Investment in African startups by venture capitalists has seen tremendous growth in recent years.
WeeTracker in its Venture Investments Report 2018 reported a 300 percent increase in the total funding of startups in Africa in 2018 as compared to 2017. The number of deals also increased by 127 percent in the same period.
Kenya was ranked by the same report as the third favourite investment destination in Africa, behind South Africa and Nigeria.
While the statistics indicate an increased appetite for investment in African startups, most entrepreneurs at the various stages of the growth of their businesses still cite funding as one of the hurdles. The funding stages span from the conceptual point, where the entrepreneur is developing the idea, to the exit stage where the startup is offered to the public through an IPO or sold to a strategic buyer.
Having worked with numerous startups at various stages of financing, a few initiatives can be employed to mitigate common challenges that affect startups’ readiness for financing.
The first challenge is that some founders do not have an articulate business case. Founders should be able to clearly state their business proposition.
This can be achieved by having a regularly updated business plan that outlines the business, sales and marketing strategies and financial projections. The business plan is a good tool to justify a startup’s financial needs.
Secondly, most startups do not effectively manage their finances. Prudent management of finances will not only mean more funds are applied where most needed, but also point towards proper application of the money being sought from the investors.
Thirdly, startups should have proper record-keeping. These records include the constitution documents, records on ownership and leadership, the financial statements, contracts with service providers and evidence of assets and liabilities.
Potential investors usually conduct a due diligence on a startup before making an investment. It therefore helps that records can be retrieved with ease.
Fourthly, startups should ensure they are compliant with applicable laws.
Over a period of time, lack of compliance with legal requirements builds up penalties, which are a liability and therefore affect the valuation of the business.
Lastly, there are several startup incubation centres and accelerators that provide a support system for entrepreneurs. Founders of a startup may benefit immensely from such initiatives.
These are just but a few tactics that founders can exploit to prepare a startup for funding.
The objective is to create value and keep documentary evidence of the business case.
The writer is partner, MMC Africa Law.