African entrepreneurs are seeing remarkable growth in terms of startup funding and investment deals. Just last year, funding for African startups quadrupled, while the number of funding deals more than doubled. Big ticket rounds in excess of $5 million are increasingly common. WeeTracker’s 2018 venture investment report counts the total value African entrepreneurs raised in investment capital at $725.6 million, across 458 deals.
The top ten largest funding rounds accounted for $457 million (or 61% of the total funding received), but a full 30 startups have been able to supersede the $5 million threshold, including Harambean companies Yoco and Flutterwave. In short, investors are showing more confidence in African entrepreneurs. As a result, there are more funds available for startups from a wider variety of places. As investors see the potential for strong returns, that confidence, and the subsequent market growth, is sure to increase as well.
2019 is off to a good start. Andela — a company co-founded by Harambean Iyinoluwa Aboyeji — raised $100 million in a round led by Al Gore’s Generation Investment Management. This is one of the largest fundraising amounts secured by any company on the continent and demonstrates that faith in African entrepreneurs is growing.
As the pool of investors broadens, it is important for African entrepreneurs to start qualifying their investors. Especially in the early stages, those first investors are very important for a company’s success. For too long it’s been thought that investment negotiations had to be one-sided, with investors asking the bulk of the questions, but as examples from Harambeans demonstrate, entrepreneurs should ask questions of the investors to ensure that the partnership really is a good fit for both parties.
Even in the early stages of any startup, it’s important for African entrepreneurs to be clear and direct when dealing with investors. For example, a vague question, like “will you be involved in my business?” can be answered with a breezy “yes”, without ever explaining the nature and detail of that involvement. Getting a clear answer, and putting it in context, are much more easily accomplished by asking strategic and open-ended questions. Inspired by articles on Inc. and similar forums, we’ve compiled the top 10 questions to ask investors, according to Harambeans.
10. What attracts you most to investing in Africa? What gets you excited about African ventures?
Africa as a whole is largely an untapped region for investors and there are many reasons why firms want to invest. The reason you think a firm is investing in your company may be very different than the actual reason — and most likely in a good way. Any investment agreement will be formally negotiated much later on, but asking this question right at the start can give some structure and perspective to ongoing negotiations. There may be terms, clauses, or expectations that come as a surprise, and it’s all the more important for entrepreneurs to discover them as soon as possible, and also to establish a relationship based on what is truly a good fit and not assumptions.
9. What’s your history of investment in my sector?
This is a great starting point. It provides a great deal of information from a lot of different angles. For instance, it will help an entrepreneur to establish whether this investor is just testing the waters and exploring potential options, or whether they are ready to commit to a deal. If an investor does have a lot of experience in your industry, that’s all the better for both parties. It shows that an investor is likely keeping abreast of market trends, and their insights can help a startup to grow more quickly.
8. What is your current, or yearly investment budget?
Asking this at the outset can help to establish what sort of investor you’re dealing with, and how likely they are to stay committed in the long-term. A higher budget will tend to correlate with a longer commitment, but past a certain threshold it may indicate that an investor will be more hands-off. The answer to this question can inform the context of the following one:
7. How many investments, and of what size, do you typically make in a year?
If you know the total annual pot is, say, $10 million, then the next logical question should ask how many different investments will be sharing it. It’s also valuable to know where in the annual cycle your negotiation happens to fall. If that annual budget is mostly spent, it might be fruitful to renew your negotiations in the following quarter, when it’s been replenished.
6. What metrics do you track when considering an investment?
Raising investment capital doesn’t happen all at once. It’s an ongoing process over several quarters. Investors will be watching closely to see how a potential startup is performing or what steps are being taken to help it develop. Different investors will have different priorities when it comes to establishing the viability of a potential investment. An investor might be more concerned with early-stage sales than product development, for instance. By finding out what an investor is looking for, Harambeans not only play to the crowd, but glean sound business insights as well.
5. Which have been your most successful investments, or which are you most proud of?
More than just an opportunity to test a potential investor’s acumen, this gives an entrepreneur an opportunity to network. Getting in touch with other CEOs that an investor has worked with in the past is a great way to establish what this new partnership might look like. If your business has a focus that is unique to a particular region or country, this is also a way to find out if that area is a successful niche for this investor.
4. Do you prefer to lead, or to follow investments?
While neither answer is necessarily preferable over the other, in some cases it can make all the difference. If too many potential investors prefer to follow, and none is willing to stake a larger share of capital, the investment might just sort of fizzle out. While it’s not out of the question that an investor might break with their trend, by asking this question at the outset, an entrepreneur can get a read on the level of involvement or commitment an investor is expecting.
3. Do you typically co-invest with anyone in particular?
Harambean Christoper Ategeka of UCOT discovered that this question can quickly expand your network of potential investors. “Birds of the same feather flock together. It really gives you an insight on who else might be interested in investing in your venture.”
This question is a way to find out who else you should be contacting about potential co-investment is rounds. During the fundraising process, you can be influencing and impressing those recurring partners just as assiduously as you would your primary investor.
2. Besides capital, how do you add value to your portfolio companies?
The relationship between an investor and an entrepreneur is a fertile one. Beyond the venture capital itself, that relationship can provide business development support, marketing avenues, and invaluable networking opportunities. It’s in the investor’s best interests to leverage all their resources in supporting an investment, so be sure to find out what else that investor brings to the table.
Given the unique constraints in many African countries, there is also a strong social justice component that is best not to ignore. Harambean Obinna Onungwa of Powered By Cue notes, “It’s important to build a partnership rooted in empathy and alignment for both investor and entrepreneur. Beyond what financial models can tell you, investors must have an eye for value beyond dollars and cents. Given the unique history of Africa, business people with vision should think in terms of social impact regardless of the industry of focus.”
1. Have you invested in an African-based venture before?
As Africa is the “up and coming” region for investors, many Harambeans quickly learned that when they received investment for their companies, it was often the very first time those investors were working directly with an African company. For example, Harambean Adetayo Bamiduro’s company MAX NG attracted investors such as Techstars and the Shell, which never before had invested into a locally-owned West African company. If it is indeed the first time an investor is investing in your specific region, take this as an opportunity to guide the conversations and shape the narratives based on your expertise. Both investors and entrepreneurs can take on the role of mentorship in partnerships like these, allowing both parties to gain new knowledge and expand.
About the Authors
Okendo Lewis-Gayle is author of Harambeans, Founder and Executive Chairman of the Harambe Entrepreneur Alliance. Okendo is a graduate of Harvard University and served as Africa Advisor to the Rhodes Trust, the Chan Zuckerberg Initiative and the Vatican.
Jasmine Cabanaw is Director of Communications & Marketing at Harambeans. She is an award winning writer, dancer, and Founder of Green Bamboo Publishing.