Prior to raising $36.6 in total funding, Kuda Bank was a startup needing to be incubated and grabbing a $15,000 pre-seed lifeline from Startupbootcamp in 2018. Its product was in the development stage for nearly a year before it hit the market in 2019.
Today, Kuda’s CEO Babs Ogundeyi tells BusinessDay he is building a billion-dollar business. The company has closed much funding including a $10 million seed round, the largest of that level by any startup in Africa. Its last funding was a $25 million Series A closed in March 2021.
In an economic environment as uncertain as Nigeria, it takes significant skills to spot a startup that is going to succeed from the early stage.
“It wasn’t until after five years of angel investing I truly understood how much they sacrifice by choosing to work with early-stage companies. It is gruesome, thankless work,” Iyinoluwa Aboyeji, Co-founder and CEO of Future Africa said.
In the past year, several venture arms have recruited new scouts specifically to help them identify early-stage startups in Africa that are growth-focused and have the potential of going global.
Apart from scouts, new venture firms have come into the scene all claiming to prioritise startups at the early stage. Early-stage companies face funding challenges because they are often perceived as very risky assets.
An estimated 30 percent of all venture-funded companies fail completely. Another 30 percent return their initial investment. The remainder produces positive returns for investors. Often, getting funded is not a guarantee that a startup would be a success. About 70 percent of startups fail around 20 months after funding.
Read Also: 3 things we learnt from Future Africa’s funding of 13 African startups in 2021
Briter Bridges, a market insight provider, explained that the startup capital needed by companies to cover costs before they generate any revenues is usually hard to come by and investors tend to exercise caution as companies often do not have enough data and evidence to prove traction.
“There’s a massive early-stage funding gap for African startups. All the data we were looking at pointed to the fact that work needed to be done to bridge that gap,” Aboyeji said.
Future Africa has invested in 47 startups since 2020 it started operation as a venture fund. Microtraction, an early-stage venture capital fund founded in 2017, has invested in 15 startups.
What happens in the early stage of a startup’s life?
Typically, at the early stage, the aspects of the company are still in development although there may be evidence of progress. The management team is incomplete, the product or service is in development, or if developed is in the testing stage and has not yet gone to market on a commercialised basis. For example, Kuda Bank was in beta for nearly one year before it was launched in 2019.
Many big tech companies use the testing model as well. For example, Facebook is testing its Live Audio Rooms service in Taiwan.
Funds available for early-stage startups
Early-stage startups are the primary targets of angel investors. Angel investors refer to high net worth individuals who provide seed capital for scalable, high growth companies.
There are two types of angel groups, angel networks and angel funds. Angel networks are groups whose members participate actively in the identification, screening, and vetting of the investment opportunities, who make their own investment decisions for each investment opportunity, and who invest as a group through a shared investment vehicle. An angel fund is when the members of the group invest based on established criteria and guidelines and primarily utilise the support of third parties to identify, screen and complete the due diligence on the opportunity.
“Angel investors support early-stage startups because they invest mostly from their personal funds and that limits the amount they can invest,” Collins Onuegbu, executive vice-chairman, Signal Alliance and director at Lagos Angels Network (LAN) said.
There are smaller venture funds like Microtraction, First Check and Future Africa now targeting early-stage startups. Most of these cater to local investors who usually invest small amounts.
Perhaps this is a low-risk approach that local VCs employ to position themselves to get the best returns on investments. Indeed, being a Nigerian VC itself, Microtraction invests $25,000 for 7 percent equity in early-stage African startups.
FirstCheck, which focuses especially on early-stage women-led startups, also invests around $25,000 in funding.
Early-stage startups are risky bets for any investors. Nevertheless, many investors would prefer to get in early rather than later. Investing early in startups that are potential winners would mean more returns when the valuation starts to rise.
Shitala Sonar, a startup expert says that the most successful startups have founders with the right mix of skills and experience.
“Founders who are good startup CEOs should be able to design and build a product, but they should also know how to sell it, where to get the money for it, how to attract and retain great talent, which investors to approach, and what to do when their original plan no longer makes sense. They must be able to anticipate and respond quickly to unexpected challenges — and even turn apparent liabilities into assets,” Sonar wrote.
