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Where is the money going? Giving local founders more access to funding in Africa

Where is the money going? Giving local founders more access to funding in Africa- Startup Lagos

Many commentators speak enthusiastically about the increase in funding to Africa this year, especially in the area of fintech. These successes in recent times are strong testaments to Africa’s meteoric rise to prominence, in today’s tech age. Africa, with a population of predominantly young people (approx. 200 million between the ages of 15 to 24), is a growing hub for innovation and tech expertise. As such, Africa is attracting huge interest, and as well as an increasing money trail in investments. Africa’s youths are energetic, curious, and doggedly determined to blaze the entrepreneurial pathway with their relentless energy.

A local founder pitching solutions - 
Where is the money going? Giving local founders more access to funding in Africa

Obstacles to accessing funding by local founders

Committed to changing the socio-economic circumstances of their lives and the prevailing situations of their countries, these youths are curating competitive startup innovations that rival those of the global North. These innovations are not just revolutionary, they are scalable and profitable, and are drawing in foreign investment to spur growth in different sectors and markets. In spite of this, only about 20% of venture investment comes from Africa-based investors, with a bulk of startups seeking investment from outside of Africa. This implies that a lot of locally-based investors are not actually interested in participating in the process of developing Africa-based innovations. With a lot of African startups at the early stage of growth, many investors are reluctant in weighing their options with these bundles of growth potential. While investment in Africa is growing considerably, with predictions that it would hit over $4 billion this year, Quartz Africa reports that the average size of seed funds over these few years has remained unchanged, relative to the later stages of startup growth. Still, while foreign investors are finding places to direct their funds to in Africa, some more stats reveal very shocking details about where the money is going.

Of the 10 top African-based startups that received a large amount of venture capital in Africa in 2019, over eight were led by foreigners. Kenya’s case is far more telling, as only a meager 6% of locally-led startups have received funding of more than $1 million. In a very interesting report by Quartz, Seyram Avle points out that,

It is not new that Africans or black Africans are perceived in a particular way in the global market. The interesting thing is that tech is–at least the narrative that we’re given–supposed to eliminate some of these things. But we also know that of course not.

He further outlines the challenges that funders in the West face in understanding the opportunities that abound in Africa and easily identifying which of these innovations possess the greatest potential to scale, and a significant impetus for impact and growth. Mehrsa Baradan, a law professor at the University of California, Irvine, echoes this point, saying, ‘Credit disparities are where past injustices lead to present disparities.’ Even in America, these racial inequities are haunting the entrepreneurial space, with Forbes detailing structural racism and power imbalance as fueling discriminatory financial practices and crippling growth in early-stage financing. As such, a report in 2020 by Score, shows that less than 1% of US venture capital-backed firms are owned by black people.

In the case of Africa, these stats get even grimmer. Still, while the above stats suggest some deliberateness about funding motives and directions, to non-black startup founders, some commentators may prefer to read these, instead, due to mistrust and apprehensiveness. Many foreign investors are asking: You want me to give my money to some random company based in Nairobi? How will I visit that company? How will I go? Who are these guys?

These questions are very valid, because no one just gives money willy nilly, without carrying out some due diligence on where his/her investment is going, and what prospects lie there. Also, as the stats show, about 7 out of 10 investors involved in deals in Africa of above $100,000 as of 2021 so far are headquartered outside of the continent. Also, as humans, we operate with a certain level of bias in decision-making. Thomas Nagel, a famous philosopher frames this challenge thus: ‘there is no view from nowhere’. Every decision has a circumstantial and subjective prejudice coming from a wide range of situations (familiarity, gender, tribe, etc.). The expectation is always about managing these biases so that their effects are mitigated, and there is greater equity in the distribution of funds and access to capital.

While awareness of this gap in the ecosystem, helps to bring to the consciousness of stakeholders the necessity of acting proactively against this bias, some significant steps in changing the status quo that can be taken include:

Increase in local Venture Capitalists’ (VC) participation

A first step would be for local VCs in Africa to increase participation in the funding landscape in Africa. Charity, it is said, begins at home. With a greater focus on tech initiatives at home, local VCs will be offering these startups the opportunity to grow even more. This is because local VCs understand the peculiarities of the African market, the challenges that these startups are facing, the in-country business requirements for startups, and are connected with significant stakeholders who can help the success of these startups in their portfolios. Local VCs should also push for a counter bias of focusing on local founders that show through their initiatives, the huge potential to scale considerably. Geographical closeness to these startups will help them to better eliminate the fears and apprehensions that come from treading unfamiliar territories.

Offering local startup founders’ peculiar opportunities for funding

It is also important that local founders are given more opportunities to access funding of their own worth. Some investors are already exploring these new vistas, such as the Future Africa collective that is an exclusive community of All-African co-investors who are looking at giving funding support to African startups. Founded by Jude Dike and William Okafor, Nigeria’s GetEquity platform also offers local startups the opportunity to access a wide and versatile list of funding options, while benefitting users with the chances of cashing out on successful startups in the long run. This platform helps to offer more local startups greater visibility within the tech ecosystem in Africa. More platforms need to emerge to bridge the diversity gap in the ecosystem.

Without a doubt, it is remarkable that Africa is drawing the cynosure of eyes globally. However, startups in Africa are still facing difficulties with accessing funding, under the burden of tacit gender and racial biases. it is crucial that all inequities are managed appropriately, to give more and more local startups a level-playing field for accessing investment on the continent.

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