The startup culture in Africa has come to stay as youths creatively seek to push their big and small ideas forward all in an effort to eradicate unemployment and poverty from their lives.
One peculiar thing among these startups, irrespective of the sector, is that they constantly seek funding from investors to enable them to scale.
According to Disrupt Africa, African tech startups raised about $2.7 billion in the first three quarters of 2022 compared to $2.1 billion in 2021. This is extremely huge and a clear demonstration of the deep interest in the African tech startup scene.
What exactly do these investors look out for before committing their hard-earned funds to these startups that are springing up almost daily?
To answer this important question, Nairametrics spoke to three tech CEOs and two tech investors to give us a clearer understanding and to help aspiring startup owners better prepare to convince investors to invest in their companies.
Performance Data: According to Temitope Ogunsemo the CEO of edtech startup Krystal Digital, investors are keen on the numbers, particularly the Returns on Investment. Some examples of this performance data include gross margin, revenue growth, monthly recurring revenue, net income, churn rate, and liquidity.
Passionate Founders: Investors also look out for founders who believe sturdily enough in the products or services by investing their funds in them and also have the grit to push their passion.
Market Viability: A new venture will have to demonstrate that it has a marketable product or service – It must have begun operations and shown a significant ability to sell it. The product in question should have a significant reach and market size with growth potential and comparative advantage.
Product Differentiation: What makes your product or service unique? What new thing are you bringing to the table? These are two important questions investors ask and you must be prepared to answer them correctly with evidence.
Exit Strategy: Investors typically ask the following questions: How much do I need to invest? When do I need to invest it? How much do I get it back and when? These questions can be answered through a thorough financial projection which entails:
- A complete set of pro forma financials – income statement, balance sheet and statement of cash flow.
- A return-on-investment analysis using capital budgeting techniques and various ROI calculations.
Cash sources and uses report: According to Segun Adeyemi, the Co-Founder and CEO of fintech startup Anchor, investors look out for a large addressable market (TAM -Total addressable market). They also look out for the following:
- A strong, experienced & technical founding team
- An idea that is birthed by a clear problem, need or want that is unmet
- A product/solution that solves the problem in an innovative way
- A sustainable competitive advantage: this could be the unique insight of the founders, patents, network effect, economies of scale, etc.
Jide Awe, the Founder, and CEO of Jidaw.com bared his mind on this issue when he opined:
- “Investors seek founders with a deep passion for their startups and belief in the product/service they want to provide as well as consistency in driving for success. Investors want to see evidence of the founder’s real and solid, belief in, and commitment to the startup.
- “The product offering is also critical. Investors look for a great product or service that can stand out as a market leader with solid success prospects; a product that closes an important and big market void, with significant product differentiation/competitive advantage (pricing, profit, structure, organization, and processes).
- “Most investors are looking for a business opportunity with growth potential. It helps to have proof of growth and expansion potential and opportunities. A clear, realistic, and credible growth strategy that includes sales and marketing is important. Investors will look for evidence of impact so far, traction from the target market and future aspirations, as well as the possibility of significant market size.
- “Just as important for the investors, is not just a passionate and dedicated founding team but a team that is knowledgeable, capable, collaborative, and driven. It’s about ensuring the startup’s foundation is sound, stable, and consistent foundation.
- “Ethical considerations are also critical; investors must believe that there is a readiness to do what is right not just what is possible. Honesty, transparency, and integrity must be unquestionable.
- “Investors additionally seek clear comprehensive plans for the financial management of startups. Well thought through and credible financial (profitability, cash flow, balance sheet) and risk considerations and management. Investors must be sure that there has been serious and hard thinking about all aspects of the business and readiness to ensure impressive performance and impact.
- “Furthermore, investors must be clear about the amount needed, how the investors’ money will be invested in the business, when the investor will see a return on their investment, a well-defined exit strategy and clear expectations of the role the investor will play, for example, the investor may help in providing connections to help the startup grow.”
Investors’ perspectives: We also sought the views of two tech investors. One of them is Harvard-trained Efe Uwaifo who is a Venture Capitalist with Rise Ventures. He said:
- “As an investor, I look at companies raising from the Angel to the Series A rounds. At the angel/pre-seed stage I am looking at companies very early in their business trajectory, so I have to be comfortable with the fact that things are likely to change a lot over time. Therefore, metrics like revenue are less important (as they are unlikely to have any significant amount).
- “In terms of the idea/business, I would want to see what problem they are addressing and ascertain whether this truly is a problem that needs solving. An issue with some businesses is that whilst they are great ideas, they don’t solve any issue/problem so it will be very hard to make any ground later on. This is the same if the market opportunity is present but extremely small.
- “When looking at the team I look for domain expertise to assess the potential competitive advantage. If the company is tech-related I want to see some technical capabilities in the founding team. If the company is in another sector or vertical I would want to see some evidence of prior success or experience from the founding team in that same sector. Within the founding team, I like to see some combination of technical and commercial capability. Some intangibles I like to look for at this stage are drive, resilience, and passion (to name a few), as these are traits shared by almost all successful founders.
- “For businesses from the Seed-Series A stage, traction becomes a lot more important. I would like to see evidence of product market fit in the form of happy customers or a successful pilot for example. For Series A companies I would expect some monthly/annually recurring revenue. Traction in the form of customer growth is also positive. All the above earlier points that apply to angel & pre-seed companies would still stand but the later stage it gets, the more things like traction and revenue become important.”
Another investor, Ike Eze, is a Wharton Business School-trained investor who is the CEO of Beta.Ventures also spoke on the importance of the right team consisting of the right founders with unique insight into problem-solving and staff qualified and passionate enough to execute.
Other factors investors consider, according to him are:
- The market size: Is it an established or emerging market?
- Problem-solving techniques: Are they solving the right problem with the right solution?
- Traction: How far along in building this solution is the team grit? What challenges have the founder(s) endured?