You have the idea that could change the world. You have the passion, the drive, and maybe a prototype.
You might have also assembled a team of dedicated and qualified personnel who believe in your vision and are willing to take your idea to the ends of the earth.
You have painstakingly made a thorough research, and you are convinced that your product is an answered prayer to your target audience’s needs.
But you don’t have the funds to implement your plans or scale your startup.
Let me head straight to the point: Are you an African startup founder looking for funding?
If you are, then you have come to the right place for the best actionable information you can find on funding your startup.
Starting a business may be challenging, but funding it brings with it a whole new set of hurdles. Despite this, hundreds of startups still get funding in Africa. It is hard, but it can be done.
There are different ways to fund your startup. However, we handpicked seven typical sources of funding for entrepreneurs to provide actionable insights and guidance that would help you fund your startup.
These options should give you plenty of inspiration to get the financing you need. Let’s dive in!
Bootstrapping
If you are planning to start your own business, one of the easily accessible options for you is to finance the business through Bootstrapping.
Simply put, bootstrapping is the practice of starting and running a business with no (or very little) outside capital.
Bootstrapping is oftentimes good for testing an idea before the investment stage to increase its chances of success. However, some startups choose to bootstrap throughout the lifecycle of the firm.
Bootstrapping can come from several places:
- Monthly income from day job
- Savings
- Personal loan
- Credit cards
- Family and friends
There are hundreds of world-class examples of billion-dollar startups that were bootstrapped. Some of them are listed below:
- Steve Jobs and Steve Wozniak built Apple, running most of the company’s early operations from Jobs’ childhood home.
- Jeff Bezos’ personal software development for Amazon.com, who was working in his garage when he sold his first book in 1995.
- Mark Zuckerberg, then called Facebook, launched the social media site in a university dorm in 2004.
Bootstrapping has both its pros and cons. Some of its pros are:
- The Founder retains full ownership of the company.
- You don’t have to pay interest.
- You also retain full control.
- With Bootstrapping, you get a better sense of accomplishment
Typically, bootstrapping can be very difficult, especially when you don’t have a stable source of income. In extreme cases, it has forced founders to share a living space just to save costs.
If you can’t handle the financial stress that comes with bootstrapping, then you can leave it out. It’s up to you to know if bootstrapping is right for you or not.
However, bootstrapping is usually done at the initial stage of your startup. But when should you stop? There’s no hard-and-fast rule as to when you should stop bootstrapping. But Adeola Alli, founder of OneHealth, gave a pivotal piece of advice in her interview with Tech Cabal:
“It depends on the goal of the company. If you want full control and growth at your own pace, then Bootstrap makes sense. However, if you want to grow fast, compete favorably, and perhaps become the market leader, external funding will most likely be required.”
Business Grants
A business grant is financial support given by the government or private organizations that help start-ups finance their projects and, unlike a loan, does not necessarily have to be repaid.
The grant can be invested in a number of ways, such as:
- To fund training programmes for employees to improve their skills and knowledge, which can ultimately increase the productivity and profitability of the business.
- To purchase new equipment or upgrade old equipment to introduce production processes, efficiency, and new technology.
- Marketing: Grants can be used for advertising a business promotion to reach new markets, that can increase the number of potential customers.
- Business grants can be used to research and develop new products and services that can help grow a business and create a unique market position.
Some of the business grants available to African Startup Founders include:
- GSMA Innovation Fund for Climate Resilience and Adaptation Fund (100,000 GBP and 250,000 GBP)
- Google Black Founder Fund ($150,000 )
- Investing in Innovation Africa (i3) 2023 support startups building the future of #healthcare supply chains. Funded by the Bill and Melinda Gates Foundation and funded by AmerisourceBergen, Merck Sharpe and Dohme (MSD), Microsoft, and Chemonics.
- The $50,000 grant is for an African entrepreneur who creates a solution to the problem of distributing health products in Africa. It is an early and/or growth-stage technology-based company owned or managed by African nationals legally present on the continent.
- DeveloPPP Ventures on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ),
- United States African Development Fund (USADF) grant
- Schwab Foundation Geneva Business Grant
The biggest advantage of a grant is that you don’t have to receive money in exchange for equity. Free money, right? Not quite. They’re extremely competitive. Moreso, as told by Investopedia, “the funds (Grants) must be used in accordance with the terms of the grant, and if they are not, they will have to be paid back—possibly with interest.”
Families and friends
If the people closest to you don’t support you, why should investors?
Funding from the people closest to you will be the easiest way to get funding.
However, if the business fails and you can’t refund their money (except if it’s a gift, the relationship will suffer.
But for family and friends, fundraising comes in many forms. For instance, Joram Mwinamo, the chief executive officer of SNDBX, in his interview with Villgro Africa recounts that his startup was occasionally funded by his co-founders’ sister in the early days.
When they had a contract to work on before they were paid, they met her to get an advance that would be paid back after they received payment for their job.
You can do the same with a reliable relative to fund your startup operations.
Angel Investors
Angel or startup investors are wealthy individuals who invest money and often time in startups (at the seed and venture capital stages). In exchange for their investment, the angel investor takes an equity position in your company.
Many angel investors are successful entrepreneurs and business professionals.
Angels Investors can also help introduce startups to potential clients and investors, identifying and advising on potential issues, and generally helping startups gain credibility and recognition in their industry.
Crowdfunding
Crowdfunding is a method of raising money from several individual investors. This type of financing is usually facilitated through an online platform.
Crowdfunding is slowly taking off in Africa, as a result, crowdfunding regulations in Africa are still unclear. In the absence of regulation, equity crowdfunding platforms cannot succeed at scale in Africa. However, it is important to mention that it has potential.
Types of crowdfunding include:
- Equity Crowdfunding: In general, equity crowdfunding offers the securities of your company to a large number of investors in exchange for funding. Each investor is entitled to receive a proportional share of their investment in your company.
- Rewards-based crowdfunding: Backers are offered non-monetary exclusive benefits such as pre-launch access to the product (useful if you want to get feedback on the product in its early days) or additional products.
Now projections show that crowdfunding in sub-Saharan Africa could reach $2.5 billion by 2025. The three leading countries in the crowdfunding market are Kenya, Zambia, and South Africa.
Startup Accelerator
Another way to get funding for your startup is to join an accelerator or incubator program
Startup Accelerators are short, intensive programs that provide training, resources, and mentoring if you’re an early or mid-stage founder, and outline specific paths to help you turn your startup into a scalable business.
Participants can also receive a cash bonus after graduation, but they usually have to give up some equity.
To be accepted into an accelerator, you usually need a business model that you have either tested or implemented.
The benefits of joining the accelerator include training in fundraising, product development, and growth marketing, access to the alumni network and investors, networking and engagement with your cohort, and intensive mentoring from industry leaders.
Examples of accelerators include:
- Techstars $120,000 6%
- Founder Institute
- Y Combinator $500,000 7%
Venture capital financing
In simple words, Venture capital is a form of financing that is invested in a business, usually a startup, that has strong growth potential but carries significant risk.
Venture capitalists provide financing to startups hoping that in the future they can recoup their investment through a potential “exit event,” such as a company selling stock to the public for the first time in an initial public offering (IPO) or selling stock in a merger, or even by selling to another party, as a competitor.
Partly due to the recent success of unicorns (e.g. Uber, Airbnb, etc.) and the huge amount of capital available, venture capital has taken a prominent place in the startup ecosystem.
The most important features of venture capital investment financing are:
- Venture capital firms invest in young, early-stage companies with aggressive growth.
- They take an equity position, which means ownership without repayment of funds.
- Venture capitalists usually aim for exponential growth in 4-6 years.
- Venture capital firms are active investors and often participate in the management of the companies in which they invest. This means that they need a seat on the board or a consultant in the company.
According to Digest Africa, more than 3,000 venture capital deals for African companies have funded more than 5,000 startups in the last six years. There’s a strong potential for you to get funding from this source.
But how do you get venture capital funding?
The first step for a company seeking venture capital is to prepare a presentation, which is a PowerPoint presentation of the concept being developed.
This presentation should explain in full detail how and when the company will make money.
If a venture capital firm or investor is interested in a proposal, it must conduct due diligence, which includes, among other things, a thorough investigation of the company’s business model, products, management, and operating history.
If they like what they see and hear, they can offer terms and conditions that state what they want to offer as an investment and on what terms.
These funds can be given all at once, but capital is usually given in rounds.
Many of the most famous venture capital firms are located in Silicon Valley, the most notable of which are:
- Andreessen Horowitz invests in early-stage startups and growth companies in areas such as enterprise IT, gaming, social media, e-commerce, and cryptocurrency.
- Sequoia Capital has invested in prominent US technology companies including WhatsApp, LinkedIn, Paypal, and Zoom.
- Y Combinator has invested in more than 3,000 companies,
Startup Pitching Competitions
Startup pitching competitions are one of the surefire ways to get funding for your business. But as the name signifies, it is highly competitive.
Startup pitch competitions are also a good way to gain experience and exposure in the startup world. They provide a platform for entrepreneurs to connect with potential investors, mentors, and other entrepreneurs.
During such an event you get to pitch to multiple investors and gain valuable networks that could pay off in the future. You will network, you will potentially build partnerships but, most importantly, you will get a chance to secure funding and accelerate your business.
Dragons’ Den and Startup Shark Tanks are good examples of reality television program formats in which entrepreneurs pitch their business ideas to a panel of venture capitalists in the hope of securing investment finance from them.
Examples of other Top Startup Pitching Competitions include;
- Startup World Cup 2023
- TechCrunch Disrupt 2023
In conclusion
Funding is the fuel that every business runs on. Knowing the ins and outs is therefore essential if you want your startup to be successful.
There’s no universal best fit when it comes to funding your startup – the right choice for you will depend on what stage your business is at and what you want to do with the finance you receive.
Funding is quite important, but don’t focus solely on it.
Instead, “Focus on making your product or service awesome. I see a lot of guys go into business with a ‘how can I make money’ approach. But if you go in there saying ‘how can I make something awesome’, the money will follow.” – Alex Fourie, iFix, South Africa
Whichever route you decide to go down, make sure you understand exactly what you’re signing up for.
Let us know if you have any questions. We’ll be happy to elaborate Good luck!