How African Startups can see to Better Series A Rounds

How African Startups can see to Better Series A Rounds

The cost of starting a business from scratch is high. A startup must budget for a wide range of expenses in its early phases, including product development and testing, personnel salaries, equipment, legal and registration fees, and marketing, to mention a few.

The typical startup does not immediately have access to money or have angel investors pounding on their door. To expand and, essentially, survive, the founders must actively seek outside investment if they can’t bootstrap their business. Since even companies with access to significant amounts of funding can fail, a business with few or no financial sources is likely to have difficulties.

Here’s where several funding rounds come into play. Startups can raise money from outside investment thanks to series A funding. Startups sometimes utilize the money they receive from Series A fundraising to expand, paying for things like product development and hiring. Investors in Series A typically obtain “Series A preferred stock” in exchange for their investment.

The rise in startup valuation in Africa has been mostly attributed to rising consumer spending and growing internet use in the continent. Startups are prepared to make sure they work hard enough to secure high money as venture capitalist investment operations continue to flourish in Africa. The Series A round, one of the most crucial for early-stage firms as it influences growth and expansion.

The Process

Small investors provide the initial seed money that start-up businesses need to get going. For founders, cash from friends and family, angel investors, and other small investors looking to get in on a potentially lucrative new opportunity can all provide seed funding. Another method for founders to receive seed fund is through crowdfunding.

Seed Fund: A Necessary Hurdle for Startups

The amount of cash and the type of ownership or involvement the investor receives are the primary distinctions between seed capital and Series A funding. Smaller sums of money, such as tens or hundreds of thousands of dollars, will normally be used as seed capital, whereas millions of dollars will typically be used as Series A financing.

Well-known venture capital (VC) and private equity (PE) firms that manage multi-billion dollar portfolios of several investments in start-up and early-stage businesses frequently provide series A financing. A startup may not have enough income, if any, to grow after establishing itself with a workable product or business plan. It will then contact VC or PE companies for more money or be approached by them.

Series A in Africa

Because post-seed startups are in an uncertain stage regarding product and market fit, investors tend to steer clear of them. It is simpler for an investor to take a small risk on pre-seed and seed stage startups or to bet big on strong, rapidly expanding businesses.

Although there isn’t a set time when startups should raise a Series A, most will do it during the first five years. Digest Africa transactions data show that, on average, seed rounds take 414 days, or little under 1 year and 2 months, from the time a business closes its pre-seed funding. The median round size is $150,000, and the average seed round is $450,000. This is a multiple of two.

On the other hand, Series As takes on average 455 days to close. Series A rounds have a mean of nearly $7 million which is more than twice the median at $3 million. Per The Big Deal, in 2021, Series A deals in Africa ranged from $225,000 to $200 million, while the median deal size was $8.3 million.

Raising the Preferred Series A

Startups are inspired to raise more money in the following round after raising a modest seed round. They will want to raise adequate series A funding in order to hit product development milestones and draw in fresh talent. The majority of the investors in this round of financing are venture capitalists, and they are ready to go through the due diligence and valuation process before deciding whether or not to invest.

A startup’s valuation is a crucial component of series A financing. Companies seeking series A fund, as opposed to startups in the seed stage, are able to present more information that may be utilized to make knowledgeable investment decisions.

The goals of valuation in series A fundraising include the identification and assessment of progress made by a company using its seed capital, as well as the efficiency of its management team. Additionally, the valuation process demonstrates how well a company and its management use the available resources to earn profits in the future.

Poor series A rounds have been common in Africa as startups tend to fail to develop interest among investors as part of a Series A funding effort. For startups, demonstrating strong minimum viable product (MVP) is key to pushing investors to invest. Startups are inherently chaotic and investors want to know the risk and potential reward from investments.

Investors are more likely to support growth when a product or service shows the capacity to have sufficient features for consumers to buy the product, making it easier for the startup to market it, and possesses some sort of feedback mechanism wherein users would be able to send their feedback about the product.

  • Join an accelerator
  • Build a network
  • Scale your product/service
  • Go for the series A.