There’s a Problem with Seed Capital in Africa



John Balen of Canaan Partners, originally uploaded by whiteafrican.

Wherever I go in Africa, one of the consistent comments that I hear from young entrepreneurs in the technology space is that there is no way to get started. There is little seed capital and very few angel investors to be found. That’s a problem – and it’s true in East Africa as well as South Africa.

In a conversation with John Balen, General Manager of Canaan Partners – a top tier Bay Area venture capital firm, over breakfast this morning at PopTech Fellows we discussed a few of these challenges. Canaan has operations and offices in India, Israel and the US, which means that they have some experience working in areas with non-traditional VC ecosystems.

Problem: The Investment Community

It turns out that one of the main problems in places like Africa, which is somewhat similar to places in India, is that the investors have to be educated first. Seed capital and early venture funding is a high risk proposition. There are few investors who care about technology, and those that do are interested in the later stages of investing.

A common problem in Africa is finding young entrepreneurs with a good idea, generally technical in nature, and they need about $5000-$10,000 to handle operations and build out of their technology in the first 6 months to a year. If they can find a local funder, that person generally wants an inordinate amount of equity in the operation – anywhere from 40-80%.

Some serious education in the investor circles in Africa needs to take place.

Lastly, there should be some recognition that a lot of the young entrepreneurs need some help. Beyond the funding, just giving some help in learning how to set up and grow a real business is hugely important. Introducing potential partners, helping broker deals and giving advice on how to hire employees are ways that investors grow into being a true partner – and African entrepreneurs badly need this too.

Ideas

I’m interested in seeing some Y-Combinator style venture funding companies AND communities developing around different regions in Africa. Groups that only fund the very early stages of development ($5000 – $15000) for very short periods of time (3-6 months).

I know there are some individuals doing just that, but let’s talk about communities around this space. What I think would be interesting would be to see these individuals band together and create real communities that connect with and plug in to the community in much closer ways. Become part of the local technology ecosystem and really learn how to find promising individuals and foster them to greatness – and make a lot of money along the way.

As John Balen said, “It’s hard for large VC funds to invest in small enterprises.” This is especially true in Africa, so why not figure out a way to foster earlier stage investments as a community of smaller investors?

22 thoughts on “There’s a Problem with Seed Capital in Africa

  1. Wilf

    Hash,
    “What I think would be interesting would be to see these individuals band together and create real communities that connect with and plug in to the community in much closer ways.”

    I own http://www.diasporainvestment.com and created a community using Ning (at the moment by invitation only). We are still trying to figure out exactly what to do. Our initial thoughts were to use it to create investment clubs that will invest in the various stock markets. However, based on your suggestions I see no reason why this could not become a Y-combinator style business. I am open to suggestions.

  2. Akosua

    Good points, Hash. I actually think the help for start-ups is the larger piece than the funding itself, which is where the Y-combinator model comes in. I’m fairly confident that there is enough money in the system, and enough investors who couldbe convinced by an experienced person about the merits of the VC/seed model (riskier untested companies, but also higher risk higher return potential). The issue several investors I have spoken to come back with is that the teams, and the way they present themselves and their ideas are not confidence inspiring. Often they are technically brilliant, but very rough around the actual business plan, or longer-term strategic thinking.

    Wilf, I would be very interested to see how you are thinking about this, and potentially putting together a group of professionals who could help with the strategy and business development, as opposed to just the funding.

  3. Marilyn

    I currently run a small business in Kenya and seed and early stage funding is a significant challenge, that stifles innovation and growth. While I completely agree that money alone is not enough, without it the entrepreneurs cannot get off the ground and when they do find it they are often given a less than fair shake.

    I am interested in setting up an exclusively early stage VC fund focused on start ups in East Africa and would be interested in anyone with a similar interest or an existing fund.

  4. Jonathan Gosier

    Erik,

    As you may know that’s exactly what Appfrica is aiming to become. A Y-Combinator for software developers and programmers while supplementing their education in programming and business. In other words, an incubator. I’ve actually made a lot of progress in connecting with investors and VCs from the Valley an other places around the globe, and I made even more headway last week when I was there attending SoCap08 (Social Capital Markets for Investors).

    Although, not much exists right now outside of the usual hubs (South Africa, Kenya, Egypt) there’s definitely been a shift in thinking over the past few years. A number of people are looking all over the continent for young people with big ideas. Hopefully groups like mine and others can turn that interest into action.

    I think community involvement is critical. Without peer mentorship and support outside of school, people are more likely to be discouraged from ever trying. Great post.

  5. mosh

    This one really hits home. Great post. A few friends and I have been through the process (and not yet out of it). I can say that more than the money, what would help more is an experienced guiding hand.

  6. jean-patrick EHOUMAN

    We really need to educate investors. In Ivory Coast i see lot people investing in projects just because they know the entrepreneur. And those project never succed because there is no long term plan. The problem is that investors can’t make the difference between a good business plan and a bad one as they don’t really care about the content.

  7. Ismail

    Great post. Something that was discussed during the (Almost) linkup between barcamp Johannesburg(AKA BarCamp Silicon Valley) and barcamp africa. We recorded the session, and i proposed some ideas. Will post up the video soon. Jon, Will send you an email Re: Appfrica.

  8. Crystal

    As someone with an idea and a small NGO I have literally had to starve and use student loans for funding. Even now while working 50+ hours per week I am paying for everything. We have suffered long and hard to fulfill our organization’s mission while the funders look and say ‘Let us see what you can do in the next six month…” Honestly, if we weren’t so determined we would give up. Waiting for government funds is like waiting for God to shower money from heaven. So what does an innovator do? We are the lucky ones who know how to operate on a shoestring so we still exist. But until more capital flows into Africa for ICT4D ON THE GROUND rather than through governments, many great ideas will die on the drawing board. I would love to see what the Diaspora and others can come up with to prevent this from happening…

  9. GE

    If you are proud to be a white african, why are you letting your fellow brothers and sisters dies of proverty and diease? you are all african, are you not? why is that you dont commit yourself tio helping them no else will you live there. Also, africa acquire billions of dollars fron the world over what happens to it? I myself would to have funds to invest and do some charity works there and make profit doing so.

  10. Andreas Widmer

    Agree completely that funding (both seed and SME) is a critical issue.
    Our foundation is running an open source competition in this field – aimed at stimulating this discussion by creating “proxy” measures that might indicate future success of SME companies in emerging markets – it’s a completely open competition – anyone may compete by submitting their ideas – and the winners are awarded USD 50k – check it out at http://www.sevenfund.org/vine/ and contribute your ideas to help increase understanding of emerging market SME’s and with that increase funding and investments.

  11. Dipesh Pabari

    It’s strange how things always pop up at the most appropriate times. A group of business entrepreneurs in Kenya are very keen to support this very kind of initiative. Over the past two weeks, I have been having several meetings and gearing up towards setting something up that addresses the very problem of seed capital for new ideas. We hope to launch by early next year using the Rev Ken model from Kwani Litfest. (http://samosafestival.com/index.php?option=com_content&view=article&id=28&Itemid=41) If you are interested in exploring this concept or feel that you have something in mind that fits the description, please have contact me on dpinkenya (at) yahoo (dot) co (dot) uk

  12. Wilf

    Update: We are thinking of using diasporainvestment.com pretty much in a similar way to opencofee club [http://opencoffee.ning.com/] where any african or friend of africa can start their own local diaspora investment group and then use the diasporainvestment network to connect to all the other investors around the world.

  13. Pingback: 20 Ideas for Social Entrepreneurs [Part 1] - Appfrica

  14. Pingback: StartupsNigeria » Why Are Nigerian Start-ups Left Out of VC Funding?

  15. Pingback: Why Are Nigerian Start-ups Left Out of VC Funding - Start-Up News? | Internet Startups

  16. Pingback: Who’s Blogging About African Tech? - Appfrica

  17. Saul

    I think this is very true – the need for credit or at least money in the African economies is critical. Even in the highly monetized country of SA it is incredibly hard to access seed money for any kind of business.
    I would love to be invloved with a group of people that is looking at how to get credit into these economies. As someone that grew up in SA and has lived many years in the USA I understand the difference and the impact of this difference on opportunities. I will be returing to SA soon to live for a while – if anyone needs an SA/Southern Africa representative I am your man ;-)

  18. Melanie

    I am an owner of a fully accredited training company in South Africa – we deliver fully accredited courses to our learners. Yet it is impossible to get investors to invest into our company for expansion as the need has risen – due to the poor quality educational institutions that are currently in South Africa. I have done accreditation assistance to many companies who are not willing to do the layout for accreditation – so they just go ahead lying to their learners – and make lots of money through this. Most educational institutions in South Africa are not accredited for the courses they claim to be — this I know for a fact. Further the corruption in this country has taken its toll on education within the corporate world – this has exhausted the education budgets within the companies to such effect that training does not get done – although their performance systems states it does. We are trying to make a difference in building up the quality of the system – so that all graduates are on the same level – we go the extra mile in ensuring that all students get the support they need to graduate from our programmes competently – gaining the knowledge, skills and attitudes to do their jobs adequately. Yet, we find it impossible to expand due to lack of funds in our country and not finding investors. I have read what all of you had said and it will be interesting to know who of you are willing to assist in this project together with Future Performance Training for a brighter future. We have the experience, the knowhow, great innovative thinkers within our company – we have great potential – we have everything in order – yet we do not have the money to make this a success – the question is do we close our doors – or do we keep our heads high and push through this storm – educating the little amount of learners we can only handle now – or do we go out and make a difference in this world – through people with courage and honesty and let’s not forget money, to make this educational institution one of the greatest companies in Africa.

  19. Pingback: Crowdfunding and Seed Funding in African Tech — WhiteAfrican

  20. Amoroso Gombe

    Very true. I have what I think is a fabulous business idea but getting funding is impossible. I have people telling me unless you need 80 million shillings we’re not interested, but who needs 80 million shillings at the start! I’m starting and financial services IT company not building a hydroelectric dam!

Comments are closed.