What can entrepreneurs do to secure venture finance for their African startup?
As reported by the World Bank, 43 per cent of sub-Saharan Africa’s population is between the ages of 0 and 14. This growing population is keen to secure economic opportunity and clearly there is a growing need to create jobs. Governments can’t do it alone & entrepreneurship is a key driver in this process. A recent Gallup poll reported that at least 1 in 5 African youth plan to start a business in the next 12 months. So what are the challenges we need to overcome if we are to further unlock this potential?
In our first poll the VC4A community of entrepreneurs identified ‘access to finance’ as the biggest challenge they face in building their businesses today. It is simply not easy securing the financial resources an entrepreneur needs to build a viable business. Micro credit is too small, banks are too risk averse and investors lean towards bigger deals & better returns. Yet African countries are consistently listed as some of the fastest growing economies in the world and research again and again shows the returns are to be made in African business. So what stops more investors from getting involved?
Interested in better understanding this question we turned to our investors and asked, ‘What is the biggest challenge that comes with investing in the African space?’ Is it quality exit opportunities, trust & corruption, the legislative environment, banking infrastructure, identifying valid business models, finding quality entrepreneurs or a simple lack of viable markets?
From the poll VC4A investors identified trust & corruption as the key challenge they face investing in African businesses. Members also highlighted fraudulent loan scams, overcoming the currency gap and generally a fear of the ‘unknown’ as additional hurdles that needed to be overcome. Respondents mentioned that generally there is still too little understanding of the local market conditions needed to make a good assessment of the business potential and that investors too often under-estimate good management in the investment process.
Schmooze FM expands, ‘In our experience a key gap is investment readiness of potential opportunities, we see a lot of start up projects requesting huge sums with little track record and an unproven concept. Entreprenuers must be willing to pilot their project, ideally on their own, before applying for funding. This proves the business model and provides for a much more comprehensive investment proposal.’ @Wkwamiof expands,’In my experience many entrepreneurs seeking funding underestimated good management, or quality of management as a critical component of investment readiness. The quality of management goes a long way to mitigate other risk factors mentioned in the survey and should be given more weight by entrepreneurs.’
These two points make clear that without a track record it really comes down to traction and a quality management team, two key factors entrepreneurs need to put into place if they want to increase their chances of securing investor support.
On VC4Africa.biz we now have 139 ventures online from 26 African countries. Each of these businesses is building the foundations for an exciting business. As a community we seek to track their progress (help establish their track record), increase their visibility (needed to build trust) and connect them with the knowledge, network and capital they need to grow successfully.
For some additional background on the subject see, ‘Challenges facing venture capital in Africa‘