What VCs Look for in African Startups

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In the first half of 2021, African startups across Africa are reported to have raised $1.19 billion. This is more than double the amount received in the same period of 2019 and 2020 combined.

Some of the startups that got funding include:

  • Flutterwave ($170M), a payments software company based out of Nigeria
  • Gro Intelligence ($85M), a data-based software company based out Kenya
  • Swvl ($20M), a transport and logistics company based out of Egypt

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So with VC activity increasing over the years, what are venture capitalists really looking for in African startups?

Team

An important aspect is finding a team that is committed to their business and idea. Since 2019:

  • 48% of deals over $1 million have been received by startups with two founders
  • 26% of deals have been received with teams of 3 founders
  • 20% of the deals are by one-founder teams
  • 6% of the deals are received with a team of 4 or more

Other than the size of the team is their ability.

VCs are interested in working with founders who have the ability to attract other excellent people to work with them.

Also, VCs favor founders with technical skills.

Problem and Market

A key aspect of VC work is determining whether founders truly understand the problem they are trying to solve.

As repoted by TechNext, Lauren Cochran, a VC on the African continent, points out that ‘sometimes people see a problem that they don’t fully understand, or that they haven’t really evaluated and try to solve them which often times doesn’t work.’

Lauren Cochran also points that VCs are looking for ‘billion-dollar‘ problems and a hundred million dollar problems at the very least.

Moreover, they are interested in startups that have achieved some kind of product-market fit, in which case they should be pulling in some revenue.

Most VCs won’t invest in a pre-revenue startup.

So far, financial technology (fintech) startups have been the most attractive across the continent. In the half-year, 48% of funding went to such startups, buoyed by Flutterwave’s $170 milllion deal to become the third startup with over $1 billion valuation (unicorn) on the continent.

The other unicorns are Interswitch and Paystack, both in fintech payments.

In terms of region, Nigeria, South Africa, Kenya, and Egypt have traditionally been more attractive destinations for venture capital.

In the half year:

  • 80% of the deals were closed by startups in those countries
  • In deals between $100k and $1 million, 1 in 3 startups that raised was from outside the 4 countries, suggesting wider early-stage funding across the continent

Overall, the bumper half-year suggests that 2021 is going to be a record investment year for startups on the continent.

NB: This analysis is based on a report by Max Cuvellier, that can be found in full here: https://thebigdeal.substack.com/

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RECOMMENDED READING: 47% of Deals Closed in the First Half of 2021 are in the Fintech Sector – Inside the 2021 Africa Investment Report

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