Catalysing a Village of Diverse Capital into Startups in Africa

Despite the severe headwinds of a global pandemic, African startups continued to raise over $2bn in funding in 2020.

What we've also seen is an increasing shift towards larger and larger rounds at the earliest of stages, I'm really excited at how we're regularly seeing pre-seed rounds reach or surpass the $1m mark. In Fintech APIs alone we've seen Okra's $1m pre-seed round by TLcom and OnePipe's $950k pre-seed by Techstars, Raba Capital, Sherpa Ventures and other African and global investors.

This compared to just a few short years ago in 2016 when recently acquired Paystack's then seed round raised $1.3m.

What's Changed?

Is it the entry of more global accelerators like Techstars (launched in South Africa also in 2016), Catalyst Fund (also launched globally in 2016), Startupbootcamp and Founders Factory - both backed by South African corporates?

Is it the dramatic rise in venture funds comfortable at the earlier stages? Like the prolific Kepple Africa Ventures bridging Japanese capital and corporates to Africa, innovative collectives like Future Africa and RallyCap and pre-seed focused, founder backed, Sherpa Ventures?

Is it the increasing number of global tech leaders making bets in Africa? From Jack Ma's philanthropic startup initiatives in Africa, to Jeff Bezos' recent investment in ChipperCash and even more recently Gumroad's Sahil Lavingia backing Nigerian digital savings and investment platform Cowrywise.

Could it be that each and every one of these pieces (and more!) had to come together for us to see the kind of rounds we do now, the kind of growth we do now, the kind of acquisitions we see do now?

Grants Unlocking Venture Capital

I've seen first hand how programs backed by progressive DFIs that are constantly adapting interventions with their partners to truly be meaningful, have catalysed significant capital into startups in Africa. Taking the example of Catalyst Fund where I have the privilege to lead growth at, through significant non-dilutive grant capital of $100k (most startup grant giving programs pre-Catalyst Fund in Africa, and even post, tend to inject far less into each company) and direct venture building support, our team was not only able to take early bets on inclusive tech solutions but also prove the commercial traction they can gain with capital injections (this went a long way towards Catalyst Fund's startups going on to raise more than $130m from venture firms after intervention).

Cowrywise was the Catalyst Fund's 1st startup in Nigeria and just 1 year after our sprints with Razaq and his team, and our injection of $100k in the middle of the pandemic, and after deftly calm and agile manoeuvring of the company through the pandemic to a new normal, they announced a $3m pre-series A round with Quona.

Most venture firms were not set up to inject $250k in capital and support as a bridge round for a startup in Nigeria in the middle of a pandemic, with macro uncertainty and further capitalisation risk top of mind, but Catalyst Fund was able to step in and bridge that gap, beyond capital - working with the team on really understanding their consumers, building robust models to hyper segment and project financial performance of their various business lines.

Once a pathway or progress towards product market fit is observed, many investors can quickly rally behind founders to ramp up their efforts, but very often, significant capital is required to gather evidence of that pathway resulting in a catch-22 of a round not coming together until progress is demonstrated but progress not being able to be demonstrated until further capital is injected into the startup.

Read more about our work with the team: "Cowrywise inspires young Nigerians to save and invest"

We've only just begun our journey at Sherpa Ventures but in the 3 investments we've made since Q4 2020, we've already been able to see the impact of anchor pre-seed investors who provide support, diligence and significant early capital on the founding team's ability to focus on building (and the knock on effects of that enabling them to raise further capital). In a manner similar to what was described at the Catalyst Fund, significant amounts of pre-seed funding puts startups in a much stronger position to make the kind of experiments necessary to prove a pathway towards product market fit, to demonstrate strong enough traction to meet the requirements of later stage investors.

For our 1st round of funding - Grants or Venture?

There've been many discussions in founder circles about whether they should accept grant capital and whether they should raise from venture funds as early as their first round. Founders are concerned that grants will divert their attention from their core business or put an untenable reporting requirement on their team, founders are also worried about venture investments with aggressive terms diluting them too early or even beginning to take away board control too early.

These are all very real concerns but in the last few years founders who've been successful at maximising a blend of both grant and venture have been sharing their playbook with their communities, investors have been sharing this playbook with their portfolio and accelerators have been sharing it with their cohorts, the ecosystem increasingly understands how to blend both kinds of capital effectively. Stand out successes like Sokowatch and Twiga in Kenya have leveraged both grant and venture capital, both accelerating their core business growth and grants allowing them to broaden and experiment with product lines that otherwise might not have been prioritised.

There's been amazing gains in capital being allocated to early stage startups in Africa over the last few years, the mix of capital and support available to founders operating on the continent is growing increasingly diverse and robust, there are indeed less and less gaps in the funding continuum but we're only just getting started, we need to continue to work together, as a village - to ensure founders continue to have access to early capital, to ensure that together we continue to sharpen effective grant programs to fill the gaps that commercial venture capital is not yet well placed to address and deepen the pool of founder friendly pre-seed capital.

To founders, the question should not be either or, but of how they can engage smart grants and friendly venture funding, together, to grow their businesses in one of the most exciting startup ecosystems in the world.

#StrongerTogether