Why African Startups Must See Funding as a Means Rather than an End
Securing funding is a significant achievement worthy of recognition, but it should be viewed as the starting point rather than the end goal. The actions taken after obtaining investments are more crucial than the funds raised.
The growth of internet access has led to a thriving startup ecosystem in Africa. Kenya, Nigeria, Egypt, and South Africa are currently the key hubs for startups on the continent. These countries, known as ‘the big four,’ have gained global recognition for their impressive tech ecosystems. This has positioned Africa prominently on the global tech stage.
The increased availability of mobile connectivity in Africa has played a crucial role in enabling the adoption of digital solutions and driving innovation. Within the tech industry, startups are emerging across various sub-sectors including Fintech, Climatetech, Agritech, Healthtech, Edtech, and Insurtech. By utilizing innovative technologies like IoT, AI, machine learning, and blockchain, they are able to tackle the specific and diverse challenges encountered in Africa.
These start-ups are using local resources and expertise to create solutions tailored to the specific challenges faced in Africa. Through innovative technologies, they are addressing various issues such as access to affordable solar energy and enhancing agricultural productivity. Moreover, these initiatives are empowering the youth by generating employment opportunities and fostering entrepreneurship within the continent.
Funding as a means to do more
The success and sustainability of these start-ups rely not only on their own efforts but also on the support of investors. Running out of funds or failing to secure capital are common reasons for start-up failures. Therefore, having sufficient financial resources to invest in the growth and development of the business is crucial for its success.
African startups, like their counterparts in other regions, commonly seek funding to support their expansion, operational scaling, and market entry. When startups secure funding, they can allocate those resources toward optimizing their operations. This comprises funding to recruit talent, develop products, expand the customer base, invest in marketing, improve infrastructure, and explore new markets.
VCs are interested in start-ups with the capacity to produce a steady stream of cash or a viable strategy to attain profitability. According to Clive Butkow, the CEO of Kalon Venture Partners, “If you get to free cash flow, or you have a path to profitability, there will be another cheque down the line for you, because that is what VCs are looking for.” The following are examples of start-ups using secured funds as a means.
Maholla recently acquired $1.5 million in seed capital to support the development of its data platform and retail-agnostic rewards system. South Africa Cybersecurity start-up, Port443 Secures Undisclosed Funding for Expansion. NOMBA, a Nigerian fintech startup, formerly Kudi, has today announced raising $30 million to provide tailored-payment services to businesses.
Initial funding rounds provide resources for new companies to develop their products or services, including equipment, office space, and development fees. This enhances their chances of success, revenue generation, and sustainable growth.
Prioritizing recognition over vision
The purpose of funding for start-ups is clear: to achieve the goals set during the pitch. Not meeting these goals can have adverse effects on investor commitment, potentially resulting in withdrawal, as witnessed earlier this year.
Misplaced priorities are often the cause of long-term failure for many startups. This raises the question: Does funding from investors introduce a new objective for entrepreneurs? Are they now more focused on achieving a high valuation to attract investors, rather than prioritizing the development of a sustainable long-term business?
The pursuit of building a unicorn, seen as the ultimate achievement, can lead to a mindset of prioritizing fast growth over the long-term health of the company. This trend indicates that some founders may be inclined to make deals and compromises that ultimately hinder the business’s sustainability and success in the future.
Founders must adopt a more sustainable approach to business growth, where the focus goes beyond just attracting a high valuation. It is crucial to place a greater emphasis on maintaining momentum and sustainable progress even after securing investment.
Undoubtedly, the personal ego and competitive instinct have a way of clouding most founders’ vision. The desire to outperform competitors and establish their worth in the market often fuels their motivation and determination.
Entrepreneurs aim to build businesses that are valued at millions of dollars, not only for personal satisfaction but also for public recognition. That being said, it is crucial to ensure that the value created through time, effort, and traction is appropriately acknowledged and recognized.
In practice, the valuation of a venture is derived from a negotiated figure that relies on forecasts. Which are essentially educated guesses based on compelling insights and experience. Thus, it is crucial to differentiate between a valuation on paper and the tangible success of selling a company or generating substantial profits.
The means should not be the end
Undeniably, external investment is a valuable means of accessing resources that may not be available through existing cash flow alone. However, it should not be viewed as the ultimate objective, as funding alone does not ensure long-term success or sustainability.
Funding serves as a means to accomplish specific milestones in accordance with the company’s vision, but it should not become the sole focus. The primary objective of a startup should be to build a sustainable business that generates revenue and provides value to customers. Raising money, in itself, may not be fulfilling if it does not contribute to the overall goal of executing the startup’s vision.
Establishing a proven business model is indeed a crucial step toward fulfillment. A business becomes proven when its product or service effectively addresses customer needs and is widely adopted. This aspect of a startup’s success is what attracts the interest and investment of investors. The ability to provide a valuable solution to customers is a key factor in making a startup compelling in the eyes of investors.
Once a startup has achieved a proven business model and demonstrated its value to customers, it can seek further funding to progress toward its vision. The availability of funds and the stage of funding, such as series A, B, C, or D, determine the startup’s ability to take the next steps. Eventually, many startups aim to exit the market, either through an acquisition or by growing to a point where they can acquire other companies themselves.
Indeed, funding should be viewed as a means to an end rather than the ultimate goal. For startups aiming to disrupt a specific niche in the tech ecosystem, their satisfaction lies in realizing their vision and making a substantial impact in their industry. While gaining recognition and securing funding may be important milestones along the way, true fulfillment comes from achieving long-term goals and creating meaningful change, which extends far beyond the realm of funding.
In conclusion, securing funding is vital for African startups, providing them with resources and opportunities to accelerate growth and ensure long-term success. Nevertheless, it is important to recognize that securing funding is not the end goal but rather the start of a new chapter in their journey toward achieving their vision.