African digital startups are increasingly attracting international and local investors. According to transatlantic venture capital fund Partech Ventures, in 2016, 77 startups from the African continent managed to raise $ 366.8 million from investors. Despite this success, the search for funding is often complex for startups in Africa. This reality can be explained in particular by a system of aid for innovation in an embryonic state associated with an unsuitable banking sector. So what are the solutions available to startups wishing to benefit from funding?
The winning trio for obtaining funding? Cape Town, Lagos and Nairobi
Thanks to Nigeria, investments in Africa continue to grow. In fact, Nigerian startups specializing in technology obtained $ 109 million in 2016. All startup incubators are located in the “Yabacon Valley”, not far from the Yaba district in Lagos.
South Africa, meanwhile, in 28 fundraising events, received $ 96.7 million. Kenya, in third place, with $ 92.7 million in fundraising from 21 startups from “Silicon Savannah”.
All of these 3 countries attract the vast majority of investors. The other countries are still underrepresented. However, they are committed to a structuring digital innovation. This is a real opportunity for investors that has yet to be exploited.
Nevertheless, French-speaking Africa is also starting to attract the interest of investors. Five francophone countries stand out: Senegal, Ivory Coast, Rwanda, Tunisia and Morocco. They managed to secure $ 37 million in 2016, or 10% of all investments made in Africa for start-ups. This region of the African ecosystem must strengthen its position in the years to come.
What are the key sectors?
In terms of sector trends, FinTech (financial technology) comes first. Indeed, they attract 19% of investment flows. This sector is by far the one which obtains the most important investments. It is positioned far ahead of the digital sector for education (Edtech) which attracts 8% of investments. The “Health Tech” sector only obtains 2.5% of the investments.
On the other hand, the “off-grid” sector is attracting more and more investors. Innovations in this sector aim to combine solar energy and digital technology. The investment volume represents 36.6% of total fundraising on the African continent.
This boom can be explained by the rise of applications that make it possible to democratize access to energy. These applications called “pay as-you-go” (the user only pays for the amount of energy consumed day by day) are marketed by M-Kopa in Kenya or MobiSol in Rwanda. The new replicable business models that these startups are behind are of great interest to investors from other emerging regions facing the same issues of access to energy.
The different types of funding models for startups
In French-speaking Africa, the interest rates on loans granted by banking establishments vary between 10 and 17%. This price is inaccessible for young African entrepreneurs who want to transform an idea into a product without being over-indebted. On the African continent, national grants dedicated to innovation remain extremely rare.
Zero interest loans
To compensate for the failures of the African banking system, many programs offering zero interest loans have been set up in Africa. This is, for example, the funding platform attached to the Africa Innovation program. The French Development Agency is behind this project, which provides deferred reimbursement for entrepreneurs. They can borrow an amount that varies between 10,000 and 30,000 euros. The program budget is 550,000 euros.
Seed and venture capital funds
First lever, seed funds are intended for startups lacking capital to finalize their product. Their turnover is non-existent. The Teranga Capital fund, co-founded by Omar Cissé and Olivier Furdelle in Senegal, provides support to innovative start-ups in the early stages before entering their capital. This fund is endowed with 4.9 million euros.
Venture capital funds concern startups with sales prospects. Set up by public or private actors seeking tax advantages and business opportunities on the African continent, funds are increasingly attracted to African incubators. In Ghana, the technology incubator Meltwater Entrepreneurial School of Technology (MEST) created in 2016 its venture capital fund for African startups.
The use of a Business angel is an option increasingly favored by African entrepreneurs. Driven in Nigeria, the networking of African business angels is also appearing in French-speaking Africa such as Cameroon Angels Network. The network of business angels, Africangels, created by Cameroonian Aldo Fotso aims to provide its expertise to investors wishing to invest in a startup in Africa. However, faced with the lack of tax incentives, the trend remains embryonic.
Funds raised abroad by the diaspora
To ensure the financing of a promising start-up, Africans in the diaspora have privileged access to the resources of the countries in which they live. Some young entrepreneurs can thus benefit from seed funds set up by public institutions in France, for example.
To supplement their own funds, some African startups use crowdfunding. Thanks to the Ulule platform, the Faso Soap project, aimed at creating an anti-mosquito soap, was developed by Burkinabé engineers.
In French-speaking Africa, to compensate for the very low banking rate, mobile telephony plays an important role. Indeed, some crowdfunding platforms are powered by mobile credit.
Competitions and scholarships
The accelerators and incubators of start-ups in Africa are increasing the number of partnerships with companies that provide seed grants for project leaders. This is for example the CTIC in Dakar, which initiated the BuntuTeki program in 2015. This project, which aims to support around ten projects per year, is carried out in partnership with Tigo.
New financing methods to consider?
Africa has good prospects ahead. This continent is able to finance startups itself. Indeed, startup funding is now channeled through a new segment of investors. These are mobile financial services companies.