The role of tech hubs and accelerators in supporting early-stage startups in Africa

Early-stage companies face funding challenges as the start-up phases are often, by definition, perceived as risky by local and international investors on account of the unpredictability of the market in which these companies operate. The start-up capital needed by companies to cover costs before they generate any revenues is usually hard to come by and investors tend to exercise caution as companies often do not have enough data and evidence to prove traction. Startups are typically required to achieve certain milestones (read, results) that can be unrealistic without an influx of funding and, for founders lacking previous exits or success, it can be harder to get noticed by investors. Although $1.3 billion (excluding M&As) was deployed into ventures across Africa in 2020, only a select few late-stage startups like Vezeeta, Chipper Cash, Gro Intelligence, and Flutterwave attracted more than half of the deals, leaving many younger startups competing for a limited share of early-stage funding.

Despite the challenges and the perception of risk, the availability of capital at the seed level in Africa is growing and, in order to fill the persisting funding gap, a growing number of venture capital firms are stepping up efforts by deploying quick and flexible capital and providing the resources needed by early-stage startups to reach the necessary milestones and possibly generate revenues until they can raise more capital from investors. As observed in a 2020 report in collaboration with Founders Factory Africa, startups looking to raise a seed round usually are expected to be able to show some degree of product sophistication, a core team, and a plausible business model. While pre-seed funding and any initial starting-up capital predominantly represents a bet on the ability of the early team to deliver, from the seed level, investors have shown a tendency to prefer more structured businesses.

What do support organisations offer? A look at the landscape

Organisations offering support services such as incubation and acceleration have shown to be striving to bridge the funding gap that early-stage startups encounter on the continent, traditionally by offering cohort-based programmes. Over 800 ecosystem support organisations across Africa are listed on Briter Intelligence as of Q2 2021 (see screenshot below). These organisations normally present multiple financial and revenue streams including advisory, programme implementation, equity investment, and grant schemes. The types of support offered to startups usually include:

• In-kind, including  training, advice, mentorship, and facilities; 

• Cash funding, such as grants, non-equity assistance, and equity investments.

Notable among them are global players financing and supporting startups on the continent, including names such as Y Combinator, 500 Startups, Startup Bootcamp, Catalyst Fund, the GSMA Ecosystem Accelerator (now GSMA Innovation Fund), Google for Startups, and Alibaba’s African Business Heroes. These organisations have sources of revenue that enable them to run their operations and offer different types of support to early-stage startups: Y Combinator and 500 Startups both offer a hybrid support model where they provide in-kind support and invest $125K and $150K in return for 7% and 6% equity stake in their respective portfolio companies; Flat6labs invests $65K to $120K in exchange for equity in its portfolio companies; Although still largely experimental and pioneering across Africa, venture building as a service is being heralded by organisations such as Greentec Capital Partners (with a model also known as results for equity), and global venture builder Antler, which recently launched in Nairobi. Finally, programmes such as Catalyst Fund, Jack Ma Foundation’s African Business Heroes, and the GSMA Innovation Fund offer philanthropic capital in the order of $80K to $300K to entrepreneurs. Big tech companies are also entering the race, with programmes such as Google for Startups, which provides access to resources and equity-free support, and Facebook Commerce Accelerator Programme, which is a non-equity support programme in the commerce sector. The capital provided by accelerators helps mitigate the risk of entering a “valley of death”, which early-stage startups incur in when they run out of capital before reaching product-market fit or gaining traction. Besides what accelerators directly offer startups in the period between when they are accepted into the programme and their graduation, arguably, one of their added values consists of contributing to the structuring of a company’s product and model by means of brainstorming and mentoring activities which in turn helps in reducing the perception of risk and attract follow-on investment from investors. Given the degree of scepticism and caution towards market uncertainty in these geographies, de-risking activities such as those offered by these programmes can make the difference, although they do not apply to all models and industries. 

Types of funding

Equity investment and grants are the most common types of financial support provided by accelerator programmes according to the Afrilabs-Briter report, which surveyed 92 hubs. The criteria for investing in startups differ by organisations as they are done in line with their mandate and structure. And while some accelerator programmes like Google for Startups and African Business Heroes are sector-agnostic, others like Catalyst Fund, Founders Factory Africa, AlphaCode, and Facebook are targeted at companies that operate in specific industries such as fintech and e-commerce. During 2020, there has been an increase in funding towards impact-driven startups on the continent with cleantech or renewable energy, healthcare and agriculture as the popular areas of focus, as explored in the Africa Investment Report 2020, and the increasing focus of accelerators towards inclusive companies that reach certain metrics such as poverty reduction, job creation and diversity reflects this trend. Joining an accelerator programme is not necessarily subject to it being the first occasion in which a company accesses external capital, but it offers a platform to access resources, network, and exposure. There exists a number of alternative routes such as bootstrapping, raising funds from friends and family, as well as angel investors. Receiving funding from friends and family or angel investors can prove relatively easier for founders as they are familiar with the company and can vouch for the team. 

How startups in accelerator portfolios have secured additional investment

The following charts summarise the analysis we have carried out of 6 notable accelerators’ cohorts and their subsequent funding rounds, namely:

• Y Combinator

• 500 Startups

• Catalyst Fund

• Founders’ Factory Africa

• Flat6Labs Cairo and Tunis

• Google for Startups

3 main findings:

• Startups that go through accelerator programmes typically raise funding in the 12 months after graduating.

This finding is supported by a 2019 Global Acceleration Network (GAN) report, which revealed that on average, startups raise over $500K in the 12 months following acceleration. Interestingly, this figure falls short of the $2.5m average that Catalyst Fund disclosed that its portfolio companies raise in the same period after graduating from its accelerator programme. As explained above, one added value these programmes bring is raising awareness and increasing exposure through a number of initiatives. Among such initiatives are Demo Days, organised for participating startups to showcase their solution to selected investors, corporate partners, potential customers, and the media. Accelerators use their relationship with investors to make introductions for startups, which helps make investor conversations easier and reduces investor scepticism. Among many benefits that this exposure can bring for startups, the ultimate aim is to help them raise follow-on funding, in addition to the capital invested into them by the accelerator, to enable them to scale. Equity accelerators in particular are incentivised to help startups achieve success in raising additional funding because of the equity that they own in the startup. When early-stage startups raise funding - usually in a seed round - from investors, it provides the external endorsement that many seek for what they are building. In the case of the second Nigerian startup to be accepted into Y Combinator, Paystack, the company which was acquired by Stripe in October 2020 for $200 million, raised $1.3m seed funding on the back of the accelerator’s Demo Day, which provided this validation for the company.

• Deal sizes prior to 2017 were smaller when compared to how much startups raised after 2017.

2017 was a turning point for startup funding in Africa. Disclosed deal flow into African ventures grew by a record 32% from $331m in 2016 to $438m in 2017, according to historical data provided in the Africa Investment Report 2020. Although fintech and e-commerce startups attracted the largest share of funding from international investors who were beginning to bet on African companies, other sub-verticals experienced year-on-year growth as well. And with increasing interest in funding African startups from global investors, accelerators provided a supply of fundable African startups with some specifically targeting them with new programmes and others accepting them into their cohorts. Although there are gaps in available funding data as a result of companies not disclosing how much was invested into them, compound annual growth rate (CAGR) analysis, which was employed to calculate the aggregate cumulative growth of funding raised by companies in the portfolio of the six accelerators, showed that some accelerator cohorts experienced increased YoY growth in funding from 2017.

• Global accelerator landscape is growing and changing

Acceleration involves providing support for early-stage startups, and accelerators act as a viable resource, among several other routes, that early-stage startups can target to achieve growth. For instance, by joining Catalyst Fund’s accelerator programme in 2019, Sokowatch was able to get the support it needed to extend its value offering from simply providing an e-commerce platform to retailers to offering digital financial services to them. Upon graduating, the startup raised a $14 million Series A round, which was a major feat considering that they faced fears of shutting down only two years before. Globally, accelerators are innovating to respond to new realities brought about by COVID-19 and the challenges that startups experience to be ready for acceleration, by offering flexible models that aren’t cohort-based and are virtual to ensure that startups get the support they need without unnecessary restrictions. As this becomes the trend, startups can expect more support in terms of accessing flexible capital, venture building support and connection to investment opportunities that can be crucial for keeping them running.