Alternative funding sources for African startup founders

Amidst the global downturn, investors globally, especially in Nigeria have continued to maintain a tight-fisted approach towards investing causing a funding decline. In the first half of 2023, funding raised by African tech startups declined by nearly 50% compared to the first half of 2022.

What are the alternative funding sources that African tech entrepreneurs can explore? Last week via BD Talks, we hosted Oo Nwoye, Executive Director of Tech Circle to discuss the African startup funding landscape and alternative to venture capital. Opeyemi Awoyemi, the founder of Fast Forward Venture Studio also contributed to the conversation.

Overview of the African startup funding landscape

Ironically, it would depend on what you're looking at. Of course, there has been a downturn globally and it has been reflected in the number of deals that have been done this year. However, if you look at the landscape generally, there are many more early-stage funds on the continent, depending on when you start counting.

I will say that we are still on an upward trajectory. The scale on which things were growing has gone down a bit, mainly because 2020 and 2021 were outlier years.

On one hand, things are a bit tougher; fewer mediocre businesses will get funding, and it is more of a correction than a flaw. For instance, we started seeing pre-seed rounds worth $10 million in Africa—which is still searching for an exit; there was too much money and less rigour in deciding what should be funded.

Why is there a funding decline?

The reality is that money flows to where it will get a better return. Now that the interest rates have risen, the guarantee that you will get good returns means that you will not want to gamble. Venture capital is business, not charity.

What are the alternatives founders can explore?

The reality is that there should be more rigour from the founder's perspective, the most successful Y Combinator-backed companies that you know about today—Stripe, Coinbase etc—were funded with $25,000.

The idea that you need to raise more than $20,000 or $30,000 to prove a concept is a bad habit that should be expunged. If you have this perspective, things will go back to how they should be; 'family and friends' is usually the first round—this should give you your first $5000 to $10,000.

What do you need? If you need to build an app, all you need is time. Most cloud companies, including AWS, will give you your first thousand dollars for free, so you just need to build out a prototype. So, if you are a technical co-founder, what are you building that requires so much money to get out of the gate?

For instance, if you want to build a bank, the first thing you need to do is experiments, tests and market surveys, you do not just commit a million dollars to an experiment. So, if you're someone that is just building, you should focus on 'family and friends round' first. Of course, there are going to be exceptional cases.

However, if you are a growth-stage company like Paystack, it means you have considerable savings to fund your operations.  

When should founders opt for alternatives like grants and accelerators?

The purpose of building a business is not to raise money, money is just required to achieve some of the objectives like when you want to get to a particular scale and your revenue is not sufficient.

Although you should raise before you need money, you need to have a clear picture of what you are building and where you are going.

How to navigate raising another round

"What do you do with the money," this is the question we should be asking. If you raised $2 million, and you do not have a business that is generating revenue that can sustain itself, what have you done with the money and why should you be giving more money?

If you're running out of money, cut costs and extend your run way. If you set yourself up wrongly, you will run out of money quickly.

Which sectors do you think will be more at risk?

Oo: If you are in the sector of "I am building just to build" or "copy and paste", you should pack up. However, if you are solving a problem keep up with it, there is no industry that you should have a problem succeeding. The issue is when you are driven by fundraising.

Ope: All sectors are important, however, people should not go about copying and pasting, especially when you do not understand the back end of the business. For us at Fast Forward Venture Studio, we are looking out for businesses providing fintech infrastructure and artificial intelligence.

When you copy, do it with sense — Oo Nwoye

How can startups leverage debt as a source of capital?

Equity is expensive because the assumption is that the value of the equity will rise faster than the cost of interest.

So, if you sell $1 million of your company today, in one year it will be worth $2 million; that means you have taken a loan worth 100% interest. However, debt will be a 25% interest within the same period. Debt is also for short-term capital, hence it is a risky proposition if you do not have a clear direction as to what you're doing.

Meanwhile, another thing with selling equity aside from money is the strategic impulse; you give the founder money as an investor for the right for them to access you at any time.