STARTUP FINANCING: SOURCES AND WHY INNOVATION ECOSYSTEMS MATTER

STARTUP FINANCING: SOURCES AND WHY INNOVATION ECOSYSTEMS MATTER

There is no shortage of good solutions to the problems that plague Uganda, but there is a challenge with finding financial support to fund these solutions until they can survive on their feet.

African Tech Startups Funding Report 2020 states that the year 2020 was a record-breaking one for African tech startups, with 397 companies securing $701.5 million worth of investment. FinTech remained the most dominant sector with its investors growing considerably too. Nigeria, Egypt, South Africa and even Uganda’s own neighbor, Kenya, scooped the biggest portions. 

In the meantime, Ugandan startups akin to the proverbial neglected stepchild, continue to receive crumbs of this investment cake.

Martin Tumusiime, an entrepreneur, has done his fair share of pitching on platforms like Pitch Thursday that is organised by The Innovation Village under The Kampala Angel Investment Network (KAIN). The entrepreneur conceived his idea in 2015 and decided to solve Kampala’s enormous waste disposal problem with a tech innovation that links clients to waste collection companies. 

Already a pressing problem that the ever-growing urban jungle cannot neglect, one would think that with a solution like Yo-Waste, the startup, would be swimming in an abundance of funds. 

Its founder confesses that it has been an uphill climb. 

“First of all, to get investment for your startup, investors request for an impressive financial statement depicting revenue coming into the startup. If your revenue is not promising, then investors categorize you as a failing startup devoid of potential. This means that they will not risk their funding on you,” Tumusiime says. 

This paradox is equally echoed in the Partech Africa Report 2020, which indicates that while African tech start-ups raised a total of $1.43 Billion in 359 equity funding rounds last year, Uganda was one of the countries that raised the least amount of money, amounting to a measly $11.3 million. Kenya raked in $305 million in the same year.

Tumusiime says the cryptic and highly technical language used in investment funding negotiations and documentation is a hinderance to funding. Regular entrepreneurs who have no legal background need to strike deals armed with a business lawyer by their side. For these startups, it means legal costs that do not come cheap.

It is for such reasons that another entrepreneur has decided to pause the aggressive search for funds and try to concentrate on other aspects of the business. Robert Acidri launched Attravibe in 2016. Its goal was to spare university students the costs of academic literature through a platform where they can download and share it. This brilliant idea was expected to be a magnet for funding but this is yet to happen. 

“In this ecosystem, there are very few investors and yet there are so many startups competing,” he says. To get funded, Acidri shares, one must invest in visibility by building a referral network. The cofounder of Attravibe has settled for dipping into his own pockets to fund this solution.

In light of all of this, one wonders why investment funders have a very low appetite for investing in the most entrepreneurial country in the world. 

Kenneth Legesi is the chief executive officer of Ortus Africa Capital. He is also the co-Founder of The 97 Fund and Kampala Angel Investment Network (KAIN), ventures run under The Innovation Village.  

Legesi says the countries attracting a large share of the funds including Kenya, Egypt, Nigeria and South Africa also possess the larger economies of Africa representing just under 50 per cent of Africa’s Gross Domestic Product (GDP). This means that there is a market opportunity for most investors. In addition, these countries have more developed and mature startup ecosystems. This in every way relates to factors such as their human capital, attracting funding, mentors, advisory support, regulatory framework, education, skills and culture.

On the other hand, Uganda has been lauded for its regulatory landscape with investors being able to access foreign currency easily, repatriate profits and own local companies. These good attributes are, however, overshadowed by the tax and license applications that complicate business. These factors have made Uganda one of the more difficult countries to do business in, placing it as 150th out of 189 countries in the World Bank’s Ease of Doing Business rankings and 5th out of the 11 countries in East Africa. 

John Ndabarasa has worked as a startup engagement and relationship associate at International Trade Center on the Netherlands Trust Fund/IV project for a couple of years. One of the key objectives of the entity is to provide linkages between startups to investment. In his experience, it is neither too difficult nor too easy to get funding for startups. The crux of the matter is that often there is a general mismatch between startup ideas and expectations of potential funders.  Startups at the ideation stage barely receive money because they are yet to generate revenue. Experts often say money is not everything because many startups have got money and still failed into oblivion. In his opinion, what startups need to address is the glaring skills gap.

“If you know how to craft a business model and curve out a market segment, you will not need to run after investors,” Ndabarasa advises. To him, there is a disturbing misalignment of priorities by entrepreneurs that has resulted into what he terms as “Grant-preneurs.” Instead of pouring their energies on working on their business models and value propositions, these grant-preneurs take an idea and spend the better part of their entrepreneurial life scouring the local and international scene for funds. Each grant they receive is absorbed by the startup and depleted before they are back on the market looking for the next grant.

While entrepreneurs need their business fundamentals in order, still the need for funding at an early stage cannot be overstated. Some startups have beaten these odds to attain such funding. 

One such startup is Mobile Scan Solutions Uganda Limited (M-Scan) which ensures pregnant women in resource-limited settings have access to affordable ultrasound services that can help in early detection of risk factors of maternal mortality and reduce the maternal mortality rate.  

The startup emerged the best innovation on the African Continent during JICA’s NINJA COVID-19 Response and Recovery Business Challenge and just won a whopping $30,000.

At the time of this win, the startup was at the concept level. It sounds like a myth to win at that stage and yet when asked about how they managed to convince investors, Innocent Menyo the cofounder simply says, “The burden of the problem being addressed is large, so funders easily bought in.” At the moment the funding will go towards developments, iterations, pilots and operations.

Menyo advises startup founders on the lookout for money to focus on the concept. The problem that is addressed should be large and the solution should fit into the market especially sub-Saharan Africa. Also, it must be promising in its potential to scale because that is where funders want to dip their money.

With these kinds of dynamics, what are the options for Ugandan startups? The banking sector has for long been known to have a low appetite towards extending credit to startups. Matthias Katamba, Managing Director of DFCU bank says, “It is not that banks do not want to finance startups, it is because sometimes debt from the banks may not be the right structure for startups. It is good to get debt from bank usually for expansion when your model is tried and tested. The bank provides debt because it has clear projections of how the revenue is going to come in, based on the historical numbers for over six months.” 

There are other efforts towards redeeming this seemingly dire situation. 

The Ugandan startup ecosystem has since 2016 registered over a 25 per cent growth in innovation hubs including incubators, accelerators, co-working spaces and innovative centers. This has provided startups with a conducive growth environment where their innovations are nurtured and the companies are able to access funding, co-working space and accelerator programs. This is a start, according to the CEO of Ortus Africa Capital.

Legesi recommends that local angels come in to provide not just capital but also their local expertise to help companies grow. This is part of the challenge that Kampala Angel Investment Network (KAIN) is addressing through the regular pitch Thursdays where companies share with angels who may not only provide funding but also expertise.

Directly addressing the problem is The-97Fund managed by Ortus Africa, a blended capital fund offering different types of capital to entrepreneurs either directly or through partnerships and linkages to co-investors. The fund offers grants (equity-free), straight equity, quasi-equity, straight debt and other structures such as debt with revenue share, revenue-based financing. Its sole aim is to be flexible and tailor the most appropriate forms of financing to startups in Uganda.

Beyond this kind of funding, Legesi provides hope for survival to young startups.

Investor financing is only one form of financing for a startup. Others include;

Bootstrapping or self-funding, Grants: The best (and the cheapest) option for funding your business especially at the start as you build a prototype. There is applying for grants, using your own savings or borrowing from your family and friends. This tends to be a flexible and quick way of funding even if there is a limit to how much can be raised from family and friends.

Angel investors: They offer more flexible investment terms compared to venture capital firms. They tend to invest larger sums of money than family and friends usually in exchange for equity in the startup. However, they may consider other forms of flexible funding including revenue-based financing models, debt or debt-like instruments. 

Venture capital: Venture capitalists are similar to angel investors. However, they tend to invest larger amounts than angel investors, up to $500,000. Being professional investors, they can provide guidance in growing your business. They will participate in governance and oversight of how the business operates through a board seat. 

“At Ortus Africa Capital / The 97Fund is raising locally based venture capital to support Uganda/African entrepreneurs and propagate venture capital as an asset class for investors,” Legesi says. 

Crowdfunding and Pre-sales: Crowdfunding can help small and medium enterprises (SMEs) reach a broad group of potential investors and possibly generate publicity for your startup. However, crowdfunding campaigns require a significant amount of time and planning, and your ability to achieve funding often rests on whether you already have a wide network that you can access to ask for support. Through the Africa Crowdfunding Association, one can access the different crowdfunding platforms that are targeting and are operational on the African continent. Related to crowdfunding is signing up potential customers and asking them to pre-buy your product or service. This is also a good way to get funding but must be balanced against confidence and ability to deliver. Also depending on the type of product or service and your target customers, pre-sales may be difficult to achieve.

Bank loans: A bank loan is a reliable funding option for a small business or startup when cashflows become more predictable and steady growth is being achieved. SMEs may also apply for government-subsidized bank loans or soft loans via development financing institutions. 

It is clear that there are options for Ugandan startups and all is not lost. Joint efforts in the ecosystem towards practical solutions will take Ugandan startups to the level of their current competitors.

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