In 2024, Africa’s tech ecosystem has found itself talking a lot about capital and funding. After the excitement of 2020 and 2021, a global correction also affected the tech ecosystem, with some foreign investors retreating from the continent. It has allowed local investors with deeper knowledge of the terrain to lead the way. 
It has also led to deeper conversations on what early-stage startups need, more focus on unit economics and sustainability and the differing capital opportunities available to founders. - Olumuyiwa (Writer & Contributor, African Pre-seed Podcast).  

In conversation with Djiba Diallo, Senior Fintech Advisor at Ecobank Transational, Steve Biko, CEO of Zanifu and Adreata Muforo, Partner at TLCom Capital, and moderated by Loraine Achar, Investment Manager at early-stage investor 54 Collective, the types of capital early-stage founders need was the focus of a recent African Pre-seed Podcast LIVE recording in Nairobi (Full Episode drops 30th September 2024 😉).

Here are four key takeaways from that conversation:

💸 Should you bootstrap or raise venture capital?

The answer ultimately comes down to the ambition of the founder, says Andreata. Founders must define what success means for them before they jump on the venture train. 

“Venture or private equity will take you to a completely different destination than if you either bootstrap or get debt and continue to have more ownership of the business.”

If one definition of success is ownership and the flexibility to make your own decisions without the pressure of delivering returns to VCs in 7-10 years, then bootstrapping might just be for you. While this is of course a simple way of framing the decision, it will always come down to the founder’s definition of success.

Any path you choose will have its fair share of challenges. 

Here’s how Steve describes the early days: “So we would actually go and find my aunt and my friend and my colleagues, borrow cash onto our balance sheet and lend it, and we have to make a margin on top of that. It was very challenging when you start, because, you are using your personal reputation and, people are trusting you with capital.”

🚨 Watch out for bells and whistles 

Grants are a great, non-dilutive way to raise critical funding for business or experimenting with new ideas. Many startups are often on the grant circuit, pitching and hoping to land some of these grants.

While grants will not ask you to 20x their capital in 10 years, they’ll definitely have expectations, aka bells and whistles. “If they're taking you off strategy, you shouldn't take it. Sometimes they're also pretty burdensome in terms of reporting.” 

It’s not all doom and gloom. Many startups have leveraged grants to power innovation. Just keep an eye out and ensure you understand the expectations first! Due diligence from a reporting standpoint is its own cost.

🤩 Aligning incentives is critical 

In a February 2023 APS newsletter, I argued that founders must go look out for investors whose success metric matches theirs. Here’s what I wrote at the time:

“For first-time founders, there’s nothing that beats having an investor that can hold your hand as you figure out complex problems. Care and support can be as granular as getting critical feedback on a product.”

And here’s Steve: 

“If you're talking to debt investors, you have to understand how much have they told the investors what's their hurdle rate? How much are they going to make annually? 

What's their time horizon? What kind of risk appetite do they have?

So incentives are everything. We're in the money business. Everybody here earns an income, and whoever is paying you is making money somehow. Right?”

📚 What we've been reading