Did you know that African startups achieved considerable success in 2022 by raising a staggering $6.5 billion in startup business funding?
Unfortunately, this year is trending negative. Compared to Q1 of 2022, African startup funding is down 57% in Q1 of 2023. While the world is reeling from the economic downturn, Africa has problems, too.
Experts believe that several issues led to the decline in startup funding. These include regulatory challenges, poor infrastructure, foreign investors feeling the pinch back home amid a high-interest rate environment, and limited access to funding. While it’s challenging for African startup founders, securing funds at this tumultuous phase enables your startup to leapfrog competitors.
This guide offers expert knowledge and experience-based insights on funding, equipping you with valuable information about raising funds.
Seed money is the first official round of funding. It comes after the pre-seed stage. These funds help startups to scale up their business operations and pay for R&D, product development, marketing campaigns, talent acquisition, and other vital aspects. In return, investors receive some form of ownership in the startup.
Some of the startups that have raised seed funding in recent years include:
Seed funding is followed by subsequent financing rounds, such as Series A, Series B, and so on, as the startup progresses and seeks additional capital for growth and expansion.
There are several benefits of seed funding for African startups.
Seed funding helps to accelerate the growth and expansion of startups. It can provide much-needed funding for the following:
Seed funding can strengthen your startup’s credibility by indicating investor confidence. When external investors offer financing, it validates your startup’s business model, making it more appealing to customers and partners.
Startups rely heavily on top talent that can take them to the next level. However, you need to offer competitive salaries to hire the best in business. With seed funding, you hire top talent and offer them attractive perks, such as health insurance, wellness programs, and remote work flexibility.
Once you receive seed funding, it can open your startup to investor networks. These connections can provide you with much-needed mentorship and guidance.
Securing seed funding can be the key to bringing your ideas to life. Following these steps will help your fundraising journey move towards entrepreneurial success.
The first step in raising funds is to determine if you are eligible for it in the first place. Investors assess your product/service for a compelling business proposition. Just having an idea isn’t enough. Startup founders need seed funding in the following scenarios:
Startups should look into seeking seed funding when their product/service has gained enough traction in the market. Traction can refer to many things, such as increased user numbers, more revenue, or positive feedback from early users. These factors can serve as your endorsement when you seek funds.
You need to prepare a financial plan before seeking funds. Investors often ask for this document to determine how your business is doing regarding numbers. This plan includes a balance sheet, income statement, financial projections, and a cash flow statement. If your business shows promise,i.e., they will invest. Some of the metrics they compare include:
Every startup has a target amount of money they need to raise. Ideally, you should raise enough funds to become profitable. However, most startups can’t achieve profitability with only seed funding.
One common rule is having enough funds for the next 12-18 months. This timeframe offers a buffer for unanticipated challenges and ensures that you have the financial cushion to run your operations without worrying about startup business funding.
Calculate the following costs to determine how much money you will need to raise.
Startup founders often work out different financing options with investors. These include:
Equity financing is a startup business funding approach where investors provide capital to the startup in exchange for ownership shares or equity. This method ties the interests of investors with the success of the startup. Investors turn into shareholders, sharing the profits and losses and having a say in strategic decisions.
Startup valuation is one of the ways to determine the percentage of equity given to the investor. Usually, the higher the valuation, the lower the percentage of equity you have to give up.
A SAFE is a financial instrument where a startup can receive investment without setting an initial valuation for the startup. Instead, investors provide funds with the understanding that they will convert into equity during a future funding round when establishing a valuation. This approach allows startups to delay the valuation process while still getting the required funds.
However, keep in mind that there can be some uncertainty in the future with SAFEs. That’s because you can’t predict the ownership percentage the investors will get after the funds are converted into equity, as ownership depends on the valuation.
Convertible debt is a form of financing in which investors lend money to the startup to convert that debt into equity when specific conditions are met. These trigger events depend on the agreement. They can be future financing rounds or specific milestones, such as when the startup reaches a certain annual revenue level or gets 5,000 paid customers.
While the debt converts into equity, you are still responsible for making interest payments and repaying the principal if a conversion trigger event does not occur.
Grants are non-repayable funds awarded to startups by government bodies or organisations. Unlike the previous options, grants do not require startups to give up ownership or repay the funds. Grantors provide grants to support specific projects, research, or initiatives aligned with the grantor's objectives, such as startups that operate in social impact, technology, etc. However, acquiring grants is difficult due to high competition and the need to meet strict qualifying criteria.
A pitch deck is a visually engaging presentation that startups use to convey their core business idea, value proposition, and growth prospects to potential investors. It contains a series of slides that provide a brief overview of the startup's value proposition to capture the interest of investors. Here’s what a pitch deck contains:
The problem statement is the foundation of a startup's pitch. It identifies and discusses a pain point in the market that the startup aims to address. For example, a health tech startup might highlight the problem of inefficient patient record management in African hospitals, leading to errors and delays.
The solution outlines how the startup intends to solve the identified pain point. This is where the startup introduces its product or service and explains how it offers a better alternative. For instance, the solution could be a cloud-based electronic health record system that streamlines patient data management and reduces errors.
A demo, or product demonstration, is an effective way to showcase the startup's solution. It allows investors to see how the product works and what types of features it offers. For example, the healthcare startup could provide a live demonstration of its software via a Zoom call to hospital management, showing how the staff can retrieve patient records.
The business model explains how the startup plans to generate revenue to support its operations. It specifies whether the startup will charge customers directly, rely on advertising, or adopt a subscription-based model. For example, a B2B SaaS startup can show different pricing tiers based on the organisation’s size..
This section provides an understanding of the market the startup is targeting. It includes data on the total addressable market (TAM), served addressable market (SAM), and the target market segment. For instance, a fintech startup might identify that its target market is small and medium-sized businesses in Nigeria, with a TAM estimated at $500 million.
The roadmap talks about the startup's plan for future development and growth. It should highlight key milestones and goals. For example, a B2B SaaS startup can include upcoming product releases, expansion into new markets, or plans for fundraising rounds in its roadmap.
Finding and connecting with the right investors is vital for seed funding. Utilise online platforms like Crunchbase and Wellfound to find angel investors and venture capitalists. These platforms contain in-depth databases of investors and their investment histories. Other ways to find investors include
You should consider the following factors to choose an investor:
Once you finalise an investor, you can initiate contact through several channels. Start by sending a personalised and brief email and brief email about your interest in discussing your startup. You can also use LinkedIn to reach out. Request a meeting or call where you can show them your pitch deck and convince them to provide seed funding.
Negotiating with investors for seed funding is a critical skill that can significantly impact the terms of your financing, equity, and the dynamics of your future partnership. Some of the things you need to keep in mind include:
For African startups, seed funding catalyses rapid growth and innovation. This injection of capital can take your startup to the next level. You can use it to develop innovative solutions and make a difference in your industry. All you’ll need is to follow the steps outlined above and follow them to the letter.
If you are an African startup founder looking for seed funding or any other form of startup business funding, FFA can help you raise seed funding. We have an exceptional track record of turning new startups into successful ventures that have made a difference throughout Africa.
Connect with us and join the ranks of visionary startups changing the game and shaping a brighter future with our support.
