On the 19th of December, 2016 news filtered around town that Paystack, Nigeria`s hottest and emerging fin-tech startup has raised $1.3M Seed investment from both international and homegrown venture capitalists, notable among the local investors are Spark.ng founded by Jason Njoku who invested in flourishing businesses such as hotels.ng, foto.com.ng, drinks.ng with Olumide Soyombo, CEO Leadpath . Other investors include Tencent, Comcast Ventures and Singularity Investments, with participation from M&S Partners, Tokyo Founders Fund, Blue Rinc Capital, Pave Investments, KIBS-CFY Partners, Michael Siebel, Justin Kan, Leonard Stiegeler and a number of Angels.
The company, founded by Shola Akinlade and Ezra Olubi, was the first Nigerian tech company to be accepted into the world-famous Y Combinator progam, based in Silicon Valley USA. Since then, having taken Paystack through Private beta, and securing $120,000 early-stage investment from Y Combinator, Akinlade [CEO] and Olubi [CTO] have quietly been building the company and working to secure this Seed investment round.
It is generally believed that majority of African start-up still don’t understand how the venture capitalist funding works, though every business seems to think that over time investors would come in to grow its business or idea.
To make this dictate easy we have tried to explore a little bit of venture capitalist and venture capital financing in Africa. Venture capital is a type of funding for a new or growing business. It usually comes from venture capital firms that specialize in building high risk financial portfolios. With a venture capital, the firm gives funding to the startup company in exchange for equity in the startup. Almost every ambitious entrepreneur would have at one time heard the word venture capital and capitalist. Venture capital is the funds set aside to be invested in early startup while venture capitalist is the term representing the investor or the firm. Sometimes they are used interchangeably. Venture funding is fast gaining ground in Africa with the incursion of Silicon valley, UK and African based venture funds. In our previous article 17 ways to raise funds for your business in Africa, we highlighted firms like EchoVC, Sawari Capital,88MPH, Investment AB Kinnevic as one of the major venture capitalist firm investing in Africa.
Unicorn is a word coined in silicon valley to describe firms that have crossed the $1B valuation line. Consider JUMIA the first unicorn start-up company out of Africa, this happened after an $83 million investment from insurance company AXA . Company valuation always rise after each round of investment depending on the situation on ground. Over time, different startup in Africa has continue to raise funds from silicon valley and other part of the world to grow their businesses. Startups raised $27.3 billion globally in 2015, down from 30% from the previous quarter, according to a research firm CB Insights. Last year, startups in African brought in more than $185.7 million, according to a report from Disrupt Africa. Kenyan startups in particular saw their best year in fund-raising since 2010. And in 2015, they raised over $47.4 million , according to the same publication. The incursion and growth of the startup ecosystem as displayed by VC4africa indicated that Nigeria, Kenya and South-Africa has the highest growing plethora in Africa.
In general terms, venture capital investment occurs after an initial seed funding round, an example of such is the TEEP (Tony Elumelu Entrepreneurship Program) where participant are given a seed investment of $10,000 to kickstart their businesses. This first round of institutional venture capital to fund growth is called the Series A round.
Venture capitalists provide this financing in the interest of generating a return through an eventual “exit” event, such as the company selling shares to the public for the first time in an Initial public offering (IPO) or doing a merger and acquisition (also known as a “trade sale”) of the company.
In addition to angel investing, equity crowdfunding and other seed investments, the most common and attractive investment is venture capital this is due to the fact that no previous history is actually required most of the time and its always venture firms investing in teams. One thing that is very common is that they become part of the shareholders and also ensure they are in lieu of significant control in the company. Start Up like Konga, M-kopa, Jumia, Andela, BitPesa, Yaoota, Wefarm and Giraffe have gone through this process to be able to create such influence and acquire more markets on the African continent. During the course of the funding and after, venture capitalist provide strategic advisory, marketing strategies, growth strategies and other value adding attribute that would help each start-up grow.
VC firms also protect themselves from risk by co-investing with other firms. Typically, there will be a “lead” investor and several “followers.” It is the exception, not the rule, for one VC to finance an individual company entirely. Rather, venture firms prefer to have two or three groups involved in most stages of financing. Such relationships provide further portfolio diversification—that is, the ability to invest in more deals per dollar of invested capital. Example of such are other investors that invested alongside its lead investor.
Generally there are different stages of venture capital investment, most times the exit is the most important aspect to any venture capital. Exit can be inform of sale of company at higher value, IPO or merger with other companies. Below we have highlighted different stages of investing.
1. Seed Investment
This is always the first round of official investment for a start up. Even though Paystack had previously received funding of around $120,000 from Y-combinator, its major seed funding is always adduced to be the recent raising of 1.3M. Seed funding is expected to help a founder establish a direction and focus for his/her business. Paystack has reaffirmed that the funds raised would be used in growing their engineering team, company sales and marketing efforts. Seed stage investment is expected to establish a start-up as a growing concern and better position it for early growth. The major expectation of seed stage investment is for Product definition, market research, customer identification, market segmentation, stratification and team building.
2. Series A Investment
There are times seed stage does not require funding, in this kind of situation the venture proceed to raise series A. Almost all times, the company already has a defined idea, commercialized and has started bringing in revenue into the venture. Series A investment is expected to help bolster distribution and open new markets. Examples of such organization that has raised Series A are Nomanini ($600k) and Inventure ($10M).
3. Series B Investment
By Series B investment it means the start-up is already an established business with structure or on its way into becoming an established business. The company is well managed with good advertisement budget to its war chest. Example of companies that have raised such funding in Africa include Zoona ($15M), Paga ($13M), Andela ($24M), BBOXX($3M). At this stage there would also be a well documented customer base that are purchasing the product. With scaling no longer discussed, the main focus at this stage include acquisition, expansion and globalization.
4. Series C Investment and Beyond
Only major companies get to this stage of funds raising. This is a very matured stage, there is no limit to the number of investment rounds a startup can pursue depending on its business model and its time to turn profit. Example of an African company that has crossed this milestone is BBOXX($20M)