What Are Investors Looking for in African Startups?

African startups are attracting major funding from global investors. But what are the investors looking for?

For months, they have prepared their presentations, polished up on their business models and rehearsed their elevator pitches in front of the mirror. On October 24 and 25, forty startups from all over Africa pitched their brilliant IT solutions to a handful of investors and hundreds of delegates at the just concluded Demo Africa 2013 held in Nairobi, Kenya.

This pitching model has been rapidly replicated across selected countries in Africa, with idea-riddled entrepreneurs looking for strategic people and partners who will put in the required amount of money for their ideas to sprout.

But with all these advancements in investor confidence in the IT industry in Africa, many startups find themselves in a bind, especially when they don’t know what type of investment would fit their business needs or what investors are looking for in the first place.

Some investors would want to put in money but take percentage stake in the business. Some investment models would advance the funds as a loan to the business, expecting a return and interest on their cash. Others would mix a bit of the two.

A new entrant to the market, Silvertree Capital from South Africa, came up with a new concept not only to build sustainable businesses but also to grow companies under them reasonably. The investment company, which is based in South Africa, has made strides investing into companies such as Zando, Glamour, SunGlasses, HealthCart and Jumia.

“Silvertree is currently operating more as a tech holding company or operational venture capital player, that starts or accelerates businesses in the tech space, does not have a typical fund cycle and does not need to sell its holdings,” Manuel Koser, Silvertree Capital investment director said.

Even for Koser, not all startups are ready for investments. “I think for us it is always a combination of four things that we look at for an investment: team, idea, market and valuation. Signs are different case by case, generally the fundamental business needs to make sense – there needs to be a chance to turn a business profitable using a reasonable amount of time and funding.”

Heshan de Silva, the chief executive officer of DSGVenCap an investment firm that has a backing of US$2 billion in funds, says that ambition for startups is everything. “Ambition is everything. Splashing money into small startups does not make sense. So the business idea needs to think big,” de Silver said during the Demo Africa conference in Nairobi.

According to Heshan, their funding model does not require a long written pitch and business plans. They invest in ideas.

“We invest with what is in your head,” de Silva said. “We are not in the business of endlessly talking.” His sentiments are truly reflected with the fact that they are working with 24,000 ideas in Kenya. With 400 analysts on hand, pitch results are delivered to entrepreneurs in 48 hours.

Nicol Woodard of Nexus Group Global, an investment firm putting US$1-20 million into companies, says his main apprehension is in the structure of the business or startup.

“My concern is in the leadership team. Where they are coming from? What have they done with the money they have gotten so far? Where do they see the business going? Who are your partners?” he said.

Passion for the idea and a sober mind to think through the business model is something that is valuable in potential investing opportunities.

Disruptive ideas are something that most investors are attracted to; most investors are looking for that ‘new way’ of doing things. Saya Mobile from Ghana has been able to prove its disruptive nature to investors. The company offers mobile web chats, eliminating the need of text messaging.

For Robert Lamptey, the founder and chief executive officer for Saya Mobile, the journey with investors has seen him grow his company in great leaps in Ghana.

Lamptey has seen his company propel him to levels that very few companies in Africa have seen. He pitched his idea on TechCrunch Disrupt, San Francisco in 2012, which saw his company attract even more international investors.

Lamptey got an opportunity to train and be incubated at Meltwater Entrepreneur School of Technology (MEST) in Ghana, a center that has seen startups such as Dropifi, LetiGames and mPawa.

Getting support from such hubs across Africa could offer the startups relevant information on how to present their companies to investors. Numerous startups have grown from hubs such as iHub, 88mph and the GrowthHub in Kenya. Such hubs offer mentorship and advice that is priceless in any business.

As much as money can build the business, an investor with key networks can open partnership opportunities with key companies.

But with all these opportunities, Koser of Silvertree Capital advises African businesses not to fully rely on investor cash, unless it is really important for their business to survive.

“I think that would be reckless as there is almost no private capital/investor capital in Africa for tech start-ups. How many 1US$+ rounds were there in Africa in the last 5 years – a handful at most. So you need to finance privately, convince friends and family and bootstrap as much as you can,” Koser said.

During announcements for applications, investors usually stipulate what kind of startups and ideas they are looking for. But businesses should not stop there. They should investigate even from former beneficiaries on the conditions of the investments.

A brilliant match is not only the work of the investor but also the work of the businesses. Both need to do their homework to make a blissful business ‘marriage’.


Vincent Matinde is an international IT Journalist highlighting African innovations in the technology scene.