Positioning for investment: How to woo investors as an emerging startup?

Positioning for investment: How to woo investors as an early-stage startup - Startup Lagos

Is it difficult for your startup to get investment deals? Do you lament the sometimes, one-sided biases of investments coming into Africa, and feel left out of the blazing trail of funds entering the continent? What challenges have you faced with regards to getting investors interested in your startup initiative? These are a number of pertinent questions that startup founders have to grapple with, day in, day out, especially when overburdened by the pressures of managing their startups under the harsh African economic climate. Many startup founders, at some point in their journey towards product maturity, contemplate closing shop and throwing in the towel. And still, even with this despondency in getting product innovations through the growth phase, more startups are springing up daily in Africa. A report of Briter Intelligence shows that as of 2021, Africa has over 4,286 startups, from over 17 countries, with 50 startups and above. Nigeria leads the pack with 750 startups, followed by South Africa with 702, and Kenya with 650. With this huge growing number of startups in Africa, a bulk of these are from the fintech and renewable energy sectors, with the greatest attractions for investments in 2021, coming from these sectors.

As Maxime Bayen and Max Cuvellier highlight in their mid-year report, African startups have had quite a phenomenal first half of the year with over $1.2bn+ raised through deals $100k and over. South Africa and Nigeria have topped these statistics, with over 28% and 27% respectively of the deals, and Kenya, Egypt, and Ghana trailing behind in the top 5 with 13%, 11%, and 10% respectively. In July 2021 alone, startups in Africa have raised a total of about $300 million, with the largest sizes of these deals coming from Yoco, Fairmoney, and MaxAB.

Yes. Investment is coming in droves into the continent, with investors looking for which company would be the next Flutterwave or Paystack. The African market is getting very busy and active. A lot of fund managers are moving into Africa, and hubs are springing up daily across the continent.

Yet, in spite of all the investment that is coming into Africa, many African startups are still cut off from funding due to a number of reasons.

Adam Molai, TRT Investments (The Southern African Times, 2021)

Many startups however are still struggling with access to investment, with Forbes citing that about 29% of startups globally blame lack of capital as a major reason for them failing. Some of these challenges are further compounded by the lack of investment readiness of most startups in Africa. This is particularly because many African startups are trying, in vain, to quickly create market solutions without due diligence, as well as the required documentation to easily communicate with would-be investors in their initiatives. Adam Molai highlights this in an interview with The Southern African Times where he outlines lack of due diligence friendliness as a primary cause of startups failing to access funding for their initiatives. Citing the case of his venture capital fund, Jua Fund, as an example, he highlights how they are just approximately at a 60% stage in the disbursement of a fund of over $2 million, within four months of starting. He blames a lot of this on the inability of startups to pass muster on due diligence requirements, as well as their failure to provide statutory documentation and a standard data room for investors to easily identify startup structure and needs for support.

Apart from this, startups need to be well-grounded on the particularity and idiosyncrasies of institutional investors and high-net-worth individuals (HNIs). This will help them to better pitch their ideas and win the emotional investment of their target investors first, before their money. Watching the Dragon’s Den, one can easily see how investors sometimes, make intuitive gut decisions based on an emotionally strung cord or personal bias. As humans, we often trust our gut instincts, even in decisions that are very weighty. Behavioral economist, Daniel Kahneman refers to this method of instant thought as ‘System 1’, which is contrasted with a slower form of thinking, in ‘System 2’. However, our gut decisions are not as random as we think. They take the bulk of our decision circumstances and are based on preconceived notions of things, persons, and places. Understanding what these are, and how they affect the decisions to fund a startup initiative or not, can help the startup to make a pretty convincing pitch.

It is also important that aside from presenting an irresistible pitch, that the startup is investment-ready. This implies that the startup should have a clear and defined strategy on how to succeed, as well as a bias towards execution. It cannot be overstated that startups should have dynamic teams. These teams should be ready to bootstrap and improvise. As the lean startup model of Toyota revolutionists, Taiichi Ohno and Shigeo Shingo, startups should be prepared to fail fast and to fail forward. Part of this implies that the startup should be iterating aggressively to meet the dynamic and changing patterns of the market. Most investors, as LoftyInc, a sector-agnostic firm, highlights this as a key need. In an interview with Techpoint, Idris Ayodeji Bello, one of its co-founders, says:

We are looking for balanced founding teams, with a bias towards execution, going after a large market with few to no competitors, and a product that users seriously want/need. We are sector-agnostic with a bias for tech-enabled startups in the health, fintech, and IoT space.

LoftyInc Investments (Techpoint, 2021)

“Given the robustness of our deal flow, the ultimate differentiator is the ability to pick the ventures that go on to grow and scale and raise additional funding. In doing so, we have found our experiences launching startups, building larger corporations, and angel investing have proven invaluable.”

Startups should also have a clear understanding of the end-to-end experience of their customers, and how to continually optimize and enhance this experience. With this focus on customers, the startup would be continually setting itself out to succeed, by offering tangible value to society. When this value proposition is not well-spelled, it is easy to spread oneself thin across a wide range of possibilities without any real growth towards actuality. Once an investor identifies this knowledge gap, he/she would be wary of investing in the initiative.

When most of these are put into good practice, it is without a doubt that startups will start to find investment. As the startup investment climate continues to grow in Africa, startups should be thinking about positioning themselves well to gain the interest of the general public and investors as well. Africa is blossoming with opportunities, and as a continent with a vast population of young people, Africa has a bright future.

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