider pool? I want to explore the pros and cons of two popular approaches.
The Loaf-of-Bread Basket: Concentrated Investment
Imagine a budding entrepreneur with a revolutionary product idea. A more significant investment allows them to hire skilled developers, launch a robust marketing campaign, or refine their prototype – all crucial steps for success. With a concentrated investment, you’re placing all your eggs (or, in this case, slices of bread) in one basket, but it’s a well-stocked basket with the potential for a delicious outcome. And the word here is potential as nothing is guaranteed in the world of business. Here are pros of putting your loaf-of-bread in one basket:
More significant Impact: Imagine a budding entrepreneur with a revolutionary product idea. An enormous investment would allow them to hire skilled developers, launch a robust marketing campaign, or refine their proof-of-concept prototype, which is a crucial step for success. With a concentrated investment, you’re fuelling a more ambitious journey. You are providing the entrepreneur with enough energy to fly to the moon, which is beneficial not only in Silicon Valley alone but elsewhere in Africa. I know the tendency is to talk about Africa in small terms; some will argue to death that investment in the tens of thousands is already too significant for an African entrepreneur, and to some extent, there is some truth in there, but that does not enable any entrepreneur to create an impact on a larger scale. Significant business impact comes from substantial business investments even beyond the boundaries of finance.
Deeper Collaboration: The higher the amount people are willing to invest, the deeper the due diligence, and rightly so, but when it is even more applaudable is the dedication toward the entrepreneur after the investment. Building a solid relationship with the entrepreneur to foster and nurture support will go a long way to producing results instead of giving a small amount and not caring whether it succeeds or fails. Doing this makes you more than just an investor; you become a trusted advisor, offering guidance and support tailored to their needs based on your experience and network.
Decrease the chance of failure: One common expectation for the entrepreneur and the investor should be the venture’s success. That means whatever needs to be done to ensure the venture’s success becomes the priority, including all the pre-venture investigations before the business goes live. If it is an existing business, one needs to ask the right questions through careful evaluation so that you can identify entrepreneurs with the potential to succeed. Mostly they have a well-defined business plan, a substantial market opportunity, and an understanding of their market. Once you have shortlisted these ventures, you can concentrate your investment on these high-potential ventures, increasing the chances of a significant return.
The Sandwich Basket: Diversified Investment
Not all startups will succeed. Diversifying your portfolio by investing smaller amounts in a broader range of ventures acts as a hedge. It’s like filling a basket with a variety of delicious sandwiches. Some fillings might not suit your taste, but others might be delightful. The positive of the diversified investment from an entrepreneur’s perspective is that we get to initiate a lot of early-stage entrepreneurs. While the amount they receive might not help them create any significant business impact, it will help them validate their business idea, as mentioned in the example above. It could be a progressive support system where African entrepreneurs can find investors who will be there with them, from providing them with diversified investment to concentrated investment once the idea has been validated and ready for growth. The caveat here is ensuring that these entrepreneurs find enough funding to pass the first phase of their venture. For the investor, however, the divisification has advantages:
Spread the Risk: As an aspiring entrepreneur, I can attest that not all startups will succeed. Many factors can topple early ventures; therefore, diversifying your portfolio by investing smaller amounts in a broader range of ventures significantly acts as a hedge especially for non-professional investors, for instance if you are investing as part of your social responsibility as a diaspora. You may be investing from some of your savings, so putting all that savings into one venture wouldn’t be advisable. It is better to spread this investment so that even if some ventures fail, others might thrive, potentially generating a positive return overall.
Multiple Opportunities: The startup landscape in Africa is teeming with innovative ideas. The new generation of Africans understands the importance of solving local problems. They are consistently developing the skills that will increase their chances of success. So, there are plenty of opportunities to improve your exposure to a broader range of opportunities by spreading your investment. By engaging with some of these startups at an early stage, you will increase your chances of being better positioned when the venture eventually takes off. You might miss out on the next big thing by focusing on just a few ventures unless you have done your due diligence and risk analysis well.
Mitigating Overoptimistic Ideas: Identifying the absolute “sure thing” in the world of startups is incredibly challenging and even more difficult in Africa. The reason, or at least one, is that sourcing validated information needs to be more evident, and that is still a work in progress. Most people recommend that if you want to invest in Africa, it is better to go through an investment group with trusted information sources, a better understanding of the markets and the individuals behind the businesses. Proper estimation and valuation of businesses in Africa can be misleading at times because it can be difficult to trace the sources of facts and calculations that lead to the forecast. It happens to all entrepreneurs when we overestimate because of our enthusiasm and overoptimistic outlook on the market. Diversification helps mitigate the risk of overestimating the potential of a single entrepreneur or idea.
Finding the Suitable Basket:
The optimal strategy depends on several factors:
Risk Tolerance: Are you comfortable with a potentially empty loaf-of-bread basket, or do you prefer a well-stocked sandwich basket? Betting big could also mean losing big time, so when it comes to investing your money, you have to consider your risk comfortability and affordability. If you are an African diaspora at age 60, taking all your pension savings and investing it in one entrepreneur can be a risky business if you don’t have a fallback plan. However, it all comes down to your investment goals. Are you looking for high returns with a higher risk profile or more stable, long-term growth? My personal understanding of this is to opt always for a slower long-term growth investment. Don’t be enticed by the get-rich-fast entrepreneurs; mostly, the reality always proves otherwise because the business simply takes time.
Expertise: African diasporans lose their investment because most hand over money to people in their home countries to do business without first, they themselves understanding where that money is going. In the book The Richest Man in Babylon, written by George S. Clason, In one of the parables, a character named Rodan, a spearmaker, receives a rare opportunity to invest in a venture with a brickmaker. The brickmaker claims to be traveling to a distant land to buy jewels at a low price and sell them for a substantial profit. Rodan, eager to increase his wealth, invests all his savings in the venture.
However, the brickmaker turns out to be dishonest and squanders Rodan’s money on lavish living. He returns to Babylon empty-handed, leaving Rodan with nothing. This parable serves as a cautionary tale against blindly trusting others with your investments and emphasizes the importance of thoroughly researching and understanding any investment opportunity before committing your hard-earned money.
Caution in Selection
Selecting the right few entrepreneurs requires a robust evaluation process to identify those with the highest chance of success. Do you have the expertise to select high-potential “loaves confidently”? If not, it is advisable to learn from those who have experience in this area. Some could be free, and others will come at a price, but whatever the cost, you don’t want to end like Rodan when it comes to investment. One of the ways to protect your investment is to use the two-tiered approach.
A two-tiered approach can be a good compromise. Allocate a portion of your capital to concentrated investments in ventures with exceptional promise (your loaf-of-bread basket). Dedicate another portion to a broader pool of early-stage ventures through angel investment platforms or diversified funds (your sandwich basket). This allows you to balance the potential for high returns with a safety net of diversification.
Conclusion:
In conclusion, investment and funding are crucial for the economic growth of Africa and for empowering local entrepreneurs to realize their business ambitions. Supporting African startups through seed funding and other financial resources not only contributes to the continent’s economic prosperity but also presents significant opportunities for investors. It’s important to address the barriers to entry that many African entrepreneurs face and provide them with the necessary support to turn their ideas into successful businesses. Furthermore, it’s essential to recognize the potential of home-grown multi-billion companies in Africa and provide the financial support needed to nurture and grow such ventures. The evolving trends in financial support, including diversified funding and concentrated investment, present various opportunities and challenges for both entrepreneurs and investors. Ultimately, both approaches have their merits, and entrepreneurs should consider leveraging multiple sources of funding to drive their ventures forward. Overall, by investing in African businesses and startups, investors have the opportunity to not only generate returns but also to be part of Africa’s burgeoning economic transformation. It’s time to put trust and money back into the continent and support local entrepreneurs in creating innovative, successful businesses that can contribute to lifting people out of poverty and driving sustainable economic growth across the continent.
Disclaimer: I am not an investment expert, nor do I claim to be one. The article is based on lessons learned and sharing information. Seek professional advice if, after reading this, you want to invest in Africa.
Africa Thinkers 