Alternative Funding Options for Startups In Africa

While several entrepreneurs fund their business via bootstrapping, some choose to explore other avenues, including Venture Capital funding. An influx of VC funding into African startups has exploded over the past couple of years, with values reaching $2 billion in 2019 compared to a paltry $400 million in 2015.

Since adequate financing dramatically impacts the success of a startup, this decision requires founders to perform extensive due diligence to evaluate all implications of their chosen financing route fully. Factors to consider include funding amount, the applicable venture stage, the company’s mission and values, and the investor’s alignment with said values.

In this article, we explore three potential funding options for your startup.

Venture Capital

Venture Capital (VC) is a form of Private Equity financing provided by VC firms to startup companies and small businesses exhibiting growth potential in exchange for an equity stake in the company. Alongside the financial investment, VC firms provide companies with business expertise to ensure the business runs at the highest possible standards, which is a bonus. Founders consider this funding option in later rounds, typically from Series A onwards.

Given VC firms’ level of exposure and connectedness, they can provide mentorship, introduce their portfolio companies to potential customers, partners, and industry professionals to enable continued growth. Companies like Boost in Ghana and South Africa have previously been able to secure funding and immensely benefit from their VC’s injected capital and extensive local experience and expertise.

However, an important point to note when accepting venture capital is giving up equity stake to investors in exchange for the money. Thus, founders must ensure that the investors support their mission and are aligned with the company’s values as the investors now contribute to the company's strategic and operational direction.

Angel Investors

Angel Investors are high-net-worth individuals who provide capital to startups receiving equity or convertible debt in exchange for their investment. This alternative form of investing happens with early-stage companies in Seed financing rounds and sometimes in Series A with early-stage companies. Hence, angel funding amounts are considerably smaller than Venture funding.

Like VCs, Angel Investors provide an influx of capital and business expertise and technical assistance to startups lacking the required technical capabilities.

Consequently, a notable drawback of accepting angel investment is surrendering some of your decision-making power to the investors, making it essential for founders and investors to be directionally aligned. Additionally, it can take an extended period to find a suitable Angel Investor. Africa news publication details how angel investment is rapidly on the rise in Africa.

Loans

There are various forms of accessible loans to startups depending on the nature and growth stage of the company, with the most notable difference from other funding options is not having to give up an equity stake.

Some types of loan available to startups include personal loans, small business loans and a persona line of credit.

Personal loans can be secured, unsecured, fixed or variable rate and have their shares of drawbacks. The most notable is seizing the collateral if the borrower is unable to make their monthly instalment. Depending on the lender, the borrower can incur a prepayment penalty on early payments towards the loan to make up for the lost interest.

Raising money can be a very challenging step in growing and expanding businesses, but choosing suitable funding sources is beneficial in the long run. It is critical to note that while one funding source might work for one company, more often than not, the needs and different stages of growth of the businesses might not be the same.

Small starter developed a list of top entrepreneurs in the continent to showcase how other entrepreneurs have used various fund sources in growing their businesses and the different means they used to raise capital.

How can FasterCapital help you in securing the capital you need?

Spurt! and FasterCapital are collaborating to focus on entrepreneurs in Micro, Small and Medium-sized enterprises across Africa to provide them with the resources they need to thrive and realize their total growth and operational potential.

FasterCapital has partnered with Spurt! to provide funding to startups and small businesses worldwide and offer support and expertise in technical development, sales, marketing, and financing. Entrepreneurs can benefit from any of the following programs:

· Raising capital:

With a success rate of 92%, FasterCapital helps startups raise money by linking founders with a dedicated team of fundraising experts in a cost-sharing plan where FasterCapital caters for half cost of sustaining the team while founders cater for the rest. If things don’t work out, you get a full refund.

· Getting a technical co-founder:

The Technical Cofounder program helps founders build their product from A to Z, apply technological enhancements, and fund 50% of the technical development process.

· Growing your startup:

The Growth and Scaling program helps founders enter new and global markets, increase sales and revenues and reach new customers.

· The idea to product:

First-time entrepreneurs get help in starting their business and building their products. FasterCapital also helps in creating and improving pitch decks, business plans, and financial forecasts.

Read more about FasterCapital’s program here.