WeeTracker, a media firm focused on the African entrepreneurship space, noted in a recent report that African startups raised a record $1.34 billion in venture capital funding in 2019.
That figure amounts to approximately 46.3% compound annual growth rate (CAGR) given that in 2018, African VC funding reached $725.6 million.
But despite the tremendous growth rate in the last few years, there still remains a large funding gap that demands attention.
The biggest percentage of funds raised by African startups originates from investors outside the continent. One reason is that there aren’t sufficient local angel investors to support these startups. Another reason is based on the argument that the technology ecosystem in Africa is not that advanced compared to, say, Silicon Valley.
This means that African startups continue to struggle to get early-stage capital given the fact that venture capital funding is typically structured towards growth.
For example, of $133.5 million that Nigerian startups raised in 2018, only $1.5 million came from the Lagos Angel Network, Africa’s largest angel network. However, Nigeria still attracts almost half of African venture capital.
At the 2018 Africa Early Stage Investor Summit, angel investors in the continent raised concerns about the lack of exit avenues in the African startup investment space.
“It is easy to invest money in Africa right now, but it is hard to make money in investing here. The key is to be exit centric — we only invest in entrepreneurs who are focusing on building sustainable businesses that can exit,” Ben White, the CEO of Venture Capital for Africa (VC4A) said.
Early-stage liquidity challenges
There are only three channels that allow investors to exit and be able to make money: acquisitions, IPOs and mergers. But each of these avenues requires a company to reach a certain level of growth.
Since Africa is yet to reach optimum technology progress, a startup would take much longer to reach such a level compared to developed markets.
That longer period taken has been scaring investors and other high net worth individuals from investing in the continent. The existence of more stable opportunities investment elsewhere supports this.
Developing a liquid market turns out to be a good way of convincing investors to fund early-stage startups.
Yale Bademosi, a Binance Labs director and founder of Nigeria-based angel investment firm Microtraction, says that creating secondary markets in Africa can allow recycling of funds within the ecosystem. In return, investors would find liquidity in this.
The challenge, however, is that the capital market structure in Africa has very little impact on creating secondary markets.
Blockchain fundraising options
For this reason, blockchain is touted to help solve the liquidity problem. The disruptive technology has helped usher in new and convenient ways of raising funds whether it is through initial coin offering (ICO), security token offering (STO) or Initial Exchange Offering (IEO).
STO is similar to an ICO—a startup offers tokens to the public through crowdfunding, in which investors purchase tokens built on a blockchain. IEO is also similar except that a cryptocurrency exchange such as Binance facilitates the token sale rather than the startup doing it themselves.
Blockchain is an essential tool in widening the market for startups in Africa. It enables companies to issue security tokens or hybrid tokens in exchange for funding. In addition, these tokens can be traded on exchanges providing liquidity for investors.
There are several companies building the infrastructure to help startups in Africa raise early-stage capital in exchange for security tokens. Examples include Bloomio, Securitize, and Habor.
“Blockchain-powered equity crowdfunding can open up access to emerging tech startup hubs like Nigeria, South Africa and Kenya to a new set of investors, including anyone interested in investing in promising projects, regardless of their financial capability”, said Bloomio’s CEO Maxim Lyadvinsky.
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