Should you even raise?
Let’s start with the biggest question you likely haven't even asked yourself yet.
For entrepreneurs all over the world, fundraising is a crucial element in scaling their businesses and maximizing their impact. And, if it were easy, everyone would do it.
Whether you're seeking equity investment, debt financing, or grant funding, navigating the fundraising landscape is a challenge in itself. We (and our clients) can tell you from experience:
Fundraising… is… a… full-time job.
But with the right approach, you can increase your chances of securing the capital you need to grow. Over the next few weeks, we’ll share some of the key insights we’ve gained after having raised $20M+ in Africa.
Let’s start with the biggest question you likely haven't asked yourself yet.
Should you even raise?
Raising capital is (in of it’s itself) an investment—and not all investments are worth making. The default thinking is “might as well try to raise money—what’s the worst that could happen?” But raising money isn’t free.. It will cost you between $20,000-$200,000 to close a round of funding. Prepping your dataroom, optimizing your pitch deck, talking to 40+ investors, conferences, hotels, flights, lawyers, your time, blood, sweat & tears… it all adds up.
When CEOs raise money for the first time, usually, no one has told them the rules for fundraising. They start playing a game without even knowing what out-of-bounds was.
The sad thing is there (kinda) is a rule book… but no one has an incentive to tell you: entrepreneurs are busy doing their own thing, investors don’t want to rule out anyone in the off chance they are the next Facebook, consultants want to make money creating pitch decks.
We want entrepreneurs to have an easier time than we had so here are the rough rules for social enterprises in Africa (there are more, but this covers 80% of the situations).
Equity
Minimum requirements are going to depend on the phase and focus:
Pre-revenue up to $100k: You’ll need a strong Why You? and Why Now?
non-software businesses
up to $50k in funding for first-time entrepreneurs
up to $250k for repeat entrepreneurs
software business: double the figures above
Up to $1m Revenue: 200% year-on-year revenue growth
Up to $10m Revenue: 100% YoY growth
$10m+ Revenue: 50% YoY growth
As a consequence of the growth targets above, entrepreneurs find themselves in a “growth at all costs” mindset to get to the next milestone so they can raise even more equity. This is a double edged sword: if they try to grow fast, sacrificing profits, and fail to hit the next growth target they get neither investment nor profits and go out of business, despite having a model that could have been successful if grown slowly.
All businesses:
Strong team
An example of a weak team is a crew of recent college grads who have never built a biz in Africa before.)
Strong market
An example of a weak market would be selling low-value products like water–to low-income customers.)
For impact investment: Cut these growth targets in half. But keep in mind you’ll need a strong social angle (find a descriptive list under Grants below).
All the measures above assume you're operating within a legal system that works and is understandable to the investor. This removes most of Africa. The country can’t have currency controls and should have a tax-advantaged status from the investor’s perspective. With that in mind, the generally acceptable countries of registration for foreign investors are South Africa, Mauritius, US, Cayman Islands, UK, Singapore, or the investor’s home country (Dutch investors can invest in a country registered in the Netherlands, a Kenyan investor can invest in a company registered in Kenya).
This assumes you are selling equity to grow, not to get an exit for yourself.
And we’ll be honest with you: many times we find that companies wanting to raise equity actually have a problem with sales and cash conversion cycle (CCC). You’ve got to invest in fixing these problems first. Get more sales. Get your customers to pay you earlier and your suppliers to be paid later. This will reduce the need for investment, while simultaneously making your company more investable.
Debt
Your business assets should be more than double the loan amount (not including intangible assets like software and goodwill).
Loans should be used to buy a tangible asset that will generate enough net profits to pay the interest; and the tangible asset itself can be used as collateral, except in the case of working capital, where the rest of the assets in the business are the collateral.
Impact investors have a lower reported interest rate but higher effective interest rate when taking into account delays and onerous impact reporting. They accept more kinds of assets as collateral (for example, not just vehicles and land but also equipment). And they typically accept a longer loan tenor (up to 5 years vs 1-2 years for local banks).
Just as before, the targets above assume a legal system the investor is comfortable with.
(Convertible debt, which typically converts to equity, should be considered as equity for purposes here.)
Grant
A company is eligible for grants (or impact equity/debt) if they're doing something that Western governments consider to be a public good. This includes:
Low-income healthcare
Small business loans/grants
Humanitarian aid
Renewable energy subsidies
Stimulating new sectors that lead to other public goods
Job creation programs
Environmental conservation
Transitioning lab research to the field
Ambulance/fire response
Potable water for low-income people
Business owners identifying as members of historically marginalized groups
Basically, Western taxpayers have to be on board with the idea that they will pay for something in a developing country that their own government would also pay for at home. Other things to think about:
The public good must be more cost-effective than the state-of-the-art—the current cost of supplying that same public good.
The grant request can’t be more than the organization's current annual revenue or annual budget.
Grantors typically won’t pay for things that have residual value or easy to steal: Cars, construction (very easy to steal bags of cement, timber, etc), computers, land, large processing equipment
Most Western governments don't pay for religious organizations so their taxpayers wouldn't understand why they should pay for it in another country.
So. Should you even raise?
Take our investment readiness quiz to help you find out:
We all know there are exceptions to the rules. The mistake entrepreneurs make is wishful thinking that they are the exception.
Take a hard look at your business and see if you are highly investable. If not, save the $20,000-$200,000 it will cost you to raise money and spend that on something to help you bootstrap–like a sales or operations consultant or better sales team.
☝️☝️☝️ Did you like that rule book? ☝️☝️☝️
Want to keep it on you at all times?