Getting funded: Types of investors for early-stage startups (part 1)

Fundraising in Africa remains a challenge for many tech founders, especially in what is called the missing middle. In Africa and in the tech world, the missing middle is roughly for startups looking to raise from $25k to perhaps $300k or there about.

There is a lack, or at least a perception that money is lacking at that stage: that stage is also widely called pre-seed in Africa.

We at The Baobab Network kind of like investing in companies at this stage, so we decided to write a two part article on various types of funding available for start-ups on the continent ranking them by their average size ticket (and how early they may support a start-up).

Note that these investors sometimes only write checks for pre-seed rounds, but many can write larger tickets as well in the future, especially if the company is growing well and in need of funding to grow and scale operations.

In our first piece on funding for African founders, we look at the very earliest stage in your company’s journey. And where you can turn for funding just as you are kicking off your new project.

Bootstrapping (Love Money):

This is money coming from individuals such as your family, friends, and loved ones that are supporting you.

They typically will give you either free money, loan you money at 0% interest (or favorable interest), but also give money in exchange for equity.

When it comes to love money, our thoughts have always been quite simple; it’s great to have support from friends and family, but make sure that you do not give away equity that easily. Give them a chance to come in on good terms of course, but maintain control, and protect your cap table, as later stage investors can be quite picky about this kind of thing.

Grants:

This is equity-free money provided by organizations, foundations or multinationals to support you. They do so because your industry, or solution is part of their CSR agenda, or “Investment thesis”. (e.g. Bill & Melinda Gates Foundation, Various).

They typically will give you money that is not tied to debt or equity, and usually funding will come in tranches, with a clear set of milestones and objectives to achieve to unlock future funding.

Our view is that grant money is great because it is often equity free; however applications tend to be long and draining. So make sure it is a grant worth pursuing and that your organization matches their criteria, before engaging in long submissions.

Grant money can also be distracting. If you’re trying to build a unicorn, then you need to focus on users, product, sales and cash. Grant funders and donors may have different priorities, for example job creation, or social impact. So understand what type of organisation you want to be, before signing any term sheets.

Nothing is really ever free in this world!

Competitions:

This is money coming from various competitions across the world, sometimes led by a multinational (e.g. Startup Total) or an organization purely focusing on competition for start-ups (e.g. Seedstars World).

Competitions will typically give you financial support in the form of one lump sum of prize money into your business. Going down this route can also be beneficial as you may end up with some cool non-financial support as well, such as a mentor, some cheap office space, or free consulting from their employees.

Our recommendation is to check what you are getting beyond the financial support, and understand what the funder wants in return (PR opportunities when you may want to be in stealth mode, or equity / interest on their funding). Also ask the hard questions; what can such a relationship actually bring you and your start-up? Is it an industry network? Some new advisors? Some gravitas?

Incubators:

A start-up incubator is a collaborative program for start-up companies — usually physically located in one central workspace — designed to help start-ups in their infancy succeed by providing workspace, sometimes seed funding, often mentoring and usually training.

Many incubators in Africa offer a small amount of funding, to get businesses started on their journey. This is money coming from private or public organisations working exclusively with start-ups at various stages, but typically early, so pre-MVP.

Incubators tend to have a physical on-the-ground presence, some notable organisations in Africa are Co Creation-Hub in Nigeria or Launch Lab in South Africa.

They may provide seed funding (equity or equity-free), capacity building, and advisors, mentors to help you grow your business.

Our recommendation: Make sure to check the team advising you, check the equity share (if any) they will take. What does their programme of support look like? Is it remote or online? What would be the time commitment from your side?

Do they have a co-working space with a mentors easily accessible? Which expertise do they bring that you as a start-up don’t have and need during this incubation period?

Accelerators:

Our favourite! The humble accelerator. Organisations designed to invest early in many start-ups, helping founders learn quickly, and connecting them to strategic partners and follow-on funders to drive further scale.

This is money coming from private or public organisations working exclusively with start-ups at various stages, but typically post-MVP. Accelerators are the natural next step for an entrepreneur after an incubator in that they expedite the growth of existing businesses.

We’re not biased here, but some notable pan african accelerators are The Baobab Network or our friends at Startup BootCamp.

Accelerators typically provide pre-seed to seed funding in exchange for equity in your business. Aside from the money, accelerators should provide capacity building, advisors, mentors to help you grow and accelerate your business.

Our recommendation: Make sure to check the accelerators and the value they can provide to your team at the stage you are in. Check the equity share they want to take, the amount of funding they provide, the sectors they operate in, their regions of focus, their subject matter expertise.

And ask the tough questions. What’s their track record? What success stories have they had? Try and speak to their portfolio companies and get a feel of the culture from other entrepreneurs they’ve worked with.

Angel Investors: