Startup Funding in Africa- Let’s take a step back & talk Market Efficiency

By Mbwana Alliy  |  May 16, 2012


Over the last few days… Actually it seems like forever- The web has been full of articles about how Africa needs startup funding. Almost everyday now I see some article about it. As a general rule when you hear the same thing over and over again- you should start to ask why? I have written about what I think on this topic prior. Here is are summary of my points:

And one that tries to capture a more ecosystem approach beyond just the funding piece.

Rather than keep stating the problem, we should ask why it exists and if it really does exist?

Take this tweet yesterday- RT @africatechie: Africa: long on opportunity, short on capital on @VC4Africa

And Today the Mara Foundation in Kenya tweeted.

is lack of capital just an excuse for #startup failure in #Africa or truly a fatal factor?

This is an excellent question. I think it depends on how efficient you think the African (or Global) market is in allocating capital to worthwhile (African) startups. Note the brackets in the last sentence. How efficient is good? Well let me anchor you back to situation I had in Silicon Valley about a month ago. I met a startup focused on Africa I am an advisor for a routine meeting- basically we met at a coffee shop that we both like and when I showed up and I noticed that the startup was spending a huge amount of time applying for grants. This is how the conversation went:

  • Mbwana: “STOP IT! Find real investors!”.
  • The startup: “but its free money!”... Point well taken.
  • Mbwana: “But it takes you so long to fill out these forms to AID organizations who don’t even get your technology and even longer for them to respond- you could be building out your prototype and making tangible progress”
  • The Startup: “But we still need the money! Oh and its free”– Point taken again… (Note this startup had an excellent prototype and I noticed the team was well rounded with an engineer and business development who had just quit her job to join this startup).

Sounds familiar right? I call it inefficiency. As I left the coffee shop I suddenly remembered someone I met a week earlier who loved the domain the startup was in, not only that, she had a soft spot for women led startups AND she’d been to Africa a few times and knew the environment pretty well. I immediately made the intro via my smartphone. Less than a week later the startup had secured further angel investment from this person in one meeting. This is how efficient Silicon Valley is. I have heard of stories of startups being flooded with money on AngelList the moment they post on the website. Silicon Valley is incredibly efficient- or you could argue its now a bubble and the pendulum has swung way too far that money is being thrown at everything that moves. Are there amazing startups in Africa that deserve funding and are not getting it?

Lets try the other side: Kauffman foundation told me to be cautious of a certain big startup initiative focused on Africa. I was confused. Why? Surely any efforts to help startups in Africa should be welcomed? A staff member told me “Do you think African startups are ready for that kind of exposure- one startup can ruin the entire market when the ecosystem is still not ready yet”

This story made me pause and I started to understand- it reminded me of another story of a gentleman who wanted to take some startups from Kenya to Silicon Valley on an investor roadshow, take equity cut of each startup plus the startups must pay for their entire travel expenses to come to Silicon Valley. When we quizzed this person further, he had no Linkedin profile or online presence whatsoever and he didn’t even mention any reputable investors he’d be introducing these startups to. Had he even been to Africa? Should we have made this arrangement happen? I think not and we did not. The kenyan startups may show up to Silicon Valley, deplete valuable cash they might not have and meet investors who are not even reputable but probably have never set foot in Africa! And then when inevitable disaster strikes, the word will go round that Kenya or African startups are terrible (ruining it for others in future)! Worst of all the startups would have wasted time vs building out their startup.

I have also heard of the rich African elder making a $100k investment in a friend or relative’s startup and the startup totally failing or that person is engaged in multiple startups or projects and fails. Now this elder person will never invest in tech startups again- firmly deciding it’s better to invest in real estate to support the future of his or her family. Sometimes if the money comes too easy, it makes a startup clumsy- this is true even of Silicon Valley, it just happens at a bigger scale with bigger burnouts.  But from failure also comes a sharpening of the saw and the market learns to allocate capital just a little bit better and take on less risk next time…

So what’s the moral of the story? There are clearly market inefficiencies in the startup funding process outside of Silicon Valley and especially in Africa. Fund Managers/Venture Capitalists/Impact Investors may not be taking enough risk because they don’t know the technology domain, region or startup team characteristics. On the other side- startups may not be ready to absorb large amounts of capital and exposure for multiple reasons (talent/skills being one and focus being another). The African startup ecosystem is still developing… African founders need to focus on getting stuff built and building skills along the way and focus- a do or die scenario, not half attempting a startup when someone has betted their savings on you… Investors/Grantees need take some risk but learn from their mistakes but not flood the market with money. Back to those grants and impact investing… Even they are aware that their involvement might lead to a risk to the ecosystem they are trying to help. So yes, even grants can be bad for the ecosystem- look up Crowding out effect as a cautionary example to NGOs, AID givers and Governments.

Ultimately when we have more bigger tech startup successes, it will begin to wake up both the investor and founder side and the market will become more efficient and maybe Africa may enter into a boom and bust business cycle we see even in Silicon Valley and across the globe where one period founders have all the power and awash with cash and another time there is little funding available as investors got burnt and have showed poor returns.

I leave you with a concluding comment from Ernst and Young on Africa business confidence which captures the tension that exists in the stories I tell.

“Despite this growth, there remain lingering negative perceptions of the continent — but only among those who are not yet doing business in Africa.”