Founders Factory Africa hosted a live version of The African Pre-seed Podcast. The episode focused on the good and bad of funding and how to choose the right capital in 2024.
The podcast included Rology CFO Jason Musyoka; Bruce Nsereko-Lule, co-founder and general partner at Seedstars; and June Odongo, founder and CEO of Senga Technologies.
The podcast comes at a time when African startup funding has seen a significant fall from the highs of 2021 and 2022. According to Disrupt Africa’s African Tech Startups Funding Report, investment in African startups fell by around 27% in 2023, while the number of investors dropped by half.
Despite these and other challenges, the panellists unanimously agreed that it’s still critical for startups to be reasonable in choosing the investors they approach for funding. In doing so, however, they say that founders should also be aware of investors’ shifting priorities and adapt their fundraising strategies accordingly.
Shifting investor expectations
As the panellists pointed out, with money no longer as cheap as it once was, investors prioritise fundamentals and sustainability over pure potential. This, in turn, requires founders to have a clear roadmap with achievable milestones (pilot, funding rounds) and contingency plans.
“As investors, we’re looking for a plan but you also need to model in variation,” says Nsero-Luke. “Aim to go with the plan but let’s model it if we need to spend a little bit more, for example.”
Additionally, investors are emphasising due diligence and seeking ventures with strong fundamentals and realistic growth plans, moving away from solely chasing high-growth potential. That makes it important that they do everything they can to impress in the due diligence process.
“From an investor perspective, it’s important that you do your due diligence very well whilst you’re investing in a company so that, when you’re putting in the money, you don’t get unexpected surprises,” he adds.
This also means that founders may have to shift their business position. Rather than aiming for the kind of accelerated growth that characterised the post-2008 financial crisis, low-interest environment, startups should aim for sustainable growth.
“When a startup is trying to fundraise, they need to think about what steps they need to take to build a sustainable, profitable business,” says Nsereko-Lule. “And if I raise X amount of money can I get there? And if I can’t get there, can I get to a stage where I can get investment in the shape of either equity or debt that will eventually take me to that place?”
Choosing the right investor
Even within this shifting environment, however, the panellists agree that it’s still important for founders to be discerning in the investors they approach for funding. More particularly, they say, founders must consider whether choosing local investors makes more sense than international ones. While international investors might have deeper pockets, local investors often have a greater contextual understanding of local environments and may therefore be better positioned to guide founders to success.
“The beauty about local investors is that we understand context,” says Musyoka. “And not just context but we also have networks. There are doors that the senior-level executives and CEOs that they introduce you to can open for you or businesses that they can enable for you that they can enable for that you wouldn’t be able to open for yourself.”
But other strategic considerations come with choosing which investors to approach too. Founders should define their business goals (lifestyle vs. scaling) and align their investment strategy accordingly, potentially utilising local angels and then seeking international capital for further growth.
“A lot comes down to the quality of the investor,” says Odongo. “There are some investors who I’ve felt more flexible with, and it’s always about what they can bring to the table and what, if any, trade offs there are.”
Even with these considerations in mind, it’s still important that founders pay attention to the investment offers in front of them.
“If you’ve got two competing term sheets in front of you, always go for the one that offers the least dilution,” says Musyoka, who has a unique perspective as an investor turned operator. “It gives you flexibility and allows you to operate in your known business framework.”
That may mean accepting a smaller investment but, Musyoka believes that this isn’t always a bad thing.
“A small amount is not necessarily bad for you,” he says. “You just have to recalibrate and work with what you have.”
According to Odongo, getting to the right investor may also mean pausing funding rounds, as Senga has had to do a couple of times over the past few years.
“At one point, we were going to raise money when we had validated our idea and it was growing well,” she says. “Then we got a lot of competition that was emulating some of what we were doing and they were raising tons of money. At that point, we were going to raise and I decided not to because it was clear to me that things were not going to turn out well. So we retreated and pivoted to a new niche.”
Planning for an exit
In the long run, more and more startups taking this approach may also change how we think about exits on the continent.
“Exit opportunities exist in Africa,” says Nsereko-Lule. “We have local exchanges, we have big corporations, etc. The effective exit opportunities exist here, but the types of companies that local players want to buy are very different to the ones internationals want to buy.”
“As we contextualise venture capital to the local market, it will help,” he adds. “Then we can build businesses where founders have the necessary skill sets and build businesses capable of achieving exits on the continent.”