Towards A Business Model For Funding African Startups

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Towards A Business Model For Funding African Startups[1]

By Brian Laung Aoaeh

 

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Abstract: At the same time that Africa is experiencing a boom in entrepreneurship amidst the proliferation of Internet and mobile technology African startups face the impediment of inadequate access to seed and early stage venture capital to fund their growth. A number of converging factors in other parts of the world present the contours of a possible solution to this problem. This blog post describes the problem in some detail, discusses the factors that point to a possible solution, and studies some examples of how an analogous problem is being solved by entrepreneurs, investors and policy makers in other parts of the world. It ends by attempting to fashion an outline of how current ideas might be combined in order to solve the problem specifically for African technology startups.[2]

 

Introduction

More than ever before, African startup entrepreneurs have the opportunity to conceive and build technology-enabled startups that can compete at global scale. Internet, cloud-computing, and mobile computing technologies have made it infinitely easier and less expensive to build businesses that have the potential to become enormously successful by gathering users and customers from all over the world, and generating enormous revenues and profits in the process.

 

However unlike their counterparts in the United States and other parts of the world with more mature startup ecosystems, African startups have a much more difficult time raising seed funding and subsequent follow-on equity financing through venture capital. Even those African startups that successfully raise seed funding might find that they encounter a “follow-on equity financing crunch” which can slow things down, or lead to fatal consequences. To get a sense of the magnitude of this problem we can refer to recent research by CB Insights[3] on the venture capital industry and startups in the United States, which finds that 60% of seed-funded startups fail to raise follow-on financing.

 

In order to avoid confusion later lets define a few terms[4] before we proceed.

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