The reason why startups in the United States have been mainly so successful is because they are backed by venture capital investments. Without the support of venture capital investments, it would have been realistically impossible for people like Mark Zuckerberg, Jack Dorsey, Evan Spiegel, and other tech entrepreneurs to run successful startups and become billionaires in the process. Venture capital investments are more than useful for young bright entrepreneurs to take their startups off the ground. In the case of Africa, venture capital investment is beyond useful. It is necessary for any entrepreneur to truly get started.
What are venture capital investments? Venture capital investments, mainly called “VC,” are a form of private equity and a type of finance that professional investors provide to startup companies and small businesses that are believed to have long-term growth potential.
The fundamental difference between private-equity investment and venture-capital investment is that while private-equity investment is generally made at a later stage of a company (the company is established, generates revenues, and has a track record and valuation in the high millions of dollars,) venture-capital investment is made at the early stage of the company. Venture-capital investments are considered extremely risky because they are made at a time when a startup just kicks off. At that stage, startups generally do not have any track record, do not generate any revenue, and do not even have a minimum viable product. VC investors would generally invest between $100,000 and $2 million in early-stage startups for 10-20% equity in the startups.
The lack of capital is the primary issue that prevents African entrepreneurs from taking their startups off the ground. Debt financing has usually been the method of raising capital for African entrepreneurs. Commercial banks never lend money to startups because startups have no track record and do not generate revenue in their early stage. The only way for a startup to raise capital, especially at the early stage is to sell equity to investors. Thus, debt financing has been a real problem for African entrepreneurs to take their companies off the ground.
However, the concept of venture-capital investment is something that started to be widespread in African business. For example, Tribe Network, a hub for Black, Indigenous, and People of Color pursuing entrepreneurship and innovation, recently started a venture capital fund to financially assist African tech entrepreneurs at the early stage of their startups. The fund raised $20 million and planned on investing these $20 million in different African early-stage startups that show signs of long-term growth. In setting up the fund, Tribal Network said that the purpose of the fund was to level the playing field for entrepreneurs who have traditionally faced systemic barriers when accessing capital.
Number of VC deals in Africa between 2014 and 2019
Source: Brookings Institute
Venture capital funds grew dramatically over the last decade. Indeed, in 2014, the continent had about 69 venture capital funds. This number had doubled by the end of the decade to 2019. The dramatic surge in the number of VC deals in Africa indicates that Africa is undeniably a key player in the new set of economic opportunities. Africa can no longer be ignored as this playground where nothing substantially happens, but only its raw commodities are being exported. It is important to stress that VCs mainly invest in tech startups. This means that the growth in technology-driven products and services became a necessity in Africa for the continent to remain competitive in the global market, and venture capital funds are responding to that demand by providing the capital necessary to fuel production.