After shaking up the global tech scene with a stellar performance in 2022, start up business funding in Africa faced a bit of a reality check in 2023.
Last year marked the first decline in funding since 2016. The number of funded ventures and total capital raised decreased.
However, the continent still boasts impressive startup funding figures. The $400 million raised in 2023 represents nearly a 10-fold increase compared to $49 million raised in 2015 when organisations started collecting startup funding data in the country. With a staggering 224.8% increase in funded ventures since 2015, 147 startups secured a million dollars or more in 2023, proving that Africa's entrepreneurial ecosystem is still bubbling with potential.
For visionary founders with dreams of building the next big thing, the following sections provide expert knowledge and experience-based insights on funding, with a step-by-step guide on how to raise funds.
Let’s get started.
Seed money is the first official round of funding. It puts the startup on the map after the foundation laid by pre-seed funding.
Seed funding helps startups scale up their business operations and pay for research and development, marketing campaigns, and other vital aspects.
Seed rounds have dominated the African startup funding scene. Some notable startup funding examples from the past year include:
Seed funding paves the way for subsequent start up business funding 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 startup businesses. These include:
Seed funding can provide much-needed funding to accelerate various processes, including:
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. 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.
Africa’s startup funding relies heavily on a few types of funding sources. This section explores these primary funding sources and some of the key players in each one. You’ll also find insights and tips to identify and approach the right type of funding source for your seed round.
Crowdfunding works best when you can build a community around your idea. Consider exploring niche platforms based on your target industry or audience. Their targeted audience will be more receptive to your project's unique value proposition. For instance, some might focus on social impact projects and others on scientific research.
Platforms like Reddit, LinkedIn groups, or specialised online forums can be fertile ground for finding enthusiastic supporters.
To stand out from the crowd, focus on telling a compelling story that resonates with your audience's goals and desires. Emphasise the problem your startup solves and the impact it can make. Offer unique rewards or perks to backers and showcase early adopters as social proof.
Some widely used crowdfunding platforms include:
For loans, alternative lenders and peer-to-peer lending platforms are fast becoming the go-to source for start up business funding these days. They have less stringent eligibility criteria and may offer more flexible terms tailored to startup seed financing compared to traditional lenders.
Research reputable non-traditional lenders and compare their loan offerings to find the best fit for your financing needs. Seek financing from mission-driven financial vehicles like Community Development Financial Institutions (CDFIs) and government loan programs. These sources focus on serving underserved communities and businesses. CDFIs often offer more flexible lending terms, lower interest rates, and personalised support compared to traditional banks.
Don't overlook personal and professional networks when seeking loans for your startup. Reach out to friends, family members, mentors, and industry connections who could provide loans or co-sign on a loan to support your venture.
Some popular lending platforms for African startups include:
Grants can be a goldmine for start up business funding, especially if your startup focuses on social impact or innovation. You need to target grant opportunities that align with your startup's mission and objectives, from government agencies to foundations and corporate sponsors.
Larger grant programs are fraught with significant competition. Niche grant opportunities — grants offered specifically in your startup’s niche, are low-hanging fruits.
Partner with universities, research institutions, or academic centres to access grant funding through collaborative research projects or innovation initiatives. This partnership also provides access to expertise, resources, and grant-writing capabilities from the university to secure funding for your startup.
Write grant applications keeping in mind each funder's startup business funding requirements. Build relationships with grantmakers through networking events, conferences, and collaborations with research institutions.
Because they have an equity stake in a startup, VCs are incentivised to actively support the growth and success of their portfolio companies. VC funding can accelerate the growth trajectory of startups, fueling innovation, market expansion, product development, and scalability.
When exploring VC for start up business funding, focus on those with a track record in your niche. Attend startup events, pitch competitions, industry conferences, and online communities to network with potential investors and showcase your startup's value proposition.
Focus on building strong relationships with potential investors and demonstrating your team's expertise, passion, and track record of execution. Showcase your market opportunity, competitive advantage, and scalability.
Remember to highlight your startup's traction and milestones achieved to date, providing tangible evidence of your potential for growth and success.
Some key players in the venture capital space include:
In addition to funding, accelerators and incubators provide invaluable mentorship, resources, and connections to help startups succeed.
These programs typically provide access to seed funding, coworking space, training sessions, and potential investors, partners, and customers.
By participating in accelerator and incubator programs, startups can validate their business models, refine their product-market fit, and access the resources needed to scale their ventures.
When applying to these programs, focus on what sets your startup apart and why you're a good fit. Network with alumni, mentors, and program managers for insider insights and tips.
Some popular accelerators include:
With these fundraising tips, you’ll be able to identify and approach the most suitable funding sources to fuel your startup's growth and success.
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. Startup founders need seed funding in the following scenarios:
Traction can refer to many things, such as increased user numbers, more revenue, or positive feedback from early users. These factors serve as your endorsement when you seek funds.
Investors often ask for this document to determine how your business is doing regarding numbers. A financial plan includes a balance sheet, income statement, financial projections, and a cash flow statement.
Some of the metrics they compare include:
These critical elements of a financial plan offer startups a roadmap to showcase their financial viability and attract potential investors.
Every startup has a target amount of money they need to raise; cue the spreadsheet below:
However, most startups can’t achieve profitability with only seed funding.
One common rule is having enough startup business funding for the next 12-18 months. This timeframe offers a buffer for unanticipated challenges.
Calculate the following costs to determine how much money you will need to raise.
Calculating these cost factors is critical to determining the start up business funding required to support your growth trajectory.
Startup founders often work with different startup business funding ideas. These include:
Equity Financing
Equity financing is a startup business funding approach where investors provide capital to the startup in exchange for ownership shares or equity. 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 through which a startup can receive investment without setting an initial valuation. Instead, investors provide funds with the understanding that they will convert into equity during a future funding round when establishing a valuation.
However, keep in mind that there can be some uncertainty in the future with SAFEs. You can’t easily 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 capital funding for startup businesses in which investors lend money that is converted into equity when specific conditions are met. These trigger events 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.
A pitch deck is a visually engaging presentation that conveys a startup’s value proposition and growth prospects.
A pitch deck contains:
The problem statement is the foundation of a startup's pitch. It 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 your start up business funding is a critical skill that can significantly impact the terms and the dynamics of your financing. Some of the things you need to keep in mind include:
With these six crucial steps, you have a comprehensive roadmap to entrepreneurial success. Now it’s time to get started on your funding application.
The funding application process is fraught with many hurdles, and we’ve dedicated an entire section to help you overcome them.
Here are tips to execute a smooth-sailing application process.
Use numbers to tell a story that captivates the reader's imagination and emotionally resonates with them. Build your pitch around key metrics that showcase your business's success and growth potential.
Quantify your achievements. Instead of vague statements, specify the percentages and amounts in figures.
If your startup addresses a pressing social or environmental issue, emphasise the positive change it can bring to communities or ecosystems. Investors are increasingly drawn to ventures that prioritise social responsibility and sustainability.
Use numbers and statistics to quantify your business's social impact. For example, instead of simply stating that your business aims to empower women, provide specific figures on the number of women you've trained, employed, or supported through your initiatives.
Share testimonials, case studies, or anecdotes that showcase how your products or services have positively transformed lives.
Even more importantly, investors seek startups with the potential for exponential growth and scalability. Outline clear strategies for scaling your business beyond the initial stages. Explain plans for expanding into new markets, diversifying product offerings, or innovating for efficiency.
Showcase how your operations can be replicated or standardised to accommodate growth without sacrificing quality or efficiency.
Discuss how you plan to deploy software, automation, artificial intelligence, or other technological solutions to streamline operations, reduce costs, and increase capacity.
Also, show investors that your business can quickly adapt to changing market conditions and scale operations up or down as needed.
Investors invest in people as much as ideas. Demonstrating a cohesive and capable team can instil confidence in your startup's potential.
Emphasise how each member of your team brings unique skills, expertise, and perspectives to the table. Showcase how these complementary skill sets enable your team to tackle diverse challenges and drive innovation.
Provide examples of successful collaboration within your team.
Highlight the strong leadership within your team. Show how leaders effectively delegate responsibilities, empower team members, and foster a culture of accountability.
Offering unique incentives or perks to investors sets you apart from the competition. Examples include exclusive access to beta testing, personalised experiences, or recognition in marketing materials. Creative incentives add value to the investment proposition and promote a sense of community and engagement with your project.
Also, consider personalised perks tailored to individual investors based on their interests or preferences. For example, you could offer exclusive access to industry events, personalised product demonstrations, or one-on-one meetings with key team members.
Offer a bonus equity stake or profit-sharing arrangement based on specific milestones or performance targets in exchange for start up business funding. This will encourage investors to actively support the business's growth and success.
By implementing these uncommon tips, you can significantly enhance the chances of success of your startup business funding application, opening doors to valuable opportunities for growth and development.
You need to assess various factors such as your business model, stage of growth, funding needs, and long-term goals. Compare funding options in areas like equity versus debt and the level of control you're comfortable relinquishing.
Start up business funding requirements can vary depending on the type of funding sought. Common factors include a viable business idea, a strong team, evidence of market demand or traction, and a clear strategy for growth and scalability. Additionally, factors like credit history, collateral, and industry regulations may also play a role.
The time it takes to secure startup funding depends on factors like the funding source, the complexity of your business model, market conditions, and your networking and pitching abilities. For instance, the average time it takes to raise a series A after a seed round is 18 months.
In some cases, funding can be secured within a few weeks, while in others, it may take several months of networking, pitching, and due diligence.
Some common seed funding mistakes that startups make include underestimating funding needs, targeting the wrong investors, and failing to diversify their funding sources. Startups also often lack a clear and compelling business plan and neglect to build relationships with potential investors.
Several resources and tools can help you streamline your funding application process for startups. These include online platforms for connecting with investors such as AngelList and Crunchbase, and crowdfunding platforms like Kickstarter and Indiegogo.
For due diligence and preparations, explore financial modelling tools like Excel or software applications. Talent platforms like Upwork and Freelancer provide access to relevant expertise on-demand.
Networking events, accelerators, incubators, mentors, and consultants can help you access invaluable insights for managing the funding process.
For African startups, seed funding helps accelerate growth and innovation. You can use this startup business funding to develop innovative solutions and make a difference in your industry. All you’ll need is to follow the steps outlined above 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 difference makers throughout Africa.
Connect with us and join the ranks of visionary startups changing the game and shaping a brighter future.
