August 11, 2014
The role of smart funding in nurturing African startups
I was recently asked to comment on whether or not crowdfunding could be the next big thing in boosting African startups. Crowdfunding is becoming the new buzz word in Africa as an alternative to overcoming the bottleneck of access to capital. The concept has been trending globally and recently introduced to the continent, adopted in markets such as Nigeria, South Africa, Kenya, Ghana and many others. While there have been some success stories, I personally do not find it to be a sustainable model in supporting African entrepreneurship in the long run.
I am in no way generalizing the situation as each business case is unique. However, as a private investor, one of the key reasons I am averse to it is the lack of regulation. With many crowdfunding models, there is no risk profile mechanism in place to protect investors which in turn could have negative consequences on the longevity of startups relying on these means of funding.
The African startup scene has never been in a better place than now with increased foreign direct investment coming through especially in high return sectors such as ICT, manufacturing, agriculture and healthcare. Yet many startups have not been able to access capital.
I believe the answer lies in what I call ‘smart funding’ and this is where local investors especially play a key role. There is no shortage of great ideas in Africa, only the lack of an investment support system. Local investors who are truly interested in supporting African startups should approach from a place of deep rooted values, long term outlook and thorough market understanding including the risk return profile of the startup or innovation in question. They need to first be truly vested in African development, and second, they should have knowledge of the commercial ecosystem within that sector so that they can support the startup from idea towards wide-scale commercialization and beyond.
When I see a great idea, I am often immediately inspired to act on it. As someone who truly believes in African potential, I feel it is my role to help African startups. The first thing is to ensure that they have all their ducks in a row by challenging them to tighten their business model, to prove that their business solution addresses an unmet need and that their business idea has widespread commercial potential. Only then can they be less risk averse to potential investors.
Both investors and startups should not be looking at quick returns if they are to get anywhere. Africa needs investors who will support local businesses through mentorship and coaching to ensure sustainability. Startups need to avoid the temptations of premature scaling and be open to being mentored for a reasonable period of time or even outright challenged if need be. This doesn’t mean that they risk losing their business to investors. Investments into ideas without assessing growth and market potential factors will only negatively impact the ecosystem and further feed the trend of many startups not making it beyond the growth stage.
Needless to say, the Government also has a part to play in propelling African start ups and I would like to see more incentives and reduced bureaucracy within this space. But at the end of the day, as an entrepreneur myself, I know that good networks, skills and knowledge are powerful tools that can set African startups on the right path to success. I would like to see more established entrepreneurs working hand in hand with startups and SME’s because the future of entrepreneurship on our continent will be shaped by the availability of resources and expert knowledge being made accessible to start-ups.