Should your African startup chase investment or bootstrap?
www.africanaccelerationism.com
Raising investment is an investment—and not all investments are worth making. The default thinking is “might as well try to raise money—whats the worst that could happen?” But raising money isn’t free. It will cost at least $20,000* to build materials, go to conferences, etc not to mention your time. If you turn that into $1m+ investment all well and good, but most companies don’t. The most likely scenario for an entrepreneur is they spend $20,000, get $0 return and could have used that money in directly growing their business.
So which companies are the 1 in 10 that should raise money?
For my first company, I didn’t know anything about raising, of course. I wished there could have been a rule book. The sad thing is there kinda is a rule book but no one has an incentive to tell you: entrepreneurs are busy doing their own thing, investors don’t want to rule out anyone in the off chance they are the next Facebook, consultants want to make money creating pitch decks.
With the benefit of hindsight, here’s what I wish I knew then.
Note: this is for companies with operations in Sub-Saharan Africa.
Equity
Minimum requirements are going to depend on the phase and focus:
Pre-revenue up to $100k: You’ll need a strong Why You? and Why Now? (if you aren’t familiar with these concepts, learn by subscribing to our weekly fundraising tips here)
non-software businesses
up to $50k in funding for first-time entrepreneurs
up to $250k for repeat entrepreneurs
software business: double the figures above
Up to $1m Revenue: 200% year-on-year revenue growth
Up to $10m Revenue: 100% YoY growth
$10m+ Revenue: 50% YoY growth
[As a consequence of the growth targets above, entrepreneurs find themselves in a “growth at all costs” mindset to get to the next milestone so they can raise even more equity. This is a double edged sword: if they try to grow fast, sacrificing profits, and fail to hit the next growth target they get neither investment nor profits and go out of business, despite having a model that could have been successful if grown slowly. ]
All businesses:
Strong team. (An example of a weak team is a crew of recent college grads who have never built a biz in Africa before.)
Strong market. (An example of a weak market would be selling low-value products like water–to low-income customers.)
For impact investment: Cut these growth targets in half. But keep in mind you’ll need a strong social angle (find a descriptive list under Grants below).
All the measures above assume you're operating within a legal system that works and is understandable to the investor. This removes most of Africa. The country can’t have currency controls and should have a tax-advantaged status from the investor’s perspective. With that in mind, the generally acceptable countries of registration for foreign investors are South Africa, Mauritius, US, Cayman Islands, UK, Singapore, or the investor’s home country (Dutch investors can invest in a country registered in the Netherlands, a Kenyan investor can invest in a company registered in Kenya).
This assumes you are selling equity to grow, not to get an exit for yourself.
And I’ll be honest with you: many times I find that companies wanting to raise equity actually have a problem with sales and cash conversion cycle (CCC). You’ve got to invest in fixing these problems first. Get more sales. Get your customers to pay you earlier and your suppliers to be paid later. This will reduce the need for investment, while simultaneously making your company more investable.
Debt
Your business assets should be more than double the loan amount (not including intangible assets like software and goodwill).
Loans should be used to buy a tangible asset that will generate enough net profits to pay the interest; and the tangible asset itself can be used as collateral, except in the case of working capital, where the rest of the assets in the business are the collateral.
Impact investors have a lower reported interest rate but higher effective interest rate when taking into account delays and onerous impact reporting. They accept more kinds of assets as collateral (for example, not just vehicles and land but also equipment). And they typically accept a longer loan tenor (up to 5 years vs 1-2 years for local banks).
Just as before, the targets above assume a legal system the investor is comfortable with.
(Convertible debt, which typically converts to equity, should be considered as equity for purposes here.)
Grant
A company is eligible for grants (or impact equity/debt) if they're doing something that Western governments consider to be a public good. This includes:
Low-income healthcare
Small business loans/grants
Humanitarian aid
Renewable energy subsidies
Stimulating new sectors that lead to other public goods
Job creation programs
Environmental conservation
Transitioning lab research to the field
Ambulance/fire response
Potable water for low-income people
Business owners identifying as members of historically marginalized groups
Basically, Western taxpayers have to be on board with the idea that they will pay for something in a developing country that their own government would also pay for at home. Other things to think about:
The public good must be more cost-effective than the state-of-the-art—the current cost of supplying that same public good.
The grant request can’t be more than the organization's current annual revenue or annual budget.
Grantors typically won’t pay for things that have residual value or easy to steal: Cars, construction (very easy to steal bags of cement, timber, etc), computers, land, large processing equipment
Most Western governments don't pay for religious organizations so their taxpayers wouldn't understand why they should pay for it in another country.
Conclusion
We all know there are exceptions to the rules. The mistake entrepreneurs make is wishful thinking that they are the exception.
Take a hard look at your business and see if you are highly investable. If not, save the $20,000-$200,000** it will cost you to raise money and spend that on something to help you bootstrap–like a sales or operations consultant or better sales team.
*an investor who read this draft was surprised it was so high. In my experience, this is on the very low end of the spectrum when you include the cost of the advisor, updating the pitch deck, creating an impact report, updates to the data room and the entrepreneur’s time that could have been spent on other revenue-generating activities.
**Yes, some investors require you, the entrepreneur, to split the cost of their legal fees which can be over $500,000.
Should your African startup chase investment or bootstrap?
Should your African startup chase investment or bootstrap?
Should your African startup chase investment or bootstrap?
Raising investment is an investment—and not all investments are worth making. The default thinking is “might as well try to raise money—whats the worst that could happen?” But raising money isn’t free. It will cost at least $20,000* to build materials, go to conferences, etc not to mention your time. If you turn that into $1m+ investment all well and good, but most companies don’t. The most likely scenario for an entrepreneur is they spend $20,000, get $0 return and could have used that money in directly growing their business.
So which companies are the 1 in 10 that should raise money?
For my first company, I didn’t know anything about raising, of course. I wished there could have been a rule book. The sad thing is there kinda is a rule book but no one has an incentive to tell you: entrepreneurs are busy doing their own thing, investors don’t want to rule out anyone in the off chance they are the next Facebook, consultants want to make money creating pitch decks.
With the benefit of hindsight, here’s what I wish I knew then.
Note: this is for companies with operations in Sub-Saharan Africa.
Equity
Minimum requirements are going to depend on the phase and focus:
Pre-revenue up to $100k: You’ll need a strong Why You? and Why Now? (if you aren’t familiar with these concepts, learn by subscribing to our weekly fundraising tips here)
non-software businesses
up to $50k in funding for first-time entrepreneurs
up to $250k for repeat entrepreneurs
software business: double the figures above
Up to $1m Revenue: 200% year-on-year revenue growth
Up to $10m Revenue: 100% YoY growth
$10m+ Revenue: 50% YoY growth
[As a consequence of the growth targets above, entrepreneurs find themselves in a “growth at all costs” mindset to get to the next milestone so they can raise even more equity. This is a double edged sword: if they try to grow fast, sacrificing profits, and fail to hit the next growth target they get neither investment nor profits and go out of business, despite having a model that could have been successful if grown slowly. ]
All businesses:
Strong team. (An example of a weak team is a crew of recent college grads who have never built a biz in Africa before.)
Strong market. (An example of a weak market would be selling low-value products like water–to low-income customers.)
For impact investment: Cut these growth targets in half. But keep in mind you’ll need a strong social angle (find a descriptive list under Grants below).
All the measures above assume you're operating within a legal system that works and is understandable to the investor. This removes most of Africa. The country can’t have currency controls and should have a tax-advantaged status from the investor’s perspective. With that in mind, the generally acceptable countries of registration for foreign investors are South Africa, Mauritius, US, Cayman Islands, UK, Singapore, or the investor’s home country (Dutch investors can invest in a country registered in the Netherlands, a Kenyan investor can invest in a company registered in Kenya).
This assumes you are selling equity to grow, not to get an exit for yourself.
And I’ll be honest with you: many times I find that companies wanting to raise equity actually have a problem with sales and cash conversion cycle (CCC). You’ve got to invest in fixing these problems first. Get more sales. Get your customers to pay you earlier and your suppliers to be paid later. This will reduce the need for investment, while simultaneously making your company more investable.
Debt
Your business assets should be more than double the loan amount (not including intangible assets like software and goodwill).
Loans should be used to buy a tangible asset that will generate enough net profits to pay the interest; and the tangible asset itself can be used as collateral, except in the case of working capital, where the rest of the assets in the business are the collateral.
Impact investors have a lower reported interest rate but higher effective interest rate when taking into account delays and onerous impact reporting. They accept more kinds of assets as collateral (for example, not just vehicles and land but also equipment). And they typically accept a longer loan tenor (up to 5 years vs 1-2 years for local banks).
Just as before, the targets above assume a legal system the investor is comfortable with.
(Convertible debt, which typically converts to equity, should be considered as equity for purposes here.)
Grant
A company is eligible for grants (or impact equity/debt) if they're doing something that Western governments consider to be a public good. This includes:
Low-income healthcare
Small business loans/grants
Humanitarian aid
Renewable energy subsidies
Stimulating new sectors that lead to other public goods
Job creation programs
Environmental conservation
Transitioning lab research to the field
Ambulance/fire response
Potable water for low-income people
Business owners identifying as members of historically marginalized groups
Basically, Western taxpayers have to be on board with the idea that they will pay for something in a developing country that their own government would also pay for at home. Other things to think about:
The public good must be more cost-effective than the state-of-the-art—the current cost of supplying that same public good.
The grant request can’t be more than the organization's current annual revenue or annual budget.
Grantors typically won’t pay for things that have residual value or easy to steal: Cars, construction (very easy to steal bags of cement, timber, etc), computers, land, large processing equipment
Most Western governments don't pay for religious organizations so their taxpayers wouldn't understand why they should pay for it in another country.
Conclusion
We all know there are exceptions to the rules. The mistake entrepreneurs make is wishful thinking that they are the exception.
Take a hard look at your business and see if you are highly investable. If not, save the $20,000-$200,000** it will cost you to raise money and spend that on something to help you bootstrap–like a sales or operations consultant or better sales team.
If you do meet the above requirements and you are the 1 in 10 companies who are investable, click here and we can set up a time to talk.
*an investor who read this draft was surprised it was so high. In my experience, this is on the very low end of the spectrum when you include the cost of the advisor, updating the pitch deck, creating an impact report, updates to the data room and the entrepreneur’s time that could have been spent on other revenue-generating activities.
**Yes, some investors require you, the entrepreneur, to split the cost of their legal fees which can be over $500,000.