In this article titled Five Things African Startup Founders Raising Money in 2023 Must Learn, Efayomi Carr, Principal at Flourish Ventures, a global venture capital firm, discusses what African startup founders should do to attract funding during the prevailing economic downturn:
The potential for startups in Africa is massive, especially in the fintech space. Original pioneers and fintechs have created innovations that have fundamentally changed how people live, and we have seen that these investments can transform people’s lives for the better.
It’s still early days, but these success stories are encouraging, and a report from BCG and QED projects that upward revenue growth will continue over the next decade.
In the near term, however, funding for African tech startups declined by 57% in Q1 of 2023, according to data released by Disrupt Africa. Fintech valuations have also dropped by 50% in the public markets, a trend that has begun to claw its way into earlier stages and caused valuations to drop.
These factors affect how investors are approaching their decision-making, but there are still plenty of opportunities for founders who know how to navigate the current fundraising landscape.
Here are five things African startup founders raising money in 2023 must learn.
1. Emphasize your impact
One of the unique aspects of working in Africa is that there are many problems in need of solutions. For entrepreneurs, this means there are myriad avenues to not only build a business but also create positive change.
Flourish, where I’m an investor, is driven by a mission-driven investment strategy, but all venture capital firms look for solutions that are impactful.
As a fundraising founder, make sure to emphasize how your particular solution will engage with your end users and scale, so it will reach a broad range of people over time. In your pitch, aim high while also being realistic.
2. Focus on the details
Investors look for entrepreneurs who are very detail-oriented, who can get their hands dirty, and who know their numbers, customers, and product on a deep and granular level. We want someone who knows where their industry and customers are going so their business can anticipate changes and be ahead of (or driving) the curve. It’s challenging to find a founder who possesses these two qualities: 1) can think big – articulate a high-level vision – motivate others as a leader, and 2) pays attention to detail and has an understanding of intricate problems and a mastery of their customer’s problems. Founders who possess these qualities will stand out.
3. Back up your track record
Founders’ track records are the most critical way to evaluate them. When doing diligence, investors talk to previous and current colleagues, bosses, and employees to understand the founder’s character, how they operate, and how they have handled past challenges.
For businesses, investors will use standard elements like financial and legal due diligence, but they will also do qualitative diligence on the business. The most important element of this is to interact with a business’s customers to answer questions such as: Is the product differentiated?
How consistent is their service? Would customers continue working with the business and/or refer others? This level of due diligence is something to be prepared for while fundraising.
4. Show how you lead
Entrepreneurs often ask: Do you care more about the team or the business model? The answer is both, but what matters most depends on the stage of the business. In the early stages of a startup, leadership is critical.
The main indicators of success for early-stage companies, such as: iterating quickly on a product, recruiting and building out a team, and raising capital, are largely determined by the quality of the team. In the later stages, investors focus more on the business model because there needs to be a higher level of certainty around the company’s trajectory and position.
But earlier on, success is mainly determined by leadership because the business model would change as you refine your product and service over time.
5. Focus on the fundamentals
People often think overnight successes exist, but the most successful investments don’t happen that fast. It takes years for teams to solve problems by continually innovating, and building and sustaining communities and partnerships. There are no shortcuts to success in this industry.
This is especially relevant now because of the funding downturn. Two years ago, businesses could have bad fundamentals and attract capital because they were growing quickly, while slow-growing, strong, and resilient businesses struggled to fundraise.
Now, investors have shifted from growth-at-all-costs to finding the path to profitability; from expanding and worrying about it later to focusing on markets, core products, and product-market fit before putting additional money in the tank. Keep this in mind when preparing to fundraise, and tailor your pitch accordingly.
This reversion to fundamentals will create stronger and more resilient businesses in the long run. It means the companies that emerge in that race today will have a higher chance of success than those that raised funds two years ago.
I find this encouraging because it’s forcing people to focus on cash preservation, unit economics, and profitability over time instead of just growth at all costs.
Venture markets have steadily risen over the past 10 years, so for today’s founders, it’s important to keep in mind that some of the investors they meet are going through a true economic downturn or experiencing economic instability for the first time.
It’s a learning experience for everyone, and ideally, it will make us better stewards of capital and fintech founders if we can all weather the storm.