12th November 2018
Raising funds for your startup is challenging and even more so in Africa. Local investors are relatively few and comprise of mostly individuals rather than institutional funds, and without pooling of cash, access to large amounts of funding is limited. As a result, many African startups are being funded by foreign investors through investment programs such as Open Capital’s TRAIN, which actively seeks out local entrepreneurs for investment.
However, local entrepreneurs still feel that they’re at a disadvantage compared to expat founders. This could be due to local entrepreneurs’ lack of networks with international investors and unfamiliarity with the investment readiness processes. Foreign entrepreneurs are also likely to be more conversant with capital raise concepts and procedures having worked in markets where commercial investment is more common.
So, what do local founders need to consider before embarking on a fundraising exercise? Due to our experience helping clients raise over USD $400M+ in funding over the last eight years, we’re often invited to speak on this topic and have broken down the top three factors we commonly discuss with founders.
Timing is critical
The right time to fundraise is one of the most difficult questions for entrepreneurs. Raise equity capital too early, and you give away a far larger share of your business than you may be willing to part with. Raise capital too late, and you risk losing your first mover advantage, allowing one of your competitors to scale.
Being able to bootstrap and get friends and family on board before finding external investment is important as it builds discipline. However, startups that are likely to be competing in crowded markets need to raise funding at an earlier stage to move to the next level. This is especially true for startups with high upfront product development or distribution costs. For such companies, bootstrapping can only take them so far.
Figure out the right investor for you
Depending on the stage of your business, ticket size, and support needed post-investment, angel investors may be a better fit compared to venture capital firms, and vice versa. Angel investors tend to invest smaller amounts, have less strenuous due diligence processes, and could be a great source of mentorship and access to networks for your startup. Venture capital firms generally invest larger amounts of capital and can boost your credibility with other investors, but with the trade-off of more demanding due diligence processes, and pressure on terms that are more favorable for the investor, e.g. pushing for larger ownership stakes, more investor rights, and involvement in business decision-making. Furthermore, the due diligence process leading up to investment can be demanding, and entrepreneurs need to be prepared for that especially when approaching venture capitalists.
Set aside plenty of time to prepare for the investment process – and be realistic about your valuation
A capital raise often involves rigorous investor processes that can be draining on entrepreneurs, both emotionally and in terms of time and internal resources. It’s important to determine whether you have enough time to prepare adequately beforehand to ensure that you’re able to meet investor requests while still running the business effectively. By taking the time needed to put together business plans, financial statements and strategic plans describing what lies in the future, entrepreneurs can make the due diligence process easier on their end. International investors also appreciate research into the industry to gain local context and ascertain that the business is meeting a real need in the market. Many accelerators and advisory firms are available locally to help businesses become investor ready, and entrepreneurs can tap into the experience of other founders who have been through the capital raise process.
When approaching investor negotiations, entrepreneurs often also focus too much on valuation. Unrealistically high valuations will scare off serious investors and call the founders’ business judgment into question. Focusing on getting the highest possible valuation also distracts many entrepreneurs from other important clauses in term sheets that benefit the investor, e.g. anti-dilution provisions, tag-along and drag-along rights, veto rights, etc.
Regardless of the direction you take, make sure to do your research. There are plenty of resources online that you can take advantage of and Open Capital Advisors is also available to help you take your business to the next level.