What can entrepreneurs do to secure venture finance for their African startup?
By Ben on July 4, 2011
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‘
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Leonard Omina said on July 4, 2011
This is indeed wonderful info. I have suffered this many times in the past and know how difficult it is to secure venture capital.
Nairobi Kenya
afribiz said on July 4, 2011
Both investors and entrepreneurs might want to listen to podcasts that we have added to VC4Africa on these topics from expert interviews.
Basics of Due Diligence
http://vc4africa.biz/afribiz/2011/06/27/the-basics-of-due-diligence-for-global-business-afribiz-fm/
Preparing Your African Venture for Investors
http://vc4africa.biz/afribiz/2011/07/13/post-show-note-preparing-your-african-venture-for-investors/
Folusho Obe said on July 7, 2011
This class of entrpreneurs in Africa cannot be ignored. Investors will have to face and address this huge investment area in Africa.
Shaun Lindbergh said on July 12, 2011
Governments, incubators, VC’s and start-ups themselves may be missing out on a an extremely valuable resource, failed entrepreneurs.
There is a huge amount of energy directed towards encouraging entrepreneurs to start businesses and it is well recognised that most will fail.
What has amazed me, and latterly astounded and dismayed me, is that there is virtually (actually absolutely) no easily accessible support for failed entrepreneurs. Please tell me I am wrong and that I have missed a good support system specifically designed to help failed entrepreneurs.
I am developing a five-step plan, “Fast-track Recovery for Entrepreneurs after Business Failure”. I believe it is something every incubator should include in it’s strategy.
I have posted two blogs on this topic at http://InspiredBusinessIdeas.com
Bart Meijs said on August 19, 2011
The artikle covers very well our experiences in the market.
The InReturn East Africa Fund has a investment window for start-up companies where the entrepreneurs has a track record in the sector, is committed in time and money and a good market opportunity.
Please check our website http://www.inreturncapital.com and our investment criteria.
If you qualify do not hesitate to contact us for a first intake meeting in which we will give you direct feedback.
Success with growing your business and we are happy to become your investment partner.
Bart Meijs,
managing partner
HENRY JOHN VINCENT HORLICK said on October 3, 2011
I am a entrepreneur and I have contact with many entrepreneurs in the same business that I am in. They don’t have much schooling, their best qualifications are their code 14 drivers license. But somebody gave them a chance, their profit is R100,000.00 plus per month on 1 truck. So I feel that education is not (in certain cases) necessary in my type of business.
But in cases like chicken farming you need knowledge, not necessarily a degree or again school education, but knowledge and a will to work hard. (I don’t mean backyard farming) our government helps poor people with start up money for their business, but don’t train them. They fail in 3 to 4 months. Because they do not have the knowledge or experience to succeed. That has given entrepreneurs a bad name.
My friends had the problem from Investors .They worked for a company making electronic money boxes for ATMs. They left the company and designed a better box. They got divorced and the wife started a new business on her own. She got investors and the investors insisted that they hold majority shares.They worked her out and she had to leave. She then designed a much better money box and started a new business again. She got back all her old client’s contracts, after 6 months the old company had to close down, because her clients were loyal to her. She was the winner. So investor must not always think that they can handle the job better than others, because they have money behind them, they might have success some times. but every business out there, big or small, successful or struggling, had to start at the bottom.
GOOD LUCK TO THE ENTREPRENEURS, Especially those who the so called investors think is a “too big risk”, remember, the bigger the risk the more the profit can be.
To my knowledge nothing is more of a risk than the stock market, but most investors will invest nowhere else but at the stock exchange.